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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 58-1651222
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
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(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 21, 1997 was approximately $787,082,573 calculated
using the closing price on such date of $10.875. The number of shares
outstanding of the Registrant's common stock (the "Common Stock") as of March
24, 1997 was 72,412,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 8, 1997 are incorporated herein by reference in Part III.
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MEDAPHIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PAGE OF
FORM 10-K
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PART I
ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 9
ITEM 3. LEGAL PROCEEDINGS.................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 12
EXECUTIVE OFFICERS OF THE REGISTRANT............... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................ 13
ITEM 6. SELECTED FINANCIAL DATA............................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................ 25
ITEM 11. EXECUTIVE COMPENSATION............................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................... 26
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THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 15 U.S.C.A
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS
CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.6 TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF COMPANY
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), provides business management
services and information products primarily to healthcare providers. Medaphis'
healthcare 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. Medaphis' healthcare information systems
include patient-centered clinical information management systems and
enterprise-wide patient and employee scheduling systems. These systems are
designed to improve efficiency and quality of care within hospitals and emerging
integrated healthcare delivery systems. Medaphis currently provides business
management systems and services to approximately 20,000 physicians and over
2,500 hospitals in all 50 states, subrogation and recovery services to
healthcare plans covering in excess of 31 million people throughout the United
States and systems integration and work flow engineering systems and services in
the United States and abroad.
RECENT DEVELOPMENTS
1997 Business Plan
In February 1997 Medaphis announced the implementation during the 1997
fiscal year of a business plan focused on Medaphis' core business and comprised
of the five following components: (1) exiting non-core businesses, such as the
proposed sale of Healthcare Recoveries, Inc. ("HRI") that is discussed below;
(2) achieving improved predictability of results through enhanced management
accountability and controls; (3) reducing costs and increasing efficiencies; (4)
emphasizing customer service; and (5) implementing cross-selling initiatives.
Amended and Restated Credit Agreement
Effective February 4, 1997, Medaphis and its senior lenders entered into
the Second Amended and Restated Credit Agreement (the "Second Amended
Facility"). The lenders' commitments have been increased from $250 million to
$285 million and extended through June 30, 1998. Borrowings under the Second
Amended Facility are secured by substantially all of the Company's assets and
guaranteed by substantially all of the Company's subsidiaries. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
The Second Amended Facility provides for contractual amortization of the
$285 million loan commitments by a scheduled reduction to $200 million on July
31, 1997 (which may be deferred to September 30, 1997 by the required lenders)
and to $150 million on January 31, 1998. As of March 29, 1997, the Company had
approximately $251 million outstanding under the Second Amended Facility. The
Company and its lenders have always contemplated that the contractual
amortization of loan commitments under the Second Amended Facility would be
accomplished through asset divestitures since operating cash flow was never
intended to be utilized for this purpose and would be insufficient to meet these
obligations. Accordingly, at the time that the Second Amended Facility was
consummated and announced in February 1997, the Company adopted and announced
its 1997 business plan which, among other objectives, includes the divestiture
of non-core businesses to meet the Company's contractual obligations under the
Second Amended Facility and otherwise. The Company remains confident that it
will be able to meet its amortization obligations under the Second Amended
Facility through the continued execution of the Company's 1997 business plan and
related asset divestiture program. See Item 1. Recent Developments -- Planned
Divestitures and Assessments of Non-Core Businesses.
The Second Amended Facility provides for adjustment of the interest rates,
fees, charges and other compensation to be paid to the lenders by the Company,
including the vesting of certain warrant arrangements
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for 1% of the Common Stock of the Company on each of January 1, 1998 and April
1, 1998, modification of the financial reporting requirement to the lenders,
restrictions on new acquisitions and certain litigation settlement payments,
establishment of a maximum permitted capital expenditures covenant for the
fiscal quarters ending on or after March 31, 1997 and additional financial
covenants for fiscal quarters ending on and after June 30, 1997.
Abandonment of Reengineering Program
In an effort to improve the productivity and cost efficiency of its
operations, in late 1994 Medaphis undertook a comprehensive reengineering
program. During fiscal 1996, Medaphis assessed the reengineering program to
determine whether the objectives of the program were being achieved. Based upon
this assessment, the Company abandoned the reengineering program and incurred a
charge of $88.2 million in the fourth quarter of fiscal 1996 with respect to
such abandonment. See Note 13 of Notes to Consolidated Financial Statements and
Supplementary Data included in Item 8. Financial Statements and Supplementary
Data. As a result of the assessment it was concluded that it was not cost
effective to continue the development and deployment of the software and
technology upon which the reengineering program was based and that the
reengineering software and technology had no alternative useful application in
the Company's operations. In lieu of further developing and deploying the
reengineering software and technology, the Company intends to further refine,
enhance and develop certain of the Company's existing software and billing
systems and to migrate the Company's billing and accounts receivable management
systems to the Company's most proven software systems and technology, so as to
reduce the number of systems and technologies that must be maintained and
supported.
Planned Divestitures and Assessments of Non-Core Businesses
As part of the Company's strategy to focus on the healthcare provider
market and to meet its contractual loan obligations under the Second Amended
Facility, the Company's 1997 business plan includes the planned divestiture of
HRI and the assessment of alternatives for the BSG Group (BSG Corporation
("BSG"), Rapid System Solutions, Inc. ("Rapid Systems") and Sage Communications,
Inc. ("Sage")). The Company remains confident that the amortization obligations
under the Second Amended Facility will be timely met through the divestiture of
HRI. Consistent with these objectives, in January 1997, the Company engaged
Bear, Stearns & Co., Inc. to act as its exclusive financial advisor in
connection with the divestiture of HRI. The Company has recently filed a
registration statement relating to an initial public offering of 100% of the
outstanding capital stock of HRI and, concurrently, is in the market actively
soliciting interest from prospective financial and strategic buyers for this
business unit. The Company remains confident that these steps will result in the
divestiture of HRI within the appropriate time frame and believes that the net
proceeds of such divestiture will be more than adequate to meet all amortization
obligations required to be paid during 1997 under the Second Amended Facility.
The alternatives with respect to the BSG Group include, but are not limited to,
seeking a buyer, a spin-off transaction or other capital raising alternatives.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 16 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
Services
Medaphis is a leading provider of business management services to the
healthcare industry in the United States. The Company's business management
services enable healthcare providers to outsource to Medaphis business
management functions associated with the delivery of healthcare, thereby
allowing physicians and hospitals to focus on delivering quality medical
services to their patients. The services provided by the Company include both
revenue and cost management services. Revenue management services encompass
billing and accounts receivable management services consisting of medical
coding, automated patient billing, claims submission, capitation analysis, past
due and delinquent accounts receivable collection and contract
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negotiations with payors, including managed care organizations and other
services associated with the revenue cycle of a healthcare provider. Cost
management services include comprehensive practice management services
consisting of front office administration, benefit plan design and
administration, cash flow forecasting and budgeting, general consulting services
and other services associated with the management of the costs of running a
practice for a healthcare provider. In addition, through HRI the Company
provides subrogation and related recovery services primarily to healthcare
payors to assist them in recovering the related benefits provided to insureds
who are injured in accidents or under other circumstances where a third party is
ultimately responsible for paying such benefits. Medaphis plans to divest HRI.
The Company provides business management services to approximately 20,000
physicians and 2,500 hospitals in all 50 states and subrogation and recovery
services to healthcare plans covering in excess of 31 million people throughout
the United States. Accounts receivable and practice management services are
normally provided to customers under contractual arrangements which range from
month-to-month to longer durations, renew automatically at the end of the
initial term and can be canceled by either party with between 90 and 180 days
prior written notification. Fees payable to the Company for its accounts
receivable management services are generally based on a percentage of cash
collected by the Company for its clients. Fees are negotiated based on the
breadth and types of services provided, expected collectibility of the client's
accounts receivable portfolio and the cost of providing such services. The
Company strives to retain its customers to provide a recurring base of revenue.
No single client of the Company in this industry segment accounted for 10% or
more of the Company's consolidated revenue in 1996.
The Company's business management services to hospitals include not only
billing and accounts receivable management services, but also specialized
accounts receivable management services that generally involve more intensive
accounts receivable services, including automated collection procedures. The
Company's specialized accounts receivable management services for hospitals are
usually provided with respect to a specific portfolio or specific type of
accounts receivable.
The management services business in the healthcare industry is highly
competitive. The Company competes with national and regional physician and
hospital reimbursement organizations and certain physician groups and hospitals
which provide their own business management services. Competition among these
organizations is based upon the relationship with the client or prospective
client, the efficiency and effectiveness of converting medical and hospital
services to cash, the ability to provide proactive practice management services
and, to the extent that service offerings are comparable, upon price.
Healthcare Information Technology ("HIT")
The Company's HIT group is a leading provider of information management
systems to the healthcare industry. Medaphis' products address both the business
and clinical management needs of healthcare providers. The Company's products
generally function in either a stand-alone provider setting or across the
healthcare enterprise. Business management products include those designed to
effectively utilize and share staff by automated staff scheduling, to improve
operating room utilization and inventory management via automated scheduling and
inventory systems, to improve staff productivity by reducing or eliminating
repetitive or redundant tasks and to implement best practices via automated
expert-systems technologies. Medaphis' clinical management products can be used
to check for redundant or duplicative procedures, to provide information access
to assist the provider in clinical decision making, to automate manual care
protocols and to allow real-time shared access to a patient's clinical
information. Medaphis' products also provide a variety of interfaces to
third-party products and services which complement the Company's products and
further assist providers with their business and clinical information management
needs.
Medaphis provides its healthcare information technology products to over
1,800 hospitals and approximately 4,000 physicians, primarily in the United
States. The Company provides products to its customers via contractual
relationships that vary depending on the type of products or services being
purchased, such as software licenses, hardware purchases, implementation
services and continuing customer support and software maintenance activities.
Timing of amounts paid to the Company vary by the type of product provided, but
generally include an up front amount followed by payments tied to completion of
implementation events.
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Customer support and software maintenance fees generally renew automatically.
The Company strives to retain its customers to provide a recurring base of
revenue. No single client of the Company in this industry segment accounted for
10% or more of the Company's consolidated revenue during 1996.
The healthcare information technology business is highly competitive. The
Company competes primarily with national companies, many of which have longer
operating histories and greater financial resources than those of the Company.
These competitors exist in both the "best of breed" niche marketplace and in the
enterprise-wide market for broad sets of application products. Competition among
these companies is based on product quality, ease of use and ease of integration
of new products with other existing and planned applications.
BSG Group
In February 1997, Medaphis announced that it was assessing alternatives for
its BSG Group, including a sale, spin-off or other alternative, such as a
partial sale or a joint venture.
The BSG Group 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. The BSG Group
focuses on customers in industries where technology-enabled change and
reengineering can have a significant competitive impact. The BSG Group seeks to
establish long-term alliances with its customers, enabling them to increase
revenue, raise productivity and improve product quality.
The BSG Group offers a wide range of services that enable customers to
utilize effectively advanced information technologies, including those that
incorporate client/server architectures. Its information technology services
include consulting, change management, technology migration, application
development, systems integration, package installation, training and ongoing
systems management. Through long-term alliances with its customers, the BSG
Group helps them to increase revenue, to raise productivity and to improve
product quality. Besides working closely with its customers' information
technology professionals and users, the Company establishes relationships with
its customers' senior management who increasingly view technology as critical to
overall business strategy. No single client of the Company in this industry
segment accounted for 10% or more of the Company's consolidated revenue in 1996.
During the third quarter of 1996, Medaphis consolidated the business
operations of its wholly owned subsidiary, Imonics Corporation ("Imonics"), into
BSG. Imonics operated a software development and support and systems integration
outsourcing business acquired by Medaphis in December 1994. In 1996, Imonics'
business operations were discontinued and the responsibility for completing
Imonics' unfinished software engineering projects was transferred to the BSG
Group.
The client/server information technology and change management industry is
highly fragmented and characterized by low barriers to entry, rapid change and
intense competition. The markets in which the BSG Group competes include
companies specializing in information technology and systems integration
consulting services, application development companies, software development and
systems integration units of major computer equipment manufacturers, information
systems facilities management and outsourcing organizations, major accounting
firms and information systems groups of large general management consulting
firms.
Many of the BSG Group's competitors have longer operating histories and
substantially greater financial, technical and marketing resources, and generate
greater systems technology consulting and systems integration revenue, than does
the BSG Group. The introduction of lower priced competition or significant price
reductions by current or potential competitors, or such competitors' ability to
respond more quickly than the BSG Group to new or emerging technologies or
changes in customer requirements, could have an adverse effect on the BSG
Group's business.
Many of the BSG Group's current and potential customers periodically
evaluate whether to staff system implementation and deployment projects with
their in-house information systems staff instead of an outside services company.
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RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
operating profit or loss and identifiable assets attributable to each segment
for each of the fiscal years 1994 through 1996 is presented in Note 16 of Notes
to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
HEALTHCARE INDUSTRY
Because a substantial portion of its revenue is derived from organizations
involved in the U.S. healthcare system, the Company's business is impacted by
trends in the healthcare industry. As healthcare expenditures have grown as a
percentage of the U.S. gross national product, public and private healthcare
cost containment measures have applied pressure to the margins of healthcare
providers. Historically, some healthcare payors have willingly paid the prices
established by providers while other healthcare payors, notably government
programs and managed care companies, have paid far less than established prices
and, in many cases, less than the average cost of providing the services.
Consequently, prices charged to healthcare 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"). In addition, the increasing complexity in the reimbursement system
and the assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables and bad debt levels and
higher business office costs. Healthcare providers historically have addressed
these pressures on profitability by increasing their prices, by relying on
demographic changes to support increases in the volume and intensity of medical
procedures, and by cost shifting; nonetheless, management believes that the
revenue growth rate experienced by the Company's clients continues to be
adversely affected by increased utilization of managed care providers 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 to become more costly.
Management believes that these trends have placed pressure on the rate of
revenue growth and profit margins of the Company's physician and hospital
accounts receivable and practice management operations. Due to these revenue and
margin pressures, Medaphis Physician Services Corporation ("MPSC"), the
Company's largest subsidiary providing accounts receivable and practice
management services to physicians, did not significantly contribute to the
Company's operating profit for 1996, nor is it expected to significantly
contribute until further progress is made in, among other things, ongoing
initiatives designed to reduce redundant costs, improve efficiencies and enhance
operational effectiveness in MPSC's operations.
The United States healthcare industry continues to experience significant
change as 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.
RESEARCH AND DEVELOPMENT
Information regarding research and development (which consists primarily of
software development costs) is included in Note 1 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data.
REGULATION
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection service in certain limited
circumstances. The Medicare statutes that restrict the assignment of Medicare
claims are supplemented by Medicare regulations and provisions in the Medicare
Carrier's Manual (the "Manual"). The Medicare regulations and the Manual provide
that a billing service that prepares and sends bills for the provider or
physician and does not receive and negotiate the checks made payable to the
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provider or physician does not violate the restrictions on assignment of
Medicare claims. Management believes that its practices do not violate the
restrictions on assignment of Medicare claims, but rather the Company operates
in a manner consistent with these provisions because it bills only in the name
of the medical provider, checks and payments for Medicare services are made
payable to the medical provider and the Company lacks any power, authority or
ability to negotiate checks made payable to the medical provider. Medaphis'
medical billing and collection activities are also governed by numerous federal
and state civil and criminal laws. In general, these laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from Medicare, Medicaid and certain other federal
and state healthcare programs. See Item 3. Legal Proceedings.
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Successful
plaintiffs can receive up to 25-30% of the total recovery from the defendant.
Such qui tam actions or "whistle-blower lawsuits" have increased significantly
in recent years and have increased the risk that a company engaged in the
healthcare industry, such as Medaphis and many of its customers, may become the
subject of a federal or state investigation or may ultimately be required to
defend a false claims action, may be subjected to government investigation and
possible criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a result
of such an action. The government on its own may also institute a Civil False
Claims Act case, either in conjunction with a criminal prosecution or as a stand
alone civil case. Whether instituted by a qui tam plaintiff or by the
government, the government can recover triple its damages together with civil
penalties of $5,000 -- $10,000 per false claim. Under applicable case law, a
party successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. There
can be no assurance that Medaphis will not be the subject of false claims or qui
tam proceedings relating to its billing and collection activities or that
Medaphis will not be the subject of further government scrutiny or
investigations relating to its billing and accounts receivable management
services operations. See Item 3. Legal Proceedings. Any such proceeding or
investigation could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. The Federal
Fair Debt Act also provides for, among other things, a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states have also promulgated laws and regulations that govern credit
collection practices. In general, these laws and regulations prohibit certain
fraudulent and oppressive credit collection practices and also may impose
license or registration requirements upon collection agencies. In addition,
state credit collection laws and regulations generally provide for criminal
fines, civil penalties and injunctions for failure to comply with such laws and
regulations. Although most of the Company's billing and accounts receivable
management services the Company provides to its clients are not considered debt
collection services, the Company may be subjected to regulation as a "debt
collector" under the Federal Fair Debt Act and as a "collection agency" under
certain state collection agency laws and regulations. Management believes that
the Company operates in accordance with the Federal Fair Debt Act and complies
in all material respects with the applicable collection agency laws and
regulations governing collection practices in the states in which it conducts
its business or is exempt from such laws and regulations.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Hospitals are paid a predetermined amount for operating expenses
relating to each Medicare patient admission based on the patient's diagnosis.
Additional changes in the reimbursement provisions of the Medicare and Medicaid
programs may continue to reduce the rate of increase of federal expenditures for
hospital inpatient costs and charges. Such changes could
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have an adverse effect on the operations of hospitals in general, and
consequently reduce the amount of the Company's revenue related to its hospital
clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (the
"Health Insurance Act"), which includes an expansion of certain fraud and abuse
provisions, such as expanding the application of Medicare and Medicaid fraud
penalties to other federal healthcare programs, and creating additional criminal
offenses relating to "healthcare benefit programs," which are defined to include
both public and private payor programs. The Health Insurance Act also provides
for forfeitures and asset freezing orders in connection with such healthcare
offenses. Civil monetary penalties and program exclusion authority available to
the OIG also have been expanded. The Health Insurance Act contains provisions
for instituting greater coordination of federal, state and local enforcement
agency resources and actions through the OIG. There also have been several
recent healthcare reform proposals which have included an expansion of the
anti-kickback laws to include referrals of any patients regardless of payor
source.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program, projected that the Medicare "trust fund"
is likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the federal
budget, both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding mechanisms and other aspects of both programs. In late 1995,
Congress passed legislation that would substantially reduce projected
expenditure increases and would make significant changes in the Medicare and the
Medicaid programs. The Clinton Administration has proposed alternate measures to
reduce, to a lesser extent, projected increases in Medicare and Medicaid
expenditures. Neither proposal became law prior to Congress' 1996 adjournment.
Medaphis anticipates that both the Clinton Administration and the Republican
majorities in Congress will introduce legislation in 1997 designed to reduce
projected increases in Medicare and Medicaid expenditures and to make other
changes in the Medicare and Medicaid programs. Medaphis anticipates that such
proposed legislation would, if adopted, change aspects of the present methods of
paying physicians under such programs and provide incentives for Medicare and
Medicaid beneficiaries to enroll in health maintenance organizations and other
managed care plans. Medaphis cannot predict the effect of any such legislation,
if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These market reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis' billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
7
<PAGE> 10
Medaphis' consulting and comprehensive business management services (including
billing and collection services) for the new provider systems.
EMPLOYEES
The Company currently employs approximately 9,375 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
ACQUISITIONS
In fiscal 1996, Medaphis completed four acquisitions that were accounted
for as purchases and four acquisitions that were accounted for as
poolings-of-interests. The four purchase acquisitions are as follows:
On February 12, 1996, the Company acquired substantially all of the
assets and assumed certain of the related liabilities of Medical Management
Computer Services, Inc. ("MMCS"). MMCS provides billing and accounts
receivable management services primarily to emergency room physicians.
On February 20, 1996, the Company acquired substantially all of the
assets and assumed certain of the related liabilities of CBT Financial
Services, Inc. ("CBT"). CBT provides collection and billing services
primarily to hospitals.
On April 16, 1996, the Company acquired the outstanding capital stock
of The Medico Group, Ltd. ("MEDICO"). MEDICO provides billing and accounts
receivable management services primarily to anesthesiologists.
On October 8, 1996, the Company acquired the assets and assumed
substantially all of the liabilities of Sage. Sage provides systems
integration services and data warehousing decision support applications,
primarily to the telecommunications industry.
For each of the foregoing acquisitions, the purchase price was allocated to
the assets acquired and the liabilities assumed based on their estimated fair
value as of the date of acquisition.
The Company acquired the following businesses in fiscal 1996 which were
recorded using the pooling-of-interests method of accounting:
On February 29, 1996, the Company exchanged 92,991 shares of its
Common Stock for all of the outstanding shares of common stock of
Intelligent Visual Computing, Inc. ("IVC"). IVC provides systems
integration and work flow engineering systems and services to clients in
healthcare and other industries.
On April 3, 1996, the Company exchanged approximately 1.1 million
shares of its Common Stock for all of the outstanding shares of common
stock of Rapid Systems. Rapid Systems is a client server/systems
integration company whose core competencies include network design,
integration and management, database design and development, graphical user
interface application design, development and implementation, and strategic
systems engineering and computer security. During 1995, Rapid Systems had
revenue of $14.7 million.
On May 6, 1996, the Company exchanged approximately 7.5 million shares
of its Common Stock for all of the outstanding shares of common stock of
BSG. In addition, the Company assumed BSG stock options representing
approximately 2.3 million additional shares of the Company's Common Stock.
BSG provides information technology and change management services to
organizations seeking to transform their operations through the strategic
use of client/server and other advanced technologies. During 1995, BSG had
revenue of $69.7 million.
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 clinical information needs through the integrated
8
<PAGE> 11
monitoring, scheduling, documentation and control of patient care. During
1995, HDS had revenue of $12.2 million.
Because these acquisitions have been recorded using the
pooling-of-interests method of accounting, no adjustments have been made to the
historical carrying amounts of assets acquired and liabilities assumed. The
consolidated financial statements included in this Report have been restated to
include the financial position and operating results of Rapid Systems, BSG and
HDS for all periods prior to the acquisitions. No restatement has been made for
the financial position and operating results of IVC prior to the beginning of
the fiscal year of its acquisition due to its immateriality.
In August 1996 Medaphis announced that it did not anticipate any
significant acquisitions in the near term.
ITEM 2. PROPERTIES
The Company's principal executive offices are leased and are located in
Atlanta, Georgia. The lease expires in February 2000.
SERVICES
MPSC's principal office is leased and is located in Atlanta, Georgia. The
lease expires in February 2000. In addition to its principal office, MPSC,
through its various operating subsidiaries, occupies approximately 25
information processing centers ("IPCs") and local business offices throughout
the United States. Three of the facilities are owned and are unencumbered. The
remainder of the facilities are leased with expiration dates ranging from March
1997 to December 2008. Medaphis Services Corporation's principal office is
leased and is located in Norcross, Georgia. The lease expires in May 2002.
HIT
The HIT group's principal office is leased and is located in Atlanta,
Georgia. The lease expires in February 2000. In addition to its principal
office, HIT, through its various operating subsidiaries, occupies approximately
25 offices in the United States, Australia, Canada and Europe. All facilities
are leased and such leases expire on dates ranging from March 1997 to April
2004.
BSG GROUP
The BSG Group's principal offices are located in Austin and Houston, Texas.
The leases expire in the year 2000. In addition to its principal offices, the
BSG Group, through its various operating subsidiaries, occupies approximately 25
offices in the United States. All facilities are leased and such leases expire
on dates ranging from April 1998 to April 2005.
ITEM 3. LEGAL PROCEEDINGS
The United States Attorney's Office for the Central District of California
is conducting an investigation (the "Federal Investigation") of Medaphis'
billing and collection practices in its offices located in Calabasas and
Cypress, California (the "Designated Offices"). Medaphis first became aware of
the Federal Investigation when it received search warrants and grand jury
subpoenas on June 13, 1995. Although the precise scope of the Federal
Investigation is not known to the Company at this time, Medaphis believes that
the U.S. Attorney's Office is investigating allegations of billing fraud and
that the inquiry is focused upon Medaphis' billing and collection practices in
the Designated Offices. Numerous federal and state civil and criminal laws
govern medical billing and collection activities. In general, these laws provide
for various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of Medaphis' annual revenue, there can be no assurance
that the Federal Investigation will be resolved promptly, that additional
subpoenas or search warrants will not be received by Medaphis or that the
Federal Investigation will not have a material adverse effect upon the Company.
The Company recorded
9
<PAGE> 12
charges of $12 million in the third quarter of 1995 and $2 million in the fourth
quarter of 1996 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 which were filed following the
Company's announcement of the Federal Investigation. The charges are intended to
cover only the anticipated expenses of the Federal Investigation and the related
lawsuits and do not include any provision for fines, penalties, damages,
assessments, judgments or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995 were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits allege violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The Company expects to receive approximately $3.7
million from insurance to fund a portion of the 1995 Class Action Settlement and
accrued approximately $1.2 million in the quarter ending December 31, 1996 to
fund the anticipated balance of the 1995 Class Action Settlement and to pay
certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning the Company's Gottlieb's Financial Services, Inc. ("GFS") subsidiary.
No subpoenas or other process have been issued to the Company or to GFS in
connection with the investigation. There can be no assurance that this matter
will be resolved promptly, that subpoenas will not be received by Medaphis or
that the investigation will not have a material adverse effect upon Medaphis.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On
10
<PAGE> 13
December 30, 1996, the defendants filed a motion to dismiss most of the 1996
Consolidated Complaint. On February 3, 1997, the plaintiffs filed a Consolidated
Second Amended Complaint. On February 14, 1997, the defendants moved to dismiss
the Consolidated Second Amended Complaint in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The demurrer was denied on
February 5, 1997. On March 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the 1933 Act, but the Company believes
that it has substantial defenses to the alleged damages relating to the 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG common stock were converted to Medaphis
stock options in connection with Medaphis' acquisition of BSG. The plaintiffs
allege failure to perform diligence, breaches of fiduciary duties of candor,
loyalty and fair dealing and negligence against the BSG defendants (Papermaster,
Pickering, Lundeen, Smith, Noorda and Grosh) and fraud and deceit against the
Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it is conducting a non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that
11
<PAGE> 14
additional lawsuits will not be filed against the Company, that the lawsuits,
the written demands and the pending governmental investigations will not have a
disruptive effect upon the operations of the business, that the written demands,
the defense of the lawsuits and the pending investigations will not consume the
time and attention of the senior management of the Company and that the
resolution of the lawsuits, the written demands and the pending governmental
investigations will not have a material adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- -------- ---------------
<S> <C> <C> <C>
David E. McDowell................ 54 Chairman and Chief Executive 1996
Officer and Director
Carl James Schaper............... 45 Executive Vice President and 1997
President of Medaphis
Healthcare
Information Technology Company
William R. Spalding.............. 38 Executive Vice President -- 1996
Strategic Planning
Jerome H. Baglien................ 47 Senior Vice President and 1997
Chief
Financial Officer
Daniel S. Connors, Jr............ 54 Senior Vice President -- 1996
Personnel & Administration
Harvey Herscovitch............... 59 Senior Vice 1997
President -- Strategy &
Organization
</TABLE>
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President, Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
McKesson Drug Company in the United States and Medis Health and Pharmaceutical
Services, Inc. in Canada.
CARL JAMES SCHAPER joined Medaphis in March 1997 as President of Medaphis
Healthcare Information Technology Company and Executive Vice President of
Medaphis. From 1994 to 1997, Mr. Schaper held numerous positions with Dun &
Bradstreet Software, including President, Chief Executive Officer, Chief
Operating Officer, Executive Vice President, and Senior Vice President, Field
Operations and Marketing. From 1989 to 1994, Mr. Schaper held several positions
with Banyan Systems, Inc., including Senior Vice President, Worldwide Sales and
Marketing, Vice President, North America Field Operations and Regional Vice
President.
WILLIAM R. SPALDING joined Medaphis in January 1996 as Senior Vice
President -- Administration, General Counsel and Secretary and was promoted to
the position of Executive Vice President -- Strategic Planning in February of
1997. Prior to joining the Company, Mr. Spalding served as a partner in the law
firm
12
<PAGE> 15
of King & Spalding, where he specialized in mergers and acquisitions and
securities transactions. Mr. Spalding joined King & Spalding in 1985.
JEROME H. BAGLIEN joined Medaphis in February 1997 as Senior Vice President
and Chief Financial Officer. From 1993 to 1996 Mr. Baglien was employed by
Keebler Company where he served as Chief Financial Officer. From 1988 to 1993,
Mr. Baglien served as Vice President, Finance and Administration with Lamb
Weston, Inc., a wholly owned subsidiary of ConAgra. From 1983 to 1988, Mr.
Baglien was employed by Tree Top, Inc. as Chief Financial Officer and
Controller.
DANIEL S. CONNORS, JR. joined Medaphis in November 1996 as Senior Vice
President -- Personnel and Administration. During 1996, Mr. Connors served as
Vice President, Strategic Implementation with D.F. Blumberg & Associates, Inc.
From 1993 to 1996, Mr. Connors served as President and Chief Operating Officer
of Technology Service Solutions, an IBM/Eastman Kodak joint venture company.
From 1965 to 1993, Mr. Connors was employed by IBM Corporation where he held
several executive positions and ultimately served as Vice President, Point of
Sales Services.
HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the Nasdaq National Market under
the symbol MEDA.
The prices in the table below represent the high and low sales price for
the Common Stock as reported in the National Market System for the periods
presented. Such prices are based on inter-dealer bid and asked prices without
markup, markdown, commissions or adjustments and may not represent actual
transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
---------------------------- ------- -------
<S> <C> <C>
First Quarter............................................. $32.750 $22.000
Second Quarter............................................ 34.250 20.500
Third Quarter............................................. 30.375 20.250
Fourth Quarter............................................ 38.500 26.000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ------- -------
<S> <C> <C>
First Quarter............................................. $53.250 $34.000
Second Quarter............................................ 50.250 34.625
Third Quarter............................................. 42.500 11.250
Fourth Quarter............................................ 18.500 8.250
</TABLE>
The last reported sales price of the Common Stock as reported on the Nasdaq
National Market on March 24, 1997 was $10.5625 per share. As of March 24, 1997
the Company's Common Stock was held of record by 822 stockholders.
Medaphis has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. The Second
Amended Facility contains restrictions on the Company's ability to declare or
pay cash dividends on its Common Stock.
13
<PAGE> 16
RECENT SALES OF UNREGISTERED SECURITIES
Conversion of Medaphis Convertible Subordinated Debentures
Effective January 1, 1996, all holders of the Company's 6.5% convertible
subordinated debentures exercised their rights to convert the debentures into an
aggregate 4,526,786 shares of Medaphis Common Stock at $14.00 per share, or at
an aggregate conversion price of $63,375,004. The Company relied on Section 4(2)
of the 1933 Act as its exemption from the registration requirements of the 1933
Act.
Warrants Issued in Connection with the Second Amended Facility
On February 4, 1997, the Company entered into the Second Amended Facility.
As an inducement for the lenders named therein to enter into the Second Amended
Facility, the Company offered and issued to such lenders warrants to purchase
the Company's Common Stock. The warrants contain a vesting arrangement whereby
1% of the Company's Common Stock vests in favor of the lenders on each of
January 1, 1998 and April 1, 1998. The Company relied on Section 4(2) of the
1933 Act as its exemption from the registration requirements of the 1933 Act.
Intelligent Visual Computing, Inc.
On February 29, 1996, the Company acquired IVC by merger (the "IVC
Merger"). As the merger consideration for the IVC Merger, Medaphis offered and
issued to the former IVC shareholders an aggregate 92,991 shares of Medaphis
Common Stock for all of the outstanding common stock, par value $.01 per share,
of IVC. The Company relied on Section 4(2) of the 1933 Act as its exemption from
the registration requirements of the 1933 Act.
Issuance to Certain Employees of Health Data Sciences Corporation
On January 21, 1997, the Company offered, and on February 4, 1997 issued,
an aggregate 31,449 shares of restricted Medaphis Common Stock to certain key
employees of HDS, a wholly owned subsidiary, for $.01 per share, or an aggregate
offering and sales price of $314.49. The Company relied on Section 4(2) of the
1933 Act as its exemption from the registration requirements of the 1933 Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1996. The selected consolidated financial information of Medaphis
for each of the four fiscal years in the period ended December 31, 1996 and as
of December 31, 1996, 1995, 1994 and 1993 has been derived from the audited
consolidated financial statements of Medaphis which give retroactive effect to
the mergers with Automation Atwork Companies ("Atwork"), HRI, Medical Management
Sciences, Inc. ("MMS"), Rapid Systems, BSG and HDS, all of which have been
accounted for as poolings-of-interests. The selected consolidated financial data
of Medaphis for the fiscal year ended December 31, 1992 and as of December 31,
1992 has been derived from the unaudited consolidated financial statements of
Medaphis, which give retroactive effect to the mergers with Atwork, HRI, MMS,
Rapid Systems, BSG and HDS. Management believes that the unaudited consolidated
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 loan commitments under the Company's Second Amended Facility will
reduce to $200 million and $150 million as of July 31, 1997, and January 31,
1998, respectively, and will expire on June 30, 1998. In developing its 1997
business plan, the Company did not expect to generate sufficient cash flow from
operations to meet the required debt reduction and, therefore, management of the
Company has adopted plans to dispose of HRI and is seeking alternatives for the
BSG Group which it believes will generate sufficient net proceeds to meet the
required debt reductions.
The Company has retained investment banking counsel to advise it on the
divestiture of HRI as well as to assist in the evaluation of alternatives for
the BSG Group. There can be no assurance that the Company will
14
<PAGE> 17
be successful in its efforts divest HRI and/or the BSG Group. If the Company is
unable to generate sufficient net proceeds through the divestiture of HRI and/or
the BSG Group or obtain alternative debt financing by July 31, 1997, unless
extended by the lenders until September 30, 1997, the Company's borrowings under
the Second Amended Facility will become immediately due and payable. As a
result, there are doubts that the Company will continue as a going concern, and
therefore, the Company may be unable to realize its assets and discharge its
liabilities in the normal course of business. The consolidated financial
statements of the Company do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should the Company be unable
to continue as a going concern.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue.................................. $ 608,313 $559,877 $398,934 $279,326 $175,424
Salaries and wages....................... 398,573 325,868 227,109 164,474 106,296
Other operating expenses................. 163,677 140,296 95,195 71,363 51,241
Depreciation............................. 28,276 14,487 9,430 7,285 4,775
Amortization............................. 20,016 18,048 10,691 7,878 4,043
Interest expense, net.................... 11,585 10,062 5,926 6,573 965
Restructuring and other charges.......... 179,768 54,950 1,905 -- --
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ (124,621) (5,621) 32,523 14,704 5,534
Net income (loss)........................ (124,621) (5,621) 32,523 14,704 9,010(1)
Pro forma net income (loss)(2)........... (123,642) (8,504) 30,706 13,524 9,629
Weighted average shares outstanding...... 71,225 56,591 60,245 51,109 48,843
PER SHARE DATA(2)
Pro forma income (loss) before
extraordinary item and cumulative
effect of accounting change........... $ (1.74) $ (.15) $ 0.51 $ 0.26 $ 0.13
Pro forma net income loss................ $ (1.74) $ (.15) $ 0.51 $ 0.26 $ 0.21
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.......................... $ 75,633 $ 95,230 $ 89,262 $ 71,278 $ 36,570
Intangible assets........................ 389,033 455,611 376,827 183,190 116,383
Total assets............................. 815,624 795,606 627,151 367,281 228,305
Long-term debt........................... 215,752 150,565 148,261 9,803 16,059
Convertible subordinated debentures...... -- 63,375 63,375 63,375 60,000
Stockholders' equity..................... 392,290 421,306 257,097 189,850 87,876
</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, Company acquired Atwork, Consort, MMS, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior
to the mergers, Atwork, Consort, MMS, IVC, Rapid Systems and a company
acquired by BSG prior to the Company's merger with BSG had elected "S"
corporation status for income tax purposes. As a result of the mergers (or,
in the case of the company acquired by BSG, its acquisition by BSG), such
entities terminated their "S" corporation elections. Pro forma net income
(loss) and pro forma net income (loss) per common share are presented in the
consolidated statements of operations as if each of these entities had been
a "C" corporation during the periods presented.
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In fiscal 1996 Medaphis: (1) acquired eight companies in four transactions
accounted for as purchases and in four transactions accounted for as
poolings-of-interests; (2) recorded a charge of $138.6 million in the fourth
quarter related to the abandonment of its reengineering program begun in late
1994, the shutdown of Imonics and other matters; (3) incurred a significant net
loss due primarily to the reengineering abandonment and other restructuring
charges and operating losses in both its BSG Group and Services segments; (4)
was sued under the federal securities laws for allegedly misleading disclosures
about earnings and other matters, which lawsuits have not been resolved and are
costly for Medaphis to defend; and (5) used cash in excess of cash provided by
operations to fund working capital of $7.9 million and incurred capital
expenditures of $51.1 million, with the result that by December 31, 1996, the
Company had borrowed $242.7 million of the $250 million available under its bank
credit facilities. In response to these events, in February 1997 Medaphis
entered into the Second Amended Facility which provides $35 million of
additional debt capacity, but also requires significant reductions in the
lenders' commitments to $200 million in July 1997 (which may be extended by the
lenders to September 30, 1997) and to $150 million in January 1998.
In order to generate funds necessary to make the required payments under
the Second Amended Facility in July 1997 and January 1998, the Company announced
its plan to sell or spin-off its wholly owned operating subsidiary, HRI, by
filing a registration statement with the Commission relating to an initial
public offering of 100% of the common stock of HRI. Because HRI is not
considered a segment of the Company, the Company will not record the financial
position, results of operations and cash flows of HRI as discontinued
operations. Medaphis also is assessing alternatives for its BSG Group. The
alternatives include, but are not limited to, seeking a buyer, a spin-off
transaction or other capital raising alternatives.
In February 1997, Medaphis announced the implementation during the 1997
fiscal year of a business plan focused on Medaphis' core business and comprised
of the five following components: (1) exiting non-core businesses, such as the
planned sale of HRI that is discussed below; (2) achieving improved
predictability of results through enhanced management accountability and
controls; (3) reducing costs and increasing efficiencies; (4) emphasizing
customer service; and (5) implementing cross-selling initiatives.
Medaphis' business is impacted by trends in the U.S. healthcare industry.
As healthcare expenditures have grown as a percentage of the U.S. gross national
product, public and private healthcare cost containment measures have applied
pressure to the margins of healthcare providers. Historically, some healthcare
payors have willingly paid the prices established by providers while other
healthcare 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 healthcare 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"). The increasing complexity in the reimbursement system and the
assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables and bad debt levels and
higher business office costs. Healthcare providers historically have addressed
these pressures on profitability by increasing their prices, by relying on
demographic changes to support increases in the volume and intensity of medical
procedures, and by cost shifting. Notwithstanding providers' responses to
revenue pressures, management believes that the revenue growth rate experienced
by the Company's clients continues to be adversely affected by increased managed
care and other industry factors 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 to become more costly.
Management believes that these trends have placed pressure on the rate of
revenue growth and profit margins of the Company's physician accounts receivable
and practice management operations. Due to these revenue and margin pressures,
MPSC, the Company's largest subsidiary providing accounts receivable and
practice management services to physicians, did not significantly contribute to
the Company's operating profit for 1996 and this trend is not expected to
improve until further progress is made with, among other things, ongoing
initiatives designed to reduce redundant costs, improve efficiencies and enhance
operational effectiveness in MPSC's operations.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0%
Salaries and wages.......................................... 65.5 58.2 56.9
Other operating expenses.................................... 26.9 25.1 23.9
Depreciation................................................ 4.6 2.6 2.3
Amortization................................................ 3.3 3.2 2.7
Interest expense, net....................................... 1.9 1.8 1.5
Restructuring and other charges............................. 29.6 9.8 0.5
----- ----- -----
Income (loss) before income taxes........................... (31.8) (0.7) 12.2
Income tax expense (benefit)................................ (11.3) 0.3 4.0
----- ----- -----
Net income (loss)........................................... (20.5) (1.0) 8.2
Pro forma adjustments 0.2 (0.5) (0.5)
----- ----- -----
Pro forma net income (loss)................................. (20.3)% (1.5)% 7.7%
===== ===== =====
</TABLE>
REVENUE
Revenue classified by the Company's different operating segments is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Services......................................... $415,328 $402,467 $291,536
BSG Group........................................ 113,988 98,615 57,732
HIT.............................................. 81,646 60,521 50,387
Corporate and eliminations....................... (2,649) (1,726) (721)
-------- -------- --------
$608,313 $559,877 $398,934
======== ======== ========
</TABLE>
Services' operations in fiscal 1996 experienced minimal net business growth
as new sales were largely offset by client losses. Services' revenue in 1996
increased 3.2% from 1995 as compared with an increase of 38.1% in 1995 from
1994. The slowdown in revenue growth is attributable to the above-mentioned
revenue pressures on the physician accounts receivable and practice management
operations. The growth in 1995 was primarily attributable to acquisitions.
These client losses are partly due to the reengineering and consolidation
effort undertaken by MPSC. During the consolidation effort, management's focus
was redirected to consolidation and away from client service. Services' 1995
revenue growth resulted from acquisitions and an increase in the number of
business management services clients.
The BSG Group's 1996 revenues increased 15.6% from 1995 which had increased
70.8% from 1994. The increases in the BSG Group's revenue reflect the demand for
the BSG Group's service offerings as migration to client/server architectures
continued to accelerate. This demand for the BSG Group's services were
negatively affected in 1996 by a decrease in the revenues generated by Imonics.
HIT's revenue increased 34.9% in 1996 as compared with the same period in
1995. This increase is primarily the result of an increase in the number of
healthcare information system licenses sold by HDS. Included in HIT's revenue
for the 1996 fiscal year is approximately $14.5 million of onetime fees
associated with these licenses. HIT's revenue for 1995 increased 20.1% from
1994. This growth was due to an increase in the sales of Atwork's scheduling
products which was offset by HDS not selling as many healthcare information
system licenses in fiscal year 1995 as compared to fiscal year 1994.
17
<PAGE> 20
SALARIES AND WAGES
Salaries and wages represented 65.5% of revenue in 1996 as compared with
58.2% and 56.9% in 1995 and 1994, respectively. The increase in salaries and
wages as a percentage of revenue for 1996, as compared with 1995, is due to a
slowdown in the growth of the Company's revenue and an increase in the
employment levels (both employees and independent contractors) across the
Company. 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.
OTHER OPERATING EXPENSES
Other operating expenses increased to 26.9% of revenue in 1996 from 25.1%
in 1995 which had increased from 23.9% in 1994. The increase in other operating
expenses as a percentage of revenue for 1996, as compared with 1995, is due to a
slowdown in the growth of the Company's revenue. The increase in 1995 was a
result of the decrease in the 1995 revenue at HDS primarily associated with the
timing of new sales. Other operating expenses are primarily comprised of
postage, facility and equipment rental, telecommunications, travel, office
supplies, legal, accounting and other outside professional services.
DEPRECIATION
Depreciation expense was $28.3 million in 1996, $14.5 million in 1995 and
$9.4 million in 1994. These increases reflect the Company's investment in
property and equipment, including approximately $42 million of new computer and
other data processing equipment purchased in connection with the Company's
reengineering program, to support growth in its business, including
acquisitions.
The Company wrote down the value of the equipment purchased in connection
with the Company's reengineering program to its net realizable value during the
fourth quarter of 1996 and recorded a charge of approximately $16 million. The
Company expects depreciation expense to increase by approximately $6.5 million
in 1997 from the 1996 expense amount.
AMORTIZATION
Amortization of intangible assets, which are primarily associated with the
Company's acquisitions and software products, was $20.0 million in 1996, $18.0
million in 1995 and $10.7 million in 1994. The increases are primarily due to
increased amortization of goodwill and client lists resulting from acquisitions.
INTEREST
Net interest expense was $11.6 million in 1996, $10.1 million in 1995 and
$5.9 million in 1994. The increases in 1996 and 1995 are primarily due to
increased borrowings under the Company's expanded credit facility to finance
acquisitions and the Company's investment in its reengineering and consolidation
project. Management anticipates that future interest expense will change as a
result of increases in interest rates and borrowings under the Second Amended
Facility.
18
<PAGE> 21
RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring charges....................................... $ 14,076 $15,000 $ --
Software abandonment........................................ 86,088 1,800 --
Property and equipment impairment........................... 35,592 5,000 --
Intangible asset impairment................................. 13,048 -- 1,905
Legal costs................................................. 12,800 12,000 --
Pooling charges............................................. 8,953 11,700 --
Severance costs............................................. 3,913 5,000 --
Other....................................................... 5,298 4,450 --
-------- ------- ------
$179,768 $54,950 $1,905
======== ======= ======
</TABLE>
Restructuring Charges. In 1995, Management approved a restructuring plan
relating to the consolidation of the Company's data processing function in MPSC.
The Company recorded a reserve for the exit costs associated with the
restructuring plan of approximately $15.0 million.
During 1996, the Company revised its original plan of consolidating into
ten regional IPCs and reduced these reserves by approximately $1.8 million. The
Company has adopted a plan to downsize certain of the existing IPCs and the
costs associated with exiting these facilities will be charged against the
restructuring reserves established in 1995. The Company also incurred
approximately $5.2 million of costs which were related to MPSC's reengineering
and consolidation project which had not previously been accrued.
Also during 1996, the Company restructured its client/server system
integration businesses and consolidated Rapid Systems into BSG and adopted a
plan to shut down Imonics. In connection with this restructuring, the Company
recorded charges of approximately $3.0 million for the costs associated with the
termination of certain leases, approximately $6.5 million for severance costs
for all notified employees of Imonics and approximately $1.2 million for other
exit activities.
Software Abandonment. In June 1996, the Company began a comprehensive
assessment of the reengineering program for the Company's Services division
which was begun in 1994. The comprehensive review was completed and management
concluded that it was not cost effective to continue the development and
deployment of the software and technology upon which the reengineering program
was based and that the reengineering software and technology had no alternative
useful application in the Company's operations. In connection with abandonment
of its reengineering program and the shutdown of Imonics, the Company abandoned
certain software development projects and recorded charges for the write-off of
approximately $86.1 million of capitalized software development costs related to
these projects.
In connection with The Halley Exchange, Inc. acquisition in 1995, the
Company recorded a $1.8 million charge related to the cost of purchased research
and development activities related to acquired technology for which
technological feasibility had not yet been established and which had no
alternative future uses.
Property and Equipment Impairment. In connection with the abandonment of
the reengineering project and the shutdown of Imonics in 1996 and the
restructuring of MPSC in 1995, the Company assessed the recoverability of
certain of its long lived assets and recorded impairment losses of approximately
$35.6 million and $5.0 million in 1996 and 1995, respectively.
Intangible Asset Impairment. In 1996, the Company adopted a plan to shut
down Imonics and recorded a charge of approximately $13 million for the
write-off of the unamortized goodwill associated with the purchase of Imonics.
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.
19
<PAGE> 22
Legal Costs. In 1996, the Company recorded a charge of $5.0 million for
the administrative fees, costs and expenses it anticipates incurring in
connection with various putative class action lawsuits which have been filed
since August 14, 1996 against the Company and certain of its former officers,
one of whom was also a director. The Company also accrued $4.6 million for the
legal costs and other fees the Company has or plans to incur in connection with
the turnaround effort undertaken by the new management team and various other
legal matters.
The Company recorded charges of $2.0 million and $12.0 million in 1996 and
1995, respectively, for the administrative fees, costs and expenses it
anticipates incurring in connection with the Federal Investigation and various
putative class action lawsuits which are based on the Federal Investigation. In
1996, the Company reached an agreement in principle to settle the class action
lawsuits which are based on the Federal Investigation for $4.75 million. Also in
1996, the Company has recorded a $1.2 million charge for its portion of this
settlement (the Company expects the remainder of the settlement to be funded by
insurance).
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------ -------
(IN THOUSANDS)
<S> <C> <C>
Atwork...................................................... $ (430) $ 6,000
HRI......................................................... (778) 2,000
Consort Technologies, Inc................................... (529) 1,200
MMS......................................................... (845) 2,500
IVC......................................................... 169 --
Rapid Systems............................................... 584 --
BSG......................................................... 6,094 --
HDS......................................................... 4,688 --
------ -------
$8,953 $11,700
====== =======
</TABLE>
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $0.9 and
$5.0 million in 1996 and 1995, respectively, in accordance with Statement of
Financial Accounting Standards No. 112 to reflect the expense for employees'
rights to involuntary severance benefits that have accumulated to date. Also, in
1996 the Company recorded a charge of $3.0 million for severance costs
associated with former executive management.
Other Costs. During 1996, the Company canceled an initiative to develop an
on-line practice management system. The Company recorded a charge of
approximately $2.0 million relating to the deferred costs associated with this
project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations. In addition, the Company also recorded a charge of
approximately $2.0 million for miscellaneous asset write-offs.
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. In addition,
in 1995 the Company recorded a charge of $750,000 for certain amounts paid to
the former owners of an acquired company.
During the fourth quarter of 1996, the Company recorded charges of $138.6
million related to the abandonment of the reengineering program, the shut down
of Imonics and other charges as discussed above.
INCOME (LOSS) BEFORE INCOME TAXES
The Company's income (loss) before income taxes was (31.8)% of revenues in
1996 as compared with (0.7)% in 1995 and 12.2% in 1994. The reasons for the
losses before income taxes in 1996 and 1995 are the
20
<PAGE> 23
above mentioned revenue pressure MPSC is experiencing and the restructuring and
other charges taken by the Company. Excluding restructuring and other charges
from all years presented, income before income taxes as a percentage of revenue
would have been (2.2)%, 9.1% and 12.7%, respectively for 1996, 1995 and 1994.
INCOME TAXES
Effective income tax rates for the periods presented vary from statutory
rates primarily as a result of nondeductible expenses associated with merger
transactions consummated by the Company in 1996 and previous years. Pro forma
adjustments for income taxes have been provided for companies which elected to
be treated as "S" Corporations under the Internal Revenue Code of 1986, as
amended, prior to merging with the Company.
ACQUISITIONS
In fiscal 1996, Medaphis completed four acquisitions that were accounted
for as purchases and four acquisitions that were accounted for as
poolings-of-interests. The four purchase acquisitions are as follows:
On February 12, 1996, the Company acquired substantially all of the
assets and assumed certain of the related liabilities of MMCS. MMCS
provides billing and accounts receivable management services primarily to
emergency room physicians.
On February 20, 1996, the Company acquired substantially all of the
assets and assumed certain of the related liabilities of CBT. CBT provides
collection and billing services primarily to hospitals.
On April 16, 1996, the Company acquired the outstanding capital stock
of MEDICO. MEDICO provides billing and accounts receivable management
services primarily to anesthesiologists.
On October 8, 1996, the Company acquired the assets and assumed
substantially all of the liabilities of Sage. Sage provides systems
integration services and data warehousing decision support applications,
primarily to the telecommunications industry.
For each of the foregoing acquisitions, the purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition.
The Company acquired the following businesses in fiscal 1996 which were
recorded using the pooling-of-interests method of accounting:
On February 29, 1996, the Company exchanged approximately 92,991
shares of its Common Stock for all of the outstanding shares of common
stock of IVC. IVC provides systems integration and work flow engineering
systems and services to clients in the healthcare and other industries.
On April 3, 1996, the Company exchanged approximately 1.1 million
shares of its Common Stock for all of the outstanding shares of common
stock of Rapid Systems. Rapid Systems is a client server/systems
integration company whose core competencies include network design,
integration and management, database design and development, graphical user
interface application design, development and implementation and strategic
systems engineering and computer security. During 1995, Rapid Systems had
revenue of $14.7 million.
On May 6, 1996, the Company exchanged approximately 7.5 million shares
of its Common Stock for all of the outstanding shares of common stock of
BSG. In addition, the Company assumed BSG stock options representing
approximately 2.3 million additional shares of the Company's Common Stock.
BSG provides information technology and change management services to
organizations seeking to transform their operations through the strategic
use of client/server and other advanced technologies. During 1995, BSG had
revenue of $69.7 million.
On June 29, 1996, the Company exchanged approximately 6.2 million
shares of its Common Stock for all of the outstanding shares of common
stock of HDS. In addition, the Company assumed HDS stock options
representing approximately 433,000 additional shares of the Company's
Common Stock. HDS is a developer and supplier of advanced healthcare
information systems which address a healthcare
21
<PAGE> 24
enterprise's clinical information needs through the integrated monitoring,
scheduling, documentation and control of patient care. During 1995, HDS had
revenue of $12.2 million.
Because these acquisitions have been recorded using the
pooling-of-interests method of accounting, no adjustments have been made to the
historical carrying amounts of assets acquired and liabilities assumed. The
consolidated financial statements included in this report have been restated to
include the financial position and operating results of Rapid Systems, BSG and
HDS for all periods prior to the acquisitions. No restatement has been made for
the financial position and operating results of IVC prior to the beginning of
the fiscal year of its acquisition due to its immateriality.
In August 1996, Medaphis announced that it did not anticipate any
significant acquisitions in the near term.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $75.6 million at December 31, 1996, and
had unrestricted cash and cash equivalents of $7.6 million.
The Company used $7.9 million in cash for operating activities in the year
ended December 31, 1996. The decrease in the Company's operating cash flows
resulted from the increased levels of working capital committed to the Company's
technology systems operations, expenditures related to restructuring and other
charges and the ongoing revenue and margin pressures at MPSC.
At December 31, 1996, the Company had $242.7 million of borrowings
outstanding under the $250 million revolving credit agreement (the "Senior
Credit Facility"). Borrowings under the Senior Credit Facility bore interest at
interest rates ranging from 6.78% to 6.90%. On February 4, 1997, the Company
entered into the Second Amended Facility. This agreement replaced the Senior
Credit Facility and increased the revolving line of credit to $285 million. The
Second Amended Facility expires on June 30, 1998 and may be extended or
otherwise amended pursuant to the agreement. Borrowings under the Second Amended
Facility are secured by substantially all of the Company's assets and are
guaranteed by substantially all of the Company's subsidiaries. The Second
Amended Facility effectively refinanced the loans outstanding under the Senior
Credit Facility and can be used to finance working capital and other general
corporate needs with restrictions on new acquisitions, certain litigation
settlement payments and capital expenditures for the fiscal quarter ending March
31, 1997. The Second Amended Facility provides for "base rate" loans which bear
interest equal to prime plus 1% as long as certain financial covenants are met.
The loan commitments under the Second Amended Facility will reduce to $200
million and $150 million on July 31, 1997 (unless extended by the lenders to
September 30, 1997) and January 31, 1998, respectively. In late 1996 and in
1997, the Company has taken actions to reduce capital expenditures and to
monitor uses of cash. The Company believes that it will be able to fund its
operating cash requirements through operating cash flows and limited borrowings
under the Second Amended Facility through July 31, 1997, when the Company will
be required to reduce the outstanding amount of borrowings under the Second
Amended Facility to a maximum of $200 million. In developing its 1997 business
plan, the Company did not expect to generate sufficient cash flow from
operations to meet the required debt reduction and, therefore, management has
adopted plans to divest HRI and is seeking alternatives for the BSG Group which
it believes will generate sufficient net proceeds to meet the July 31, 1997
reduction in the loan commitments required by the Second Amended Facility. The
Company has retained investment banking counsel to advise it on the divestiture
of HRI as well as to assist in the evaluation of alternatives for the BSG Group.
On March 14, 1997, the Company filed a registration statement with the
Commission relating to the planned initial public offering of 100% of the common
stock of HRI. This initial public offering is subject to review by the
Commission and the marketability of HRI. There can be no assurance that the
Company will be successful in its efforts to sell HRI and/or the BSG Group. If
the Company is unable to generate sufficient net proceeds through the sale of
HRI and/or the BSG Group or obtain alternative debt financing by July 31, 1997,
unless extended by the lenders until September 30, 1997, the Company's lender
can cause the borrowing under the Second Amended Facility to become immediately
due and payable.
22
<PAGE> 25
As part of the consideration paid to the six-bank syndicate for the Second
Amended Facility, the Company issued the lenders warrants with vesting
arrangements for 1% of the Common Stock of the Company on each of January 1,
1998 and April 1, 1998. These warrants terminate if the Company has no
outstanding borrowings on the line of credit on December 31, 1997. The Company
has not allocated any value to these warrants because management believes the
Company will generate sufficient cash flows from asset sales to repay all the
borrowings under the Second Amended Facility by December 31, 1997.
In December 1995, the Company gave notice of its intent to redeem its 6.5%
convertible subordinated debentures due January 1, 2000. The debentures were
convertible into shares of the Company's Common Stock at a conversion price of
$14.00 per share. All of the debenture holders exercised their conversion rights
effective January 1, 1996, and as a result, approximately 4.5 million shares of
Common Stock were issued in the conversion.
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 to the Company at this time, Medaphis believes that
the U.S. Attorney's Office is investigating allegations of billing fraud and
that the inquiry is focused upon Medaphis' billing and collection practices in
the Designated Offices. Numerous federal and state civil and criminal laws
govern medical billing and collection activities. In general, these laws provide
for various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of Medaphis' annual revenue, there can be no assurance
that the Federal Investigation will be resolved promptly, that additional
subpoenas or search warrants will not be received by Medaphis or that the
Federal Investigation will not have a material adverse effect upon the Company.
The Company recorded charges of $12 million in the third quarter of 1995 and $2
million in the fourth quarter of 1996, 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 which were
filed following the Company's announcement of the Federal Investigation. The
charges are intended to cover only the anticipated expenses of the Federal
Investigation and the related lawsuits and do not include any provision for
fines, penalties, damages, assessments, judgments or sanctions that may arise
out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995 were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits allege violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act, 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The Company expects to receive approximately $3.7
million from insurance to fund a portion of the 1995 Class Action Settlement and
accrued approximately $1.2 million in the
23
<PAGE> 26
quarter ending December 31, 1996 to fund the anticipated balance of the 1995
Class Action Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as internal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning GFS. No subpoenas or other process have been issued to the Company or
to GFS in connection with this investigation.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On December 30, 1996, the defendants filed a
motion to dismiss most of the 1996 Consolidated Complaint. On February 3, 1997,
the plaintiffs filed a Consolidated Second Amended Complaint. On February 14,
1997, the defendants moved to dismiss the Consolidated Second Amended Complaint
in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations, and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The demurrer was denied on
February 5, 1997. On March 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the 1933 Act, but the Company believes
that it has substantial defenses to the alleged damages relating to the 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda,
24
<PAGE> 27
Gregory A. Grosh, Medaphis and Randolph G. Brown on November 12, 1996 in the
Superior Court, Law Division, Essex County, State of New Jersey. The alleged
class consists of persons and entities whose options to purchase BSG common
stock were converted to Medaphis stock options in connection with Medaphis'
acquisition of BSG. The plaintiffs allege failure to perform diligence, breaches
of fiduciary duties of candor, loyalty and fair dealing and negligence against
the BSG defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh)
and fraud and deceit against the Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Commission notified the Company that it is
conducting a nonpublic investigation into, among other things, certain trading
and other issues related to Medaphis' August 14, 1996 and October 22, 1996
announcements of the Company's loss for the quarter ending September 30, 1996
and its restated consolidated financial statements for the three months and year
ended December 31, 1995 and its restated unaudited balance sheets as of March
31, 1996 and June 30, 1996. The Company intends to cooperate fully with the
Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that additional lawsuits
will not be filed against the Company, that the lawsuits, the written demands
and the pending governmental investigations will not have a disruptive effect
upon the operations of the business, that the written demands, the defense of
the lawsuits and the pending investigations will not consume the time and
attention of the senior management of the Company and that the resolution of the
lawsuits, the written demands and the pending governmental investigations will
not have a material adverse effect upon the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Management of the Company" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 1997 and is incorporated herein by reference.
25
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held May 8, 1997 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 1997 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the section entitled
"Certain Transactions" of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 1997 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Independent Auditors' Report;
Consolidated Statements of Operations -- years ended December 31, 1996,
1995 and 1994;
Consolidated Balance Sheets -- as of December 31, 1996 and 1995;
Consolidated Statements of Cash Flows -- years ended December 31, 1996,
1995 and 1994;
Consolidated Statements of Stockholders' Equity -- years ended December
31, 1996, 1995 and 1994; and Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 1996, 1995 and 1994.
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference
to other filings:
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
2.1 -- Amended and Restated Merger Agreement, dated July 28, 1995,
among Registrant, RaySub, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on September 12, 1995).
2.2 -- Merger Agreement, dated December 29, 1995, among Registrant,
CarSub, Inc. and Medical Management Sciences, Inc.
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on January 19, 1996).
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
2.3 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1995,
File No. 000-19480 (the "1995 Form 10-K")).
2.4 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 33-2506).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-8, Registration No. 333-
03213).
3.5 -- Amended and Restated By-Laws of Registrant (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File No. 000-19480
(the "1992 Form 10-K")).
4.1 -- Indenture by and between Registrant and Trust Company Bank,
as Trustee, dated December 30, 1992 (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on January 11, 1993).
4.2 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1995 Form 10-K).
4.3 -- Form of Option Agreement relating to Registrant's Stock
Option Plan (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1, File No. 33-42216).
4.4 -- Form of Option Agreement relating to Registrant's Executive
Performance Plan (incorporated by reference to Exhibit 4.3
to Registration Statement on Form S-1, File No. 33-42216).
4.5 -- Form of Option Agreement relating to Registrant's Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3, File No. 33-71552).
4.6 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to the
1995 Form 10-K).
4.7 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 4.6 to the 1995 Form 10-K).
4.8 -- Registration Rights Agreement, dated as of March 17, 1995,
by and among Registrant, David Michael Warner and John P.
Holton (incorporated by reference to Exhibit 4.10 to Annual
Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480 (the "1994 Form 10-K")).
4.9 -- Form of Common Stock Purchase Warrant issued to Fredrica
Morf and Ursula Nelson (incorporated by reference to Exhibit
4.19 to the 1994 Form 10-K).
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
4.10 -- Form of Warrant issued to one or more lenders pursuant to
Registrant's Second Amended and Restated Credit Agreement,
dated as of February 4, 1997 (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed on February
18, 1997).
4.11 -- Form of Registration Rights Agreement among Registrant,
Bryan Dieter and The Decision Support Group, Inc.
(incorporated by reference to Exhibit 4.26 to the 1994 Form
10-K).
4.12 -- Form of Registration Rights Agreement among Registrant,
Mahmoud R. Ghavi, Barry G. Wahlig, William L. McCready, and
Kimberly D. Elkins (incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed on December 5, 1995).
4.13 -- Form of Registration Rights Agreement among Registrant,
William J. DeZonia, Lori T. Caudill, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained
Annuity Trust (incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed on January 19, 1996).
4.14 -- Form of Registration Rights Agreement among Registrant,
Raymond J. Noorda and Steven G. Papermaster (incorporated by
reference to Exhibit 4.17 to Registration Statement on Form
S-4, file No. 33-2506).
4.15 -- Form of Registration Rights Agreement among Registrant,
Michael Clark, Andrei Mitran, and Steven Theidke
(incorporated by reference to Exhibit 4.18 to Registration
Statement on Form S-4, File No. 33-2506).
4.16 -- Notice of Redemption for 6.5% Convertible Subordinated
Debentures Due 2000 (incorporated by reference to Exhibit
4.21 to the 1995 Form 10-K).
4.17 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees.
10.1 -- Amended and Restated Medaphis Corporation Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 28.1
to Registration Statement on Form S-8, File No. 33-46847).
10.2 -- First Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.1 to Registration Statement on Form S-8, File
No. 33-64952).
10.3 -- Second Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the 1992 Form 10-K).
10.4 -- Third Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1993).
10.5 -- Fourth Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.6 -- Fifth Amendment to the Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (the "1993 Form 10-K")).
10.7 -- Sixth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1994).
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.8 -- Seventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-95742).
10.9 -- Eighth Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07203).
10.10 -- Ninth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.2 to Registration Statement on Form S-8, File
No. 333-07203).
10.11 -- Tenth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.3 to Registration Statement on Form S-8, File
No. 333-7203).
10.12 -- Eleventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan.
10.13 -- Medaphis Corporation Senior Executive Performance
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.2 to Registration Statement on Form S-8, File
No. 33-46847).
10.14 -- First Amendment to Medaphis Corporation Senior Executive
Performance Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.15 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference
to Exhibit 99.1 to Registration Statement on Form S-8, File
No. 33-67752).
10.16 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-71556).
10.17 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-88442).
10.18 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.14 to the 1995 Form
10-K).
10.19 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.2 to Registration
Statement on Form S-8, File No. 333-3213).
10.20 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.1 to Registration
Statement on Form S-8, File No. 333-07627).
10.21 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies.
10.22 -- Medaphis Corporation Non-Employee Director Stock Option
Plan, dated as of August 12, 1994 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.23 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees.
10.24 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.25 -- Restricted Stock Plan of the Registrant, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.26 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 to the 1995 Form
10-K).
10.27 -- First Amendment to Medaphis Corporation Employee Stock
Purchase Plan.
10.28 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.29 -- Amended and Restated Medaphis Employees' Retirement Savings
Plan.
10.30 -- First Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan.
10.31 -- Form of Second Amendment to the Amended and Restated
Medaphis Employees' Retirement Savings Plan.
10.32 -- Loan Agreement, dated October 1, 1983, between Medical
Management Consultants, Inc. and Development Authority of
Cobb County (incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1, File No. 33-42216).
10.33 -- Second Amended and Restated Credit Agreement, dated as of
February 4, 1997, among the Registrant, the lenders listed
therein and the Agent (incorporated by reference to Exhibit
99.2 to Current Report on Form 8-K filed on February 18,
1997).
10.34 -- Certificate of Merger of CompMed, Inc. with and into
Medaphis Physician Services Corporation dated as of December
31, 1993 (incorporated by reference to Exhibit 10.30 to the
1993 Form 10-K).
10.35 -- Employment Agreement, dated December 14, 1992, between
MedCorp Holding, Inc. and Dennis A. Pryor (incorporated by
reference to Exhibit 10.26 to the 1992 Form 10-K).
10.36 -- Amendment No. 1 to the Employment Agreement between Dennis
A. Pryor and Medaphis Physician Services Corporation
(formerly MedCorp Holding, Inc., which changed its name to
CompMed, Inc. and subsequently merged into Medaphis
Physician Services Corporation (incorporated by reference to
Exhibit 10.37 to the 1994 Form 10-K)).
10.37 -- Lease Agreement, dated August 1, 1989, between Financial
Enterprises III (a general partnership consisting of Martin
L. Brill and Dennis A. Pryor) and Medical Management
Sciences South, Inc.
10.38 -- Agreement for Management Services by and among Registrant,
INTEGRATEC Med-Services, Inc. and Medaphis Hospital Services
Corporation, dated as of January 13, 1993 (incorporated by
reference to Exhibit 10.37 to the 1993 Form 10-K).
10.39 -- Employment Agreement by and between Registrant and Randolph
G. Brown, dated March 24, 1995 (incorporated by reference to
Exhibit 10.46 to the 1994 Form 10-K).
10.40 -- Master Equipment Lease, dated January 25, 1994, by and
between Trust Company Bank and Registrant (incorporated by
reference to Exhibit 10.63 to the 1994 Form 10-K).
10.41 -- Lease and Development and Participation Agreement, dated
April 21, 1995 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.42 -- Master Equipment Lease Agreement Intended for Security with
NationsBank Leasing Corporation, dated May 31, 1995
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995).
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.43 -- Equipment Lease, dated September 29, 1995, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.70 to
the 1995 Form 10-K).
10.44 -- Equipment Lease, dated October 31, 1995 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.71 to
the 1995 Form 10-K).
10.45 -- Equipment Lease, dated January 31, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.72 to
the 1995 Form 10-K).
10.46 -- Equipment Lease, dated February 29, 1996, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.73 to
the 1995 Form 10-K).
10.47 -- Tivoli Systems, Inc. End User Software License Agreement,
dated June 30, 1995 (incorporated by reference to exhibit
10.3 to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.48 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File no. 33-2506).
10.49 -- Employment Agreement by and between Registrant and David E.
McDowell, dated November 19, 1996.
10.50 -- Employment Agreement by and between Registrant and Daniel S.
Connors, Jr., dated February 25, 1997.
10.51 -- Employment Agreement by and between Registrant and Carl
James Schaper, dated February 25, 1997.
10.52 -- Employment Agreement by and between Registrant and Jerome H.
Baglien, dated January 3, 1997.
11 -- Statement re: Computation of Per Share Earnings.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
27 -- Financial Data Schedule (for SEC use only).
99.1 -- Consolidated Class Action Complaint filed in the United
States District Court for the Northern District of Georgia,
Atlanta Division (incorporated by reference to Exhibit 99.1
to the 1995 Form 10-K).
99.2 -- Consolidated Class Action Complaint filed in the United
States District Court, Northern District of Georgia, Atlanta
Division.
99.3 -- Complaint filed in Los Angeles County Superior Court.
99.4 -- Class Action Complaint filed in Superior Court of New
Jersey, Law Division, Essex County.
99.5 -- Verified Derivative Complaint filed in the United States
District Court, Northern District of Georgia, Atlanta
Division.
99.6 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
</TABLE>
- ---------------
* The exhibits which are referenced in the above documents are hereby
incorporated by reference. Such exhibits have been omitted for purposes of
this filing but will be furnished supplementary to the Commission upon
request.
31
<PAGE> 34
(b) Reports on Form 8-K
One report on Form 8-K/A was filed during the quarter ended December
31, 1996:
<TABLE>
<CAPTION>
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------- ---------------- -----------------
<S> <C> <C>
Restatement of Medaphis Corporation's Supplemental
Consolidated Financial Statements to effect for
the merger with HDS........................... Yes(1) November 14, 1996
</TABLE>
- ---------------
(1) Supplemental Consolidated Financial Statements of the Company (audited) for
the years ended December 31, 1995 (as restated), 1994 and 1993 were filed.
32
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Medaphis Corporation
(Registrant)
By: /s/ JEROME H. BAGLIEN
------------------------------------
Jerome H. Baglien
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: March 31, 1997
33
<PAGE> 36
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID E. MCDOWELL Chairman, Chief Executive March 31, 1997
- ----------------------------------------------------- Officer and Director
David E. McDowell
/s/ JEROME H. BAGLIEN Senior Vice President and Chief March 31, 1997
- ----------------------------------------------------- Financial Officer (Principal
Jerome H. Baglien Accounting Officer)
/s/ ROBERT C. BELLAS, JR. Director March 31, 1997
- -----------------------------------------------------
Robert C. Bellas, Jr.
/s/ DAVID R. HOLBROOKE, M.D. Director March 31, 1997
- -----------------------------------------------------
David R. Holbrooke, M.D.
/s/ JOHN C. POPE Director March 31, 1997
- -----------------------------------------------------
John C. Pope
/s/ DENNIS A. PRYOR Director March 31, 1997
- -----------------------------------------------------
Dennis A. Pryor
</TABLE>
34
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Medaphis Corporation:
We have audited the accompanying consolidated balance sheets of Medaphis
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule 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 consolidated financial statements present fairly, in
all material respects, the financial position of Medaphis Corporation and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
6 to the consolidated financial statements, the Company's credit facility
requires significant reductions in the Company's borrowings by July 31, 1997,
which may be extended by the lenders to September 30, 1997. The Company does not
expect to generate sufficient cash flow from operations to meet this required
loan reduction. While the Company plans to divest of certain assets to generate
funds to meet this requirement, the Company does not have binding contracts to
dispose of these assets or to refinance or raise additional funds to otherwise
satisfy such required debt reduction. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to this matter also are described in Note 6. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 31, 1997
Atlanta, Georgia
F-1
<PAGE> 38
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue..................................................... $ 608,313 $559,877 $398,934
--------- -------- --------
Salaries and wages.......................................... 398,573 325,868 227,109
Other operating expenses.................................... 163,677 140,296 95,195
Depreciation................................................ 28,276 14,487 9,430
Amortization................................................ 20,016 18,048 10,691
Interest expense, net....................................... 11,585 10,062 5,926
Restructuring and other charges............................. 179,768 54,950 1,905
--------- -------- --------
Total expenses.................................... 801,895 563,711 350,256
--------- -------- --------
Income (loss) before income taxes........................... (193,582) (3,834) 48,678
Income tax expense (benefit)................................ (68,961) 1,787 16,155
--------- -------- --------
Net income (loss)........................................... (124,621) (5,621) 32,523
========= ======== ========
Pro forma adjustments, principally income taxes............. 979 (2,883) (1,817)
--------- -------- --------
Pro forma net income (loss)................................. $(123,642) $ (8,504) $ 30,706
========= ======== ========
Pro forma net income (loss) per common share................ $ (1.74) $ (0.15) $ 0.51
========= ======== ========
Weighted average shares outstanding......................... 71,225 56,591 60,245
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 39
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT
PAR VALUE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,631 $ 19,270
Restricted cash........................................... 19,568 15,340
Accounts receivable, billed (net of allowance for doubtful
accounts of $13,260 and $6,225)........................ 99,823 84,256
Accounts receivable, unbilled............................. 94,057 89,429
Deferred income taxes..................................... 36,177 --
Other..................................................... 12,129 14,870
-------- --------
Total current assets.............................. 269,385 223,165
Property and equipment...................................... 97,850 97,895
Deferred income taxes....................................... 42,379 --
Intangible assets........................................... 389,033 455,611
Other....................................................... 16,977 18,935
-------- --------
$815,624 $795,606
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 11,765 $ 23,220
Accrued compensation...................................... 30,332 24,505
Accrued expenses.......................................... 95,680 69,529
Current portion of long-term debt......................... 55,975 10,681
-------- --------
Total current liabilities......................... 193,752 127,935
Long-term debt.............................................. 215,752 150,565
Other obligations........................................... 13,830 18,926
Deferred income taxes....................................... -- 13,499
Convertible subordinated debentures......................... -- 63,375
-------- --------
Total liabilities................................. 423,334 374,300
-------- --------
Stockholders' Equity:
Preferred stock........................................... -- 382
Common stock, voting, $.01 par value, 200,000 authorized
in 1996 and 100,000 in 1995; issued and outstanding
71,705 in 1996 and 58,917 in 1995...................... 717 589
Paid-in capital........................................... 522,491 426,387
Accumulated deficit....................................... (130,749) (6,052)
-------- --------
392,459 421,306
Less treasury stock, at cost -- 16 shares in 1996......... 169 --
-------- --------
Total stockholders' equity........................ 392,290 421,306
-------- --------
$815,624 $795,606
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(124,621) $ (5,621) $ 32,523
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 48,292 32,535 20,121
Impairment loss on assets................................. 135,195 5,035 --
Deferred income taxes..................................... (71,939) 1,312 15,239
Other non-cash charges.................................... -- 417 1,208
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash............................ (6,152) (3,253) (1,963)
Increase in accounts receivable, billed................ (11,316) (21,549) (8,038)
Increase in accounts receivable, unbilled.............. (8,593) (9,714) (24,279)
Increase (decrease) in accounts payable................ (10,297) 4,738 5,341
Increase (decrease) in accrued compensation............ 5,277 (396) 5,704
Increase (decrease) in accrued expenses................ 26,870 25,725 (3,844)
Other, net............................................. 9,421 (5,841) 2,197
--------- -------- --------
Net cash provided by (used in) operating
activities...................................... (7,863) 23,388 44,209
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (18,200) (76,077) (153,385)
Purchases of property and equipment......................... (51,135) (50,986) (13,063)
Software development costs.................................. (37,946) (35,611) (9,519)
Other....................................................... -- 650 (1,969)
--------- -------- --------
Net cash used for investing activities............ (107,281) (162,024) (177,936)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 11,475 151,825 4,933
Proceeds from borrowings.................................... 129,155 140,780 122,100
Payments of long-term debt.................................. (36,511) (138,244) (6,108)
Dividends to shareholders of acquired companies............. (6) (6,751) (8,528)
Repurchase of stock and warrants............................ (5,591) -- --
Other....................................................... 5,274 (7,355) (675)
--------- -------- --------
Net cash provided by financing activities......... 103,796 140,255 111,722
--------- -------- --------
CASH AND CASH EQUIVALENTS
Net change.................................................. (11,348) 1,619 (22,005)
Balance at beginning of year (see Note 2)................... 18,979 17,651 39,656
--------- -------- --------
Balance at end of year...................................... $ 7,631 $ 19,270 $ 17,651
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON PREFERRED EARNINGS TREASURY TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN (ACCUMULATED STOCK STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) AMOUNT EQUITY
------ ------ --------- --------- -------- ------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
(including tax benefit of
$7,901)......................... 557 6 -- -- 12,516 -- -- 12,522
Issuance and conversion of
preferred stock at acquired
companies....................... 3,344 33 (2,737) 157 37,398 -- -- 37,588
Pre-merger dividends to former
owners.......................... -- -- -- -- -- (4,517) -- (4,517)
Net loss.......................... -- -- -- -- -- (5,621) -- (5,621)
Other............................. 767 8 -- -- 2,900 (752) -- 2,156
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1995...... 58,917 589 19,454 382 426,387 (6,052) -- 421,306
Changes in HDS's stockholders'
equity in the three months ended
March 31, 1996 (see Note 2)..... -- -- -- -- -- (382) -- (382)
Issuance of common stock in
acquisitions.................... 93 1 -- -- 3,823 249 -- 4,073
Exercise of stock options
(including tax benefit of
$21,012)........................ 1,593 16 -- -- 32,471 -- -- 32,487
Repurchase of stock and
warrants........................ (16) -- -- -- (5,422) -- (169) (5,591)
Conversion of preferred stock at
acquired companies.............. 6,528 65 (19,454) (382) 317 -- -- --
Conversion of subordinated
debentures...................... 4,527 45 -- -- 62,305 -- -- 62,350
Net loss.......................... -- -- -- -- (124,621) -- (124,621)
Other............................. 63 1 -- -- 2,610 57 -- 2,668
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996...... 71,705 $717 -- $ -- $522,491 $(130,749) $ (169) $ 392,290
====== ==== ======= ===== ======== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries ("Medaphis" or the
"Company"), including the retroactive effect of all mergers which have been
accounted for under the pooling-of-interests method of accounting.
The Company's consolidated financial statements, have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business and
consequently do not include any adjustments relating to the recoverability and
classification of liabilities that may be necessary should the Company be unable
to continue as a going concern. As discussed in Note 6, the Company's cash flow
from operations will not be sufficient to satisfy required reductions in the
Company's outstanding borrowings; however, the Company has adopted plans to
divest of certain assets which management believes will generate the necessary
cash flows to satisfy these required debt reductions.
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. Medaphis provides business management services and
systems primarily to the healthcare industry throughout the United States. The
Company historically has not experienced any significant losses related to
individual customers, class of customers or groups of customers in any
geographical area.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of 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.
F-6
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, three 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 40 years. Clients 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. Should the Company determine that the
carrying values of specific intangible assets are not recoverable, the Company
would record a charge to reduce the carrying value of such assets to their fair
values. During 1996, the Company adopted a plan to shut down its wholly-owned
operating subsidiary, Imonics Corporation ("Imonics"), and recorded a charge of
approximately $13.0 million for the write-off of the unamortized goodwill
associated with the purchase of Imonics. 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.
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 were approximately $37.9 million
and $36.3 million in 1996 and 1995, respectively. In 1996, the Company abandoned
its reengineering program and adopted a plan to shut down Imonics and, as a
result of these actions, Medaphis wrote off approximately $85.9 million of
capitalized software costs which had no future value to the Company. The Company
recorded research and development expenses of approximately $3.2 million, $2.8
million and $4.6 million in 1996, 1995 and 1994, respectively.
Software development costs are amortized using the straight line method
over the estimated economic lives of the assets, which are generally three to
five years. Amortization expense related to the Company's capitalized software
costs totaled $6.6 million, $5.1 million and $2.9 million in 1996, 1995 and
1994, respectively.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Effective in 1996, the Company
implemented the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123").
SFAS No. 123 requires that companies which elect to not account for stock-based
compensation as prescribed by that statement shall disclose the pro forma
effects on earnings (loss) and earnings (loss) per share as if SFAS No. 123 had
been adopted. Additionally, certain other disclosures are required with respect
to stock compensation and the assumptions used to determine the pro forma
effects of SFAS No. 123.
F-7
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL COSTS. The Company records charges for the administrative fees,
costs and expenses it anticipates incurring in conjunction with its legal
matters when management can reasonably estimate these costs.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events to assess the likelihood that tax benefits will be realized in the
future.
PRO FORMA PROVISION FOR INCOME TAXES. In 1995 and 1996, the Company
acquired the Automation Atwork Companies ("Atwork"), Medical Management
Sciences, Inc. ("MMS"), Rapid Systems Solutions, Inc. ("Rapid Systems") and BSG
Corporation ("BSG") in merger transactions accounted for as poolings-of-
interests. Prior to the mergers, Atwork, MMS, Rapid Systems and a company
acquired by BSG prior to the merger between BSG and the Company (the "BSG
Merger") had elected "S" corporation status for income tax purposes. As a result
of the mergers (or, in the case of the company acquired by BSG, its acquisition
by BSG), such entities terminated their "S" corporation elections. Pro forma
provision (benefit) for income taxes, taken together with reported income tax
expense (benefit), presents the combined pro forma tax expense (benefit) of such
entities as if they had been "C" corporations during the periods presented.
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE. Pro forma net income (loss)
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 (loss) per common share
or it is antidilutive. 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 (loss) per common share.
F-8
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND DIVESTITURES
From January 1, 1994 through December 31, 1996, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
<TABLE>
<CAPTION>
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
- ---------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Sage Communication, Inc. ("Sage")....................... * October 1996
The Medico Group, Ltd................................... * April 1996
Medical Management Computer Sciences, Inc............... * February 1996
CBT Financial Services, Inc............................. * February 1996
The Receivables Management Division of MedQuist, Inc.... $ 17,300 December 1995
The Halley Exchange, Inc. ("Halley").................... * December 1995
Billing and Professional Services, Inc.................. * October 1995
Medical Office Consultants, Inc......................... * May 1995
Computers Diversified, Inc.............................. 15,500 April 1995
Medical Management, Inc................................. 8,000 March 1995
The Decision Support Group, Inc......................... * January 1995
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
</TABLE>
- ---------------
* Consideration not material.
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The allocation of the purchase price of certain
of the 1996 acquisitions is preliminary and will be adjusted when the necessary
information is available. The operating results of the acquired businesses are
included in the Company's consolidated statements of operations from the
respective dates of acquisition. The pro forma impact of the foregoing
acquisitions not presented due to the immaterial effect these acquisitions have
on the Company's results of operations for 1996 and 1995.
F-9
<PAGE> 46
NOTES TO 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 ACQUISITION
COMPANY ACQUIRED EXCHANGED DATE
- ---------------- --------- ----------------
<S> <C> <C>
Health Data Sciences Corporation ("HDS").................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC").................. * February 1996
MMS......................................................... 4,000,000 December 1995
Consort Technologies, Inc. ("Consort")...................... 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")......................... 3,265,000 August 1995
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. Accordingly, HDS's operating results for
the three months ended March 31, 1996 were duplicated in each of the years ended
December 31, 1996 and 1995. HDS's revenues and net income for that three-month
period were $3,758,000 and $382,000, respectively. The beginning cash and cash
equivalents balance in the accompanying 1996 consolidated statement of cash
flows does not equal the December 31, 1995 cash and cash equivalents balance as
a result of the combination, in the 1995 consolidated balance sheet, of HDS's
financial position as of March 31, 1996 with the financial position of the
Company as of December 31, 1995.
F-10
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of revenue, pro forma net income (loss) and pro forma net
income (loss) per common share of the Company, as previously reported, 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
--------- ----------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue:
Medaphis, as previously reported......................... $463,321 $319,138
Rapid Systems............................................ 14,722 8,558
BSG...................................................... 69,663 49,174
HDS...................................................... 12,171 22,064
-------- --------
Combined......................................... $559,877 $398,934
======== ========
Pro forma net income (loss):
Medaphis, as previously reported......................... $ (4,680) $ 22,935
Rapid Systems............................................ 972 773
BSG...................................................... (1,045) 1,329
HDS...................................................... (3,173) 6,037
Pro forma provision for Rapid Systems and BSG income
taxes................................................. (578) (368)
-------- --------
Combined......................................... $ (8,504) $ 30,706
======== ========
Pro forma net income (loss) per common share:
Medaphis, as previously reported......................... $ (0.09) $ 0.50
======== ========
Combined................................................. $ (0.15) $ 0.51
======== ========
</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 1996
for interim year-to-date periods preceding the dates of consummation are as
follows (in thousands):
<TABLE>
<CAPTION>
INTERIM PERIOD PRO FORMA
PRECEDING NET INCOME
COMPANY ACQUIRED CONSUMMATION REVENUE (LOSS)
- ---------------- -------------- ------- -----------------
<S> <C> <C> <C>
Rapid Systems................................ March 31, 1996 $ 5,248 $ (498)
BSG.......................................... March 31, 1996 19,539 2,497
HDS.......................................... March 31, 1996 3,758 382
</TABLE>
On March 14, 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the planned
initial public offering of 100% of the common stock of HRI. This initial public
offering is subject to review by the Commission and the marketability of HRI.
The proceeds from this offering will be used to repay borrowings under the
Second Amended and Restated Agreement (the "Second Amended Facility") (see Note
6 where discussed). Because HRI is not a reportable segment for financial
reporting purposes, the Company has not reported the financial position, results
of operations and cash flows of HRI as discontinued operations.
Medaphis also is assessing alternatives for its BSG Group (BSG, Rapid
Systems and Sage). The alternatives include, but are not limited to, seeking a
buyer, a spin-off transaction or other capital raising alternatives.
F-11
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 2,873 $ 2,873
Buildings................................................... 8,105 9,839
Furniture and fixtures...................................... 23,276 19,485
Equipment................................................... 120,731 100,866
Other....................................................... 9,766 6,055
------- --------
164,751 139,118
Less accumulated depreciation............................... 66,901 41,223
------- --------
$97,850 $ 97,895
======= ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $355,074 $361,096
Client lists................................................ 57,203 51,862
Software development costs.................................. 34,982 82,219
Other....................................................... 1,000 2,159
-------- --------
448,259 497,336
Less accumulated amortization............................... 59,226 41,725
-------- --------
$389,033 $455,611
======== ========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued costs of businesses acquired........................ $ 9,904 $13,582
Funds due clients........................................... 19,207 12,757
Deferred revenue............................................ 13,858 11,590
Accrued legal costs......................................... 15,173 8,264
Accrued restructuring and severance costs................... 18,080 7,801
Interest.................................................... 985 2,917
Other....................................................... 18,473 12,618
------- -------
$95,680 $69,529
======= =======
</TABLE>
F-12
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under Senior Credit Facility..................... $242,730 $128,000
Capital lease obligations, weighted average effective
interest rates of 7.4% and 8.4%........................... 27,810 23,670
Other....................................................... 1,187 9,576
-------- --------
271,727 161,246
Less current portion........................................ 55,975 10,681
-------- --------
$215,752 $150,565
======== ========
</TABLE>
At December 31, 1996, the Company had a $250 million revolving credit
agreement ("the Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line with a six-bank
syndicate to finance future acquisitions, working capital and other general
corporate needs. The Company had the option of making "LIBOR" based loans or
"base rate" loans under the Senior Credit Facility. LIBOR based loans bore
interest at LIBOR for the then current interest period plus amounts varying from
1.25% to 1.75% based on the Company's financial performance. Base rate loans
bore interest equal to prime. At December 31, 1996, the Company had LIBOR based
loans outstanding at interest rates ranging from 6.78% to 6.90%. The Senior
Credit Facility contained, among other things, financial covenants which
required the Company to maintain certain financial ratios. The Company was in
compliance with all covenants as of December 31, 1996.
On February 4, 1997, the Company entered into the Second Amended Facility.
This agreement replaced the Senior Credit Facility and increased the revolving
line of credit to $285 million. The Second Amended Facility is composed of a
$275 million revolving line of credit and a $10 million cash management swing
loan line with lenders from a six-bank syndicate. The Second Amended Facility
effectively refinanced the loans outstanding under the Senior Credit Facility
and can be used to finance working capital and other general corporate needs.
The Second Amended Facility provides for "base rate" loans which bear interest
equal to prime plus 1% as long as certain financial covenants are met. The loan
commitments under the Second Amended Facility will reduce to $200 million and
$150 million on July 31, 1997 (unless extended by the lenders until September
30, 1997) and January 31, 1998, respectively. The Company does not and did not
expect to generate sufficient cash flow from operations to satisfy the required
reductions in debt. Management of the Company has adopted plans to divest HRI
and is seeking alternatives for the BSG Group, which management believes will
generate sufficient net proceeds to meet the reduction in the loan commitments
required by the Second Amended Facility. The Company has retained an investment
banking firm to advise it on the divestiture of HRI as well as to assist in the
evaluation of alternatives for the BSG Group. While management is confident the
Company will be able to meet its debt service obligations, there can be no
assurance that the Company will be successful in its efforts to divest HRI or
the BSG Group. If the Company is unable to dispose of HRI or the BSG Group or
through other means generate sufficient net proceeds to satisfy the required
reductions in the loan commitments, the Company's lenders can cause the
borrowings under the Second Amended Facility to become immediately due and
payable. The Second Amended Facility also contains restrictions on the Company's
ability to declare or pay cash dividends on its common stock.
As part of the consideration paid to the six-bank syndicate for the Second
Amended Facility, the Company issued the lenders warrants with vesting for 1% of
the common stock of the Company on each of January 1, 1998 and April 1, 1998.
The warrants terminate if the Company has no outstanding borrowings on the line
of credit on December 31, 1997. The Company has not allocated any value to these
warrants because management believes the Company will realize sufficient net
proceeds from the divestiture of HRI and the potential alternatives for the BSG
Group or the refinancing of any remaining borrowings under the Second
F-13
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amended Facility to enable the Company to repay all borrowings under the Second
Amended Facility by December 31, 1997.
The Second Amended Facility expires on June 30, 1998 but may be extended,
or otherwise amended, pursuant to agreement between the Company and the lenders
under the Second Amended Facility. Borrowings under the Second Amended Facility
are secured by substantially all of the Company's assets and are guaranteed by
substantially all 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, 1996 and 1995, the net book value of equipment subject to
capital leases totaled $26.6 million and $20.3 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>
1997........................................................ $ 55,975
1998........................................................ 211,403
1999........................................................ 3,306
2000........................................................ 74
2001........................................................ 69
Thereafter.................................................. 900
--------
$271,727
========
</TABLE>
7. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $63.4 million of 6.5% convertible subordinated
debentures to finance the acquisition of CompMed, Inc. The debentures were due
on January 1, 2000. The debenture holders had the right to convert the
debentures into shares of the Company's common stock at a conversion price of
$14.00 per share. In 1995, the 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 based on the market price of Medaphis common stock into which the
debentures were converted on January 1, 1996. Pro forma net loss per common
share for 1995, 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 $(0.07) 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 $25.6
million, $22.4 million and $13.3 million for the years ended December 31, 1996,
1995 and 1994, respectively.
F-14
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 26,019
1998........................................................ 24,087
1999........................................................ 21,497
2000........................................................ 10,367
2001........................................................ 6,566
Thereafter.................................................. 15,336
--------
$103,872
========
</TABLE>
9. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 634 $ 66 $ 264
State............................................. 2,533 1,795 439
Deferred:
Federal........................................... (63,137) 413 13,977
State............................................. (8,948) (928) 1,988
Foreign........................................... 146 -- --
Valuation allowance................................. (189) 441 (513)
-------- ------- --------
Income tax expense (benefit)........................ (68,961) 1,787 16,155
Pro forma adjustments for income taxes.............. (979) 3,389 1,817
-------- ------- --------
$(69,940) $ 5,176 $ 17,972
======== ======= ========
</TABLE>
In 1995 and 1996, the Company acquired Atwork, Consort, MMS, IVC, Rapid
Systems and BSG in merger transactions accounted for as poolings-of-interests.
Prior to the mergers, Atwork, Consort, MMS, IVC, Rapid Systems and a company
acquired by BSG prior to the BSG Merger had elected "S" corporation status for
income tax purposes. As a result of the mergers (or, in the case of the company
acquired by BSG, its acquisition by BSG), such entities terminated their "S"
corporation elections. Pro forma net income (loss) and pro forma net income
(loss) per common share are presented in the consolidated statements of
operations as if each of these entities had been a "C" corporation during the
periods presented.
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>
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at federal statutory rate........ $(67,753) $(1,342) $ 17,037
State taxes, net of federal benefit................. (7,074) 361 2,475
Nondeductible goodwill amortization................. 1,491 1,298 380
Nondeductible deal costs of business combinations... 3,314 5,623 --
Other items not deductible for tax purposes......... 1,051 371 272
Research and development tax credits................ -- -- (596)
Valuation allowance................................. (189) 441 (513)
Foreign............................................. 146 -- --
Other............................................... (926) (1,576) (1,083)
-------- ------- --------
$(69,940) $ 5,176 $ 17,972
======== ======= ========
</TABLE>
F-15
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $122,424 $ 58,888
Research and development credits............................ -- 1,078
Valuation allowance......................................... (18,334) (18,310)
Accounts receivable......................................... (40,125) (31,841)
Depreciation and amortization............................... (15,318) (37,674)
Accrued expenses............................................ 34,268 21,166
Other deferred tax liabilities.............................. (4,359) (6,806)
-------- --------
$ 78,556 $(13,499)
======== ========
</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 1996 relates
primarily to the finalization of the purchase price allocation of an entity
acquired in 1995.
As of December 31, 1996, the Company had federal net operating loss
carryforwards for income tax purposes of approximately $315 million which expire
at various dates between 1997 and 2011. The Internal Revenue Code of 1986, as
amended, 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 ("NOLs"), the Company has approximately $250 million in
cumulative unutilized NOLs available in 1997. In future years, currently
unavailable NOLs will become available to offset income prior to the date of
their expiration. Management expects to utilize a significant portion of the
currently available NOLs with the anticipated taxable gain from the divestiture
of HRI. As of December 31, 1996, the Company has recorded a deferred tax asset
of $78.6 million reflecting primarily the benefit of $122.4 million in loss
carryforwards. Realization is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced.
10. CAPITAL STOCK
On May 1, 1996, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation, thereby
increasing the number of authorized shares of the Company's voting common stock
from 100 million to 200 million shares.
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of common stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its common stock and 244,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
Prior to the BSG Merger, BSG had two classes of preferred stock
outstanding. Dividends were noncumulative and payable at 8% per year at the
discretion of BSG's Board of Directors. The preferred shares
F-16
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were convertible, at the option of the holder on a one-to-one basis into common
shares of BSG, and the preferred shareholders had the right to vote on an as
converted basis. In connection with the BSG Merger on May 6, 1996, all preferred
shares were converted into common shares of BSG which were subsequently
exchanged for common 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.
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, a Non-Qualified Stock Option Plan for Non-executive Employees and
several stock option plans assumed as a result of the BSG Merger (collectively
the "Stock Option Plans"). Granted options expire 10 to 11 years after the date
of grant and generally vest over a three-to-five-year period. In connection with
the BSG Merger, the Company offered to issue options under the Company's
Non-Qualified Stock Option Plan for Employees of Acquired Companies in exchange
for options outstanding under the BSG option plans.
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 stockholders at the annual
stockholders' meeting in 1995. The Director Plan provides for an initial grant
of 10,000 options at a strike price corresponding to the date on which the
non-employee director is elected or appointed to the Board of Directors.
Additionally, each non-employee director receives an annual grant of 2,000
options at each subsequent annual meeting in which the non-employee director is
a member of the Board of Directors. All options granted under the Director Plan
vest over a five-year period and expire 11 years from the date of grant.
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former executive officers to purchase up to an
aggregate of 550,746 shares of the Company's common stock at $2 per share. All
options available for grant under this plan have been granted, expire January
16, 2001 and are currently exercisable. As of December 31, 1996, 347,960 options
issued under this plan have been exercised (117,960 during 1996 and zero during
1995).
F-17
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity related to the Stock Option Plans is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- -------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding as of
January 1.................. 9,559 $12.27 6,447 $ 8.38 5,680 $ 6.46
Granted...................... 7,021 11.56 4,109 17.75 1,730 12.95
Canceled..................... (3,947) 22.17 (440) 7.79 (378) 8.70
Exercised.................... (1,536) 7.95 (557) 11.24 (585) 3.02
------ ------- ----- ------- ----- -------
Options outstanding as of
December 31................ 11,097 $ 8.91 9,559 $12.27 6,447 $ 8.38
====== ======= ===== ======= ===== =======
Options exercisable as of
December 31................ 3,022 2,620 1,927
====== ===== =====
Weighted-average fair value
of options granted during
the year................... $ 4.18 $2.87
====== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED- DECEMBER 31,
1996 CONTRACTUAL AVERAGE 1996 WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------ -------------- ----------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.08 to $7.75................... 2,655 7.42 $ 3.32 1,499 $ 3.13
$8.25 to $8.50................... 3,795 10.88 8.50 6 8.33
$8.70 to $13.50.................. 3,534 8.27 9.83 1,110 9.69
$13.56 to $21.06................. 627 7.97 14.18 259 14.30
$21.75 to $52.01................. 486 9.76 29.08 148 25.25
------ ----- ------ ----- -------
$0.08 to $52.01.................. 11,097 9.00 $ 8.91 3,022 $ 7.55
====== ===== ====== ===== =======
</TABLE>
On October 25, 1996, the Company changed the exercise price of
approximately 2.0 million of its then outstanding stock options which had an
exercise price of $15 or greater. These options have a new exercise price of
$9.875. No other terms of these options were changed.
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's stockholders at
the annual stockholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value common stock to certain executive
officers who have since resigned from the Company. The restricted stock vests
ratably over a four-year period from the date of award. 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 the Restricted Plan have vested.
In 1996, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Reengineering, Consolidation and Business
Improvement Cash Incentive Plan ("Reengineering Incentive Plan") and the Company
granted 155,749 units pursuant to the provisions of the plan to certain key
employees of the Company. The Reengineering Incentive Plan provides for the
payment of cash bonuses to participants if certain performance goals related to
the Company's reengineering and consolidation project are achieved and certain
general business improvement milestones are satisfied. Awards under the plan are
based on units awarded to each participant. If the performance goals specified
in the Reengineering Incentive Plan
F-18
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are achieved and the awards vest, the value of each unit will equal the average
price of the Company's common stock during the ten trading days immediately
preceding such vesting date. At the point it becomes probable that the
performance goals and milestones will be met, the Company will begin to accrue
for the full amount of these bonuses. All awards made under the Reengineering
Incentive Plan, to the extent they remain unvested, terminate on December 31,
1997. Because of the Company's decision to abandon the reengineering program,
certain of the performance goals and milestones will not be met prior to
December 31, 1997, therefore all grants pursuant to the Reengineering Incentive
Plan will terminate unvested.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted with an exercise price equal to the quoted market price of the
Company's common stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Expected life (years)....................................... 4.16 3.84
Risk-free interest rate..................................... 5.06% 6.18%
Dividend rate............................................... 0.00% 0.00%
Expected volatility......................................... 48.83% 18.81%
</TABLE>
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma loss per share would have increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1995
--------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Pro forma net loss:
As reported -- pro forma for income taxes................. $(123,642) $(8,504)
Pro forma -- for SFAS No. 123............................. $(126,659) $(9,538)
Pro forma net loss per share:
As reported -- pro forma for income taxes................. $ (1.74) $ (0.15)
Pro forma -- for SFAS No. 123............................. $ (1.78) $ (0.17)
</TABLE>
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
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 $3.5 million, $3.3 million and $1.9 million for the
years ended December 31, 1996, 1995 and 1994, 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 $1.2 million in 1996, $1.0
million in 1995 and $0.7 million in 1994.
F-19
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring charges....................................... $ 14,076 $15,000 $ --
Software abandonment........................................ 86,088 1,800 --
Property and equipment impairment........................... 35,592 5,000 --
Intangible asset impairment................................. 13,048 -- 1,905
Legal costs................................................. 12,800 12,000 --
Pooling charges............................................. 8,953 11,700 --
Severance costs............................................. 3,913 5,000 --
Other....................................................... 5,298 4,450 --
-------- ------- ------
$179,768 $54,950 $1,905
======== ======= ======
</TABLE>
Restructuring Charges. In 1995, Management approved a restructuring plan
relating to the consolidation of the Company's data processing function in its
wholly owned operating subsidiary, Medaphis Physician Services Corporation
("MPSC"). The Company recorded a reserve for the exit costs associated with the
restructuring plan of approximately $15.0 million.
During 1996, the Company revised its original plan of consolidating into
ten regional information processing centers ("IPCs") and reduced these reserves
by approximately $1.8 million. The Company has adopted a plan to downsize
certain of the existing IPCs and the costs associated with exiting these
facilities will be charged against the restructuring reserves established in
1995. The Company also incurred approximately $5.2 million of costs which were
related to MPSC's reengineering and consolidation project which had not
previously been accrued.
Also during 1996, the Company restructured its client/server system
integration businesses and consolidated Rapid Systems into BSG and adopted a
plan to shut down Imonics. In connection with this restructuring, the Company
recorded charges of approximately $3.0 million for the costs associated with the
termination of certain leases, approximately $6.5 million for severance costs
for all notified employees of Imonics and approximately $1.2 million for other
exit activities.
Software Abandonment. In June 1996, the Company began a comprehensive
assessment of the reengineering program for the Company's Services division
which was begun in 1994. The comprehensive review was completed and management
came to the conclusion that it was not cost effective to continue the
development and deployment of the software and technology upon which the
reengineering program was based and that the reengineering software and
technology had no alternative useful application in the Company's operations. In
connection with abandonment of its reengineering program and the shutdown of
Imonics, the Company abandoned certain software development projects and
recorded charges for the write-off of approximately $86.1 million of capitalized
software development costs related to these projects.
In connection with the Halley acquisition in 1995, the Company recorded a
$1.8 million charge related to the cost of purchased research and development
activities related to acquired technology for which technological feasibility
had not yet been established and which had no alternative future uses.
Property and Equipment Impairment. In connection with the abandonment of
the reengineering project and the shutdown of Imonics in 1996 and the
restructuring of MPSC in 1995, the Company assessed the recoverability of
certain of its long lived assets and recorded impairment losses of approximately
$35.6 million and $5.0 million in 1996 and 1995, respectively.
Intangible Asset Impairment. In 1996, the Company adopted a plan to shut
down Imonics and recorded a charge of approximately $13 million for the
write-off of the unamortized goodwill associated with the purchase of Imonics.
In 1994, a charge of approximately $1.9 million, associated with the write-off
of a non-
F-20
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Legal Costs. In 1996, the Company recorded a charge of $5.0 million for
the administrative fees, costs and expenses it anticipates incurring in
connection with various putative class action lawsuits which have been filed
since August 14, 1996 against the Company and certain of its former officers,
one of whom was also a director. The Company also accrued $4.6 million for the
legal costs and other fees the Company has or plans to incur in connection with
the turnaround effort undertaken by the new management team and various other
legal matters.
The Company recorded charges of $2.0 million and $12.0 million in 1996 and
1995, respectively, for the administrative fees, costs and expenses it
anticipates incurring in connection with the Federal Investigation (as defined
in Note 14) and various putative class action lawsuits which are based on the
Federal Investigation. In 1996, the Company reached an agreement in principle to
settle the class action lawsuits which are based on the Federal Investigation
for $4.75 million. Also in 1996, the Company has recorded a $1.2 million charge
for its portion of this settlement (the Company expects the remainder of the
settlement to be funded by insurance) (See Note 14 for more detail on the
Federal investigation and the settlement of the lawsuits).
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------ -------
(IN THOUSANDS)
<S> <C> <C>
Atwork...................................................... $ (430) $ 6,000
HRI......................................................... (778) 2,000
Consort..................................................... (529) 1,200
MMS......................................................... (845) 2,500
IVC......................................................... 169 --
Rapid Systems............................................... 584 --
BSG......................................................... 6,094 --
HDS......................................................... 4,688 --
------ -------
$8,953 $11,700
====== =======
</TABLE>
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $0.9 and
$5.0 million in 1996 and 1995, respectively, in accordance with Statement of
Financial Accounting Standards No. 112 to reflect the expense for employees'
rights to involuntary severance benefits that have accumulated to date. Also, in
1996 the Company recorded a charge of $3.0 million for severance costs
associated with former executive management.
Other Costs. During 1996, the Company canceled an initiative to develop an
on-line practice management system. The Company recorded a charge of
approximately $2.0 million relating to the deferred costs associated with this
project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations. In addition, the Company also recorded a charge of
approximately $2.0 million for miscellaneous asset write-offs.
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. In addition,
in 1995 the Company recorded a charge of $750,000 for certain amounts paid to
the former owners of an acquired company.
During the fourth quarter of 1996, the Company recorded charges of $138.6
million related to the abandonment of the reengineering program, the shut down
of Imonics and other charges as discussed above.
F-21
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for both the restructuring of Imonics
and MPSC are as follows:
<TABLE>
<CAPTION>
1995 COSTS RESERVE COSTS RESERVE
INITIAL APPLIED BALANCE APPLIED BALANCE
RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31,
CHARGE RESERVE 1995 ADJUSTMENTS RESERVES 1996
------- ------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Lease termination costs......... $ 6,726 $ (736) $ 5,990 $ 5,017 $ (3,493) $ 7,514
Incremental costs associated
with discontinued client
contracts..................... 5,488 (797) 4,691 (2,690) (2,001) --
Severance....................... -- -- -- 6,541 (3,793) 2,748
Other........................... 2,823 (1,035) 1,788 5,208 (5,774) 1,222
------- ------- ------- ------- -------- -------
$15,037 $(2,568) $12,469 $14,076 $(15,061) $11,484
======= ======= ======= ======= ======== =======
</TABLE>
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 to the Company at this time, Medaphis believes that
the U.S. Attorney's Office is investigating allegations of billing fraud and
that the inquiry is focused upon Medaphis' billing and collection practices in
the Designated Offices. Numerous federal and state civil and criminal laws
govern medical billing and collection activities. In general, these laws provide
for various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of Medaphis' annual revenue, there can be no assurance
that the Federal Investigation will be resolved promptly, that additional
subpoenas or search warrants will not be received by Medaphis or that the
Federal Investigation will not have a material adverse effect upon the Company.
The Company recorded charges of $12 million in the third quarter of 1995 and $2
million in the fourth quarter of 1996 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 which were
filed following the Company's announcement of the Federal Investigation. The
charges are intended to cover only the anticipated expenses of the Federal
Investigation and the related lawsuits and do not include any provision for
fines, penalties, damages, assessments, judgments or sanctions that may arise
out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995 were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits allege violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County,
F-22
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Georgia, described more fully below. The Company expects to receive
approximately $3.7 million from insurance to fund a portion of the 1995 Class
Action Settlement and accrued approximately $1.2 million in the quarter ending
December 31, 1996 to fund the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning the Company's Gottlieb's Financial Services, Inc. ("GFS") subsidiary.
No subpoenas or other process have been issued to the Company or to GFS in
connection with the investigation. There can be no assurance that this matter
will be resolved promptly, that subpoenas will not be received by Medaphis or
that the investigation will not have a material adverse effect upon Medaphis.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On December 30, 1996, the defendants filed a
motion to dismiss most of the 1996 Consolidated Complaint. On February 3, 1997,
the plaintiffs filed a Consolidated Second Amended Complaint. On February 14,
1997, the defendants moved to dismiss the Consolidated Second Amended Complaint
in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The
F-23
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demurrer was denied on February 5, 1997. On March 18, 1997, the court denied the
plaintiff's motion for a preliminary injunction. As a result of the Company's
restatement of its fiscal 1995 financial statements, the Company may not be able
to sustain a defense to strict liability on certain claims under the 1933 Act,
but the Company believes that it has substantial defenses to the alleged damages
relating to the 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG common stock were converted to Medaphis
stock options in connection with Medaphis' acquisition of BSG. The plaintiffs
allege failure to perform diligence, breaches of fiduciary duties of candor,
loyalty and fair dealing and negligence against the BSG defendants (Papermaster,
Pickering, Lundeen, Smith, Noorda and Grosh) and fraud and deceit against the
Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it is conducting a non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that additional lawsuits
will not be filed against the Company, that the lawsuits, the written demands
and the pending governmental investigations will not have a disruptive effect
upon the operations of the business, that the written demands, the defense of
the lawsuits and the pending investigations will not consume the time and
attention of the senior management of the Company and that the resolution of the
lawsuits, the written demands and the pending governmental investigations will
not have a material adverse effect upon the Company.
F-24
<PAGE> 61
NOTES TO 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>
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Liabilities assumed in acquisitions................ $ 3,436 $11,454 $108,781
Additions to capital lease obligations............. 15,705 17,646 5,356
Common stock issued in conjunction with
acquisitions.................................... -- 459 38,796
Cash paid for:
Interest (net of amounts capitalized of $4,092,
$2,359 and $0 for 1996, 1995 and 1994,
respectively)................................... 14,762 11,129 6,796
Income taxes....................................... 7,314 3,155 517
</TABLE>
16. LINES OF BUSINESS
The Company operates in three major lines of business: Services (providing
healthcare business management services to physicians, hospitals and payors),
BSG Group (client/server information technology services) and HIT (healthcare
information technology and hardware sales). 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 income taxes, deferred financing costs, fixed assets,
and miscellaneous prepaids and receivables. Information concerning operations in
these lines of business is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenue:
Services............................................ $ 415,328 $402,467 $291,536
BSG Group........................................... 113,988 98,615 57,732
HIT................................................. 81,646 60,521 50,387
Corporate and eliminations.......................... (2,649) (1,726) (721)
--------- -------- --------
$ 608,313 $559,877 $398,934
========= ======== ========
Operating profit (loss) (1):
Services............................................ $ 14,454 $ 52,136 $ 47,979
BSG Group........................................... (14,982) 5,249 1,885
HIT................................................. 25,649 15,024 13,342
Corporate and eliminations.......................... (27,350) (11,231) (6,697)
--------- -------- --------
$ (2,229) $ 61,178 $ 56,509
========= ======== ========
Interest expense, net................................. $ 11,585 $ 10,062 $ 5,926
Restructuring and other charges:
Services............................................ $ 97,692 $ 47,000 $ 1,905
BSG Group........................................... 60,882 -- --
HIT................................................. 3,957 7,950 --
Corporate........................................... 17,237 -- --
--------- -------- --------
179,768 54,950 1,905
--------- -------- --------
Income (loss) before income taxes..................... $(193,582) $ (3,834) $ 48,678
========= ======== ========
</TABLE>
F-25
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Identifiable Assets:
Services............................................ $ 594,738 $628,522 $521,102
BSG Group........................................... 51,972 70,807 48,282
HIT................................................. 84,298 86,029 55,142
Corporate........................................... 84,616 10,248 2,625
--------- -------- --------
$ 815,624 $795,606 $627,151
========= ======== ========
Depreciation and amortization:
Services............................................ $ 32,498 $ 22,015 $ 14,606
BSG Group........................................... 7,980 5,842 1,974
HIT................................................. 6,135 4,153 3,356
Corporate........................................... 1,679 525 185
--------- -------- --------
$ 48,292 $ 32,535 $ 20,121
========= ======== ========
Capital expenditures:
Services............................................ $ 31,432 $ 34,648 $ 9,799
BSG Group........................................... 13,376 12,927 2,271
HIT................................................. 3,204 1,847 267
Corporate........................................... 3,123 1,564 726
--------- -------- --------
$ 51,135 $ 50,986 $ 13,063
========= ======== ========
</TABLE>
- ---------------
(1) Excludes restructuring and other charges and interest expense.
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>
1996 (AS PREVIOUSLY REPORTED)
Revenue........................................... $163,627 $175,193 $126,731 $ 142,937
Pro forma net income (loss)....................... 13,079 3,337 (36,370) (103,688)
Pro forma net income (loss) per common share...... $ 0.17 $ 0.04 $ (0.51) $ (1.45)
Weighted average shares outstanding............. 75,704 75,006 71,665 71,695
1996 (AS RESTATED)
Revenue........................................... $162,249 $169,719 $132,874 $ 143,471
Pro forma net income (loss)....................... 11,013 (3,097) (31,502) (100,056)
Pro forma net income (loss) per common share...... $ 0.15 $ (0.04) $ (0.44) $ (1.40)
Weighted average shares outstanding............. 75,704 71,167 71,665 71,695
1995
Revenue........................................... $133,093 $141,286 $140,752 $ 144,746
Pro forma net income (loss)....................... (11,857) 7,226 (2,723) (1,150)
Pro forma net income (loss) per common share...... $ (0.23) $ 0.10 $ (0.05) $ (0.02)
Weighted average shares outstanding............. 50,932 69,053 57,696 58,068
</TABLE>
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors (the "Audit Committee") in March 1997 prior
to completion of the audit process for the Company's 1996 fiscal year,
information was developed that certain revenues and expenses may have been
recorded incorrectly between certain quarters during 1996. At the conclusion of
the review, the Company determined that there were certain accounting errors and
irregularities and that its interim financial statements for each fiscal quarter
of 1996 required restatement as set forth herein. These errors and
irregularities
F-26
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisted primarily of the following: (1) incorrect quarterly recording of
revenues and the related costs and expenses for certain contracts; (2) incorrect
quarterly recording of certain liabilities for employee bonuses and related
expenses; (3) certain costs and expenses of certain acquired companies, which
were later determined not to be properly recordable, were recognized by those
companies in periods prior to their acquisitions, resulting in an overstatement
of the Company's earnings subsequent to those acquisitions; and (4) incorrect
depreciation of certain assets related to the Company's comprehensive
reengineering and consolidation project.
The Company has determined that all appropriate adjustments have been made
to its interim financial statements and that its consolidated financial
statements, taken as a whole, present fairly in all material respects the
Company's financial position, results of operations and cash flows for its
fiscal year ended December 31, 1996 in conformity with generally accepted
accounting principles. All adjustments were for inter-period transactions and
had no effect on the Company's 1996 annual proforma net loss as previously
reported and as set forth herein.
F-27
<PAGE> 64
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT CHARGED TO TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts..... $6,225 $16,657 $ -- $(9,622)(2) $13,260
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts..... $3,205 $ 6,718 $1,278(1) $(4,976)(2) $ 6,225
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts..... $2,193 $ 4,089 $ 338(1) $(3,415)(2) $ 3,205
</TABLE>
- ---------------
(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
F-28
<PAGE> 1
Exhibit 4.17
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
STOCK OPTION
(NONTRANSFERABLE)
STOCK OPTION AGREEMENT
Medaphis Corporation, a Delaware corporation, pursuant to action of the
Committee and in accordance with the Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees ("Plan"), hereby grants a Stock Option
("Option") to ____________________ ("Eligible Employee") to purchase from
Medaphis Corporation __________ shares of Stock, at an Option Price of
$__________ per share, which Option is subject to all of the terms and
conditions set forth in this Option Agreement and in the Plan. This Option is
granted effective as of ____________________ ("Option Grant Date").
MEDAPHIS CORPORATION
By:_________________________
TERMS AND CONDITIONS
Section 1. Plan. This Option shall not be treated as an "incentive stock
option" as defined in Section 422 of the Code. This Option is subject to all
the terms and conditions set forth in the Plan and this Option Agreement, and
all of the terms defined in the Plan shall have the same meaning in this Option
Agreement when such terms start with a capital letter. A copy of the Plan will
be made available to Eligible Employee upon written request to the corporate
Secretary of the Company.
Section 2. Vesting.
(a) Except as provided in Section 14 of the Plan or in Section 2(b)
or Section 2(c), Eligible Employee's vested percentage for
purposes of Section 3 shall be as follows:
(1) zero, if Eligible Employee's employment by the Company or a
subsidiary of the Company terminates before the first
anniversary of the Option Grant Date;
<PAGE> 2
(2) thirty three and 1/3 percent (33-1/3%) if Eligible Employee
remains an employee of the Company or a subsidiary on the
first anniversary of the Option Grant Date;
(3) sixty six and 2/3 percent (66-2/3%) if Eligible Employee
remains an employee of the Company or a subsidiary on the
second anniversary of the Option Grant Date; and
(4) one hundred percent (100%) if Eligible Employee remains an
employee of the Company or a subsidiary on the third
anniversary of the Option Grant Date.
(b) Eligible Employee's vested percentage shall be 100% no later than
the first day after the Option Grant Date which follows a 20
consecutive trading day period in which the average Fair Market
Value of a share of Stock has been at least $25 a share if Eligible
Employee remains an employee of the Company or a subsidiary on such
day.
(c) (1) If Eligible Employee's employment with the Company or any
subsidiary of the Company terminates for any reason other
than death or disability (within the meaning of Section
22(e)(3) of the Code) before this Option is fully vested, any
portion of this Option which is not vested on the date of
such termination of Eligible Employee's employment shall be
automatically forfeited as of his employer termination date.
(2) In the event of termination of Eligible Employee's employment
with the Company or any subsidiary of the Company for any
reason other than death or disability (within the meaning of
Section 22(e)(3) of the Code), after any portion of this
Option is vested as set forth in this Section 2, this Option
shall be exercisable to the extent vested in accordance
with the limitations set forth in Section 4.
(3) In the event of termination of employment as a result of the
death or disability (within the meaning of Section 22(e)(3)
of the Code) of Eligible Employee, this Option shall be and
become 100% exercisable without regard to the vesting
schedule set forth in this Section 2 and the personal
representative of Eligible Employee's estate shall be
entitled to exercise this Option subject to the
limitations set forth in Section 4.
2
<PAGE> 3
Section 3. Date Exercisable. This Option shall be exercisable (to the
extent vested under Section 2) on any normal business day of the Company that
comes before the date this Option expires under Section 4. The maximum number
of shares of Stock that may be purchased by exercise of this Option on any such
day shall equal the excess, if any, of (a) the product of the vested percentage
of this Option under Section 2 on such date and the total number of shares of
Stock subject to this Option on the Option Grant Date, as adjusted in
accordance with Section 13 of the Plan, over (b) the number of shares of Stock
which have previously been purchased by exercise of this Option, as adjusted in
a manner consistent with Section 13 of the Plan.
Section 4. Life of Option. The Option shall expire when exercised in
full; provided, however, the Option also shall expire immediately and
automatically on the earlier of (a) the date which is the eleventh anniversary
of the Option Grant Date, (b) the end of the three (3) month period which
begins on the date Eligible Employee's employment by the Company or any
subsidiary of the Company terminates for any reason other than as a result of
the death or disability (within the meaning of Section 22(e)(3) of the Code) of
Eligible Employee or as a result of a Change of Control event described in
Section 14.1 of the Plan, (c) the end of the six (6)month period which begins
on the date Eligible Employee's employment by the Company or any subsidiary of
the Company terminates for reasons of death or disability (within the meaning
of Section 22(e)(3) of the Code) of Eligible Employee, (d) upon the
consummation of a Change of Control event described in Section 14.1(1), (2) or
(3) of the Plan, or (e) the end of the three (3) month period which begins on
the date an Eligible Employee's employment by the Company or any subsidiary of
the Company terminates as a result of a Change of Control event described in
Section 14.1(4) or (5) of the Plan.
Section 5. Method of Exercise of Option. Eligible Employee may
(subject to Section 2, Section 3, Section 4, Section 11, Section 12 and
Section 13) exercise this Option in whole or in part (before the date this
Option expires) for a whole number of shares of Stock on any normal business
day of the Company by (a) delivering the Option Agreement to the Company at its
principal place of business together with written notice of the exercise of
this Option and (b) simultaneously paying to the company the Option Price.
Section 6. Delivery. The Company's delivery of Stock pursuant to the
exercise of this Option (as described in Section 5) shall discharge the
Company of all of its duties and responsibilities with respect to this Option.
Section 7. Adjustment. The Committee shall have the right to make such
adjustments to this Option as described under Section 13 of the Plan.
Section 8. Nontransferable. This Option shall be transferable by
Eligible Employee only by will or by the laws of descent and distribution at
Eligible Employee's death, and this Option shall be exercisable during Eligible
Employee's lifetime only by Eligible
3
<PAGE> 4
Employee or, if Eligible Employee is determined under applicable law to be
incompetent to act on his or her on behalf, by the person authorized under such
applicable law to act on Eligible Employee's behalf.
Section 9. Employment and Termination. Neither the Plan, this Option
nor any related material shall give Eligible Employee the right to continue in
employment by the Company or a subsidiary or shall adversely affect the right
of the Company or a subsidiary to terminate Eligible Employee's employment with
or without cause at any time.
Section 10. Stockholder Status. Eligible Employee shall have no rights
as a stockholder with respect to any shares of Stock under this Option until
such shares have been duly issued and delivered to Eligible Employee, and no
adjustment shall be made for dividends of any kind or description whatsoever or
for distributions of other rights of any kind or description whatsoever
respecting such Stock except as expressly set forth in the Plan.
Section 11. Other Laws. The Company shall have the right to refuse to
issue or transfer any Stock under this Option if the Company acting in its
absolute discretion determines that the issuance or transfer of such Stock
might violate any applicable law or regulation, and any payment tendered in
such event to exercise this Option shall be promptly refunded to Eligible
Employee.
Section 12. Securities Registration. Eligible Employee may be
requested by the Company to hold any shares of Stock received upon the exercise
of this Option for personal investment and not for purposes of resale or
distribution to the public and Eligible Employee shall, if so requested by the
Company, deliver a certified statement to that effect to the Company as a
condition to the issuance of such Stock to Eligible Employee.
Section 13. Other Conditions. Eligible Employee shall (as a condition
to the exercise of this Option) enter into any agreement or make any
representations required by the Company related to the Stock to be acquired
pursuant to the exercise of this Option, including any agreement which
restricts the transfer of Stock acquired pursuant to the exercise of this
Option and provides for the repurchase of such Stock by the Company under
certain circumstances.
Section 14. Tax Withholding. The Company shall have the right to
withhold or retain from any payment to Eligible Employee (whether or not such
payment is made pursuant to this Option) or take such other action as is
permissible under the Plan which the Company deems necessary or appropriate to
satisfy any income or other tax withholding requirements as a result of the
grant or exercise of this Option.
4
<PAGE> 5
Section 15. Governing Law. The Plan and this Option shall be governed
by the laws of the State of Delaware.
Section 16. Modification, Amendment, and Cancellation. The Company
shall have the right unilaterally to modify, amend, or cancel this Option in
accordance with Section 15 of the Plan.
Section 17. Binding Effect. This Option shall be binding upon the
Company and Eligible Employee and their respective heirs, executors,
administrators and successors.
5
<PAGE> 1
EXHIBIT 10.12
ELEVENTH AMENDMENT TO AMENDED AND RESTATED
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
THIS AMENDMENT is effective as of August 8, 1996, and is made by
MEDAPHIS CORPORATION, a corporation organized and doing business under the laws
of the State of Delaware (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has previously adopted the Amended and Restated
Medaphis Corporation Non-Qualified Stock Option Plan (the "Plan");
WHEREAS, the First Amendment to the Plan, which increased the number of
shares available for grant, became effective on January 30, 1992;
WHEREAS, the Second Amendment to the Plan, which formally allowed the
Committee authorized to administer the Plan, upon the exercise of an option by
an optionee, to withhold amounts necessary to satisfy state and federal tax
withholding requirements applicable to such exercise, became effective on August
5, 1992;
WHEREAS, the Third Amendment to the Plan, which increased the number of
shares available for grant thereunder and provided that future options be
granted at a price not less than fair market value as of the date of grant,
became effective on April 29, 1993;
WHEREAS, the Fourth Amendment to the Plan, which effected certain
changes to the Plan designed to preserve the Company's ability to account for
certain transactions under the "pooling of interests" accounting method, became
effective on July 22, 1993;
WHEREAS, the Fifth Amendment to the Plan, which permitted the options
granted pursuant to the Plan to be transferable by the optionee only by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order, became effective on December 15, 1993;
WHEREAS, the Sixth Amendment to the Plan, which increased the number of
shares available for grant, became effective on April 27, 1994;
WHEREAS, the Seventh Amendment to the Plan, which increased the number
of shares available for grant, became effective on April 27, 1995;
WHEREAS, the Eighth Amendment to the Plan, which increased the number
of shares available for grant and limited the maximum number of options
available for grant to any one individual, became effective on May 1, 1996;
<PAGE> 2
WHEREAS, the Ninth Amendment to the Plan, which formally allowed the
Committee authorized to administer the Plan to amend the Plan without the
approval of the stockholders of the Company if such amendment would not alter
the rights of any participant under the Plan who is subject to Rule 16b-3 of the
Securities and Exchange Act of 1934, as amended, and further, formally allowed
the Committee authorized to administer the Plan to adjust the time periods set
forth in Section 5(f) of the Plan, became effective as of August 24, 1995;
WHEREAS, the Tenth Amendment to the Plan, which formally provided that
the Plan would be administered by the Compensation Committee of the Company, to
consist of "disinterested persons" as defined in Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, and "outside directors" as provided for in
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations promulgated thereunder, became effective as of May 1, 1996;
and
WHEREAS, the Compensation Committee of the Company has authorized an
amendment to the Plan to clarify that absent specific action of the Compensation
Committee of the Company, options cease vesting immediately upon a participant's
termination of employment (other than as a result of death or disability within
the meaning of Code Section 22(e)(3) in which case the vesting of such options
accelerates), and to allow the Compensation Committee of the Company to permit a
participant under the Plan not subject to Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, nevertheless to continue vesting in any of such
participant's stock options granted pursuant to the Plan subsequent to
termination of employment.
NOW, THEREFORE, BE IT RESOLVED, that Section 5(f) of the Plan is hereby
amended by deleting Section 5(f) of the Plan in its entirety, and replacing it
with the following:
"(f) provide that if the optionee ceases to be an employee of the
Company or any parent or subsidiary corporation of the Company (other
than as a result of a Change of Control event or death or disability
within the meaning of Code Section 22(e)(3)), before the option is
fully vested, any portion of the option which is not fully vested on
the date of such termination of employment shall be automatically
forfeited as of such employment termination date, and the vested
portion of the option which is unexercised shall expire, terminate and
become unexercisable upon the expiration of three (3) months from the
date on which the optionee ceases to be an employee of the Company or
of any parent or subsidiary corporation of the Company; provided,
however, that the Compensation Committee, in its sole and absolute
discretion, may permit an optionee who is not subject to Rule 16b-3 of
the Securities Exchange Act of 1934, as amended, to continue vesting in
all or any portion of such option subsequent to termination of
employment with the Company or any parent or subsidiary corporation of
the Company; and
(g) provide that if the optionee ceases to be an employee of the
Company or any parent or subsidiary corporation of the Company by
reason of death or disability (within the meaning of Code Section
22(e)(3)), as determined in the sole and absolute judgment of the
Company, before the option is fully vested, the option or any portion
thereof which is unexercised shall immediately be and become fully
exercisable without regard to the vesting schedule set forth herein and
shall expire, terminate and become unexercisable after the expiration
of six (6)
- 2 -
<PAGE> 3
months from the date the optionee ceases to be employed by the Company
or any parent or subsidiary corporation of the Company."
Except as specifically amended by this Eleventh Amendment, the Plan
shall remain in full force and effect as prior to this Eleventh Amendment.
IN WITNESS WHEREOF, the Company has caused this Eleventh Amendment to
be executed on the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ Michael R. Cote
------------------------------------
Michael R. Cote
Senior Vice President, Finance and
Chief Financial Officer
ATTEST:
By: /s/ William R. Spalding
-------------------------------------
William R. Spalding
Senior Vice President, Administration
and General Counsel
[Corporate Seal]
- 3 -
<PAGE> 1
EXHIBIT 10.21
SIXTH AMENDMENT TO MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR EMPLOYEES OF ACQUIRED COMPANIES
THIS SIXTH AMENDMENT is made the 7th day of January, 1997 by MEDAPHIS
CORPORATION, a corporation organized and doing business under the laws of the
State of Delaware (the "Company").
W I T N E S S E T H
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Employees of Acquired Companies (the
"Plan"); and
WHEREAS, the Board of Directors of the Company has approved an increase
in the number of shares reserved for issuance pursuant to the Plan to 6,515,000
shares from 5,015,000 shares.
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
"Section 3
SHARES RESERVED UNDER THE PLAN
There shall be 6,515,000 shares of Stock reserved for issuance under
this Plan, and such shares of Stock shall be reserved to the extent
that the Company deems appropriate from authorized but unissued shares
of Stock and from shares of Stock which have been repurchased by the
Company. Furthermore, any shares of Stock subject to an Option that
remain unissued after the cancellation or expiration of such Option
thereafter shall again become available for use under this Plan."
FURTHER, except as specifically amended by this Sixth Amendment, the
Plan shall remain in full force and effect as prior to this Sixth Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this Sixth Amendment to be
executed on the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ Michael R. Cote
-----------------------------------------
Title: Senior Vice President - Finance,
Chief Financial Officer and
Assistant Secretary
ATTEST:
By: /s/ William R. Spalding
---------------------------------
Title: Senior Vice President,
General Counsel and Secretary
[CORPORATE SEAL]
-2-
<PAGE> 1
EXHIBIT 10.23
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. PURPOSE.............................................................................1
SECTION 2. DEFINITIONS.........................................................................1
2.1. Board......................................................................1
2.2. Code.......................................................................1
2.3. Committee..................................................................1
2.4. Company....................................................................1
2.5. Eligible Employee..........................................................1
2.6. Exchange Act...............................................................2
2.7. Fair Market Value..........................................................2
2.8. 1933 Act...................................................................2
2.9. Option.....................................................................2
2.10. Option Agreement...........................................................2
2.11. Option Price...............................................................3
2.12. Plan.......................................................................3
2.13. Stock......................................................................3
SECTION 3. SHARES RESERVED UNDER THE PLAN......................................................3
SECTION 4. EFFECTIVE DATE......................................................................3
SECTION 5. ADMINISTRATION......................................................................3
SECTION 6. ELIGIBILITY.........................................................................4
SECTION 7. GRANT OF OPTIONS....................................................................4
SECTION 8. OPTION PRICE........................................................................5
SECTION 9. EXERCISE PERIOD.....................................................................5
SECTION 10. NONTRANSFERABILITY..................................................................6
SECTION 11. SECURITIES REGISTRATION.............................................................6
SECTION 12. LIFE OF PLAN........................................................................7
SECTION 13. ADJUSTMENT..........................................................................8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 14. CHANGE OF CONTROL AND CERTAIN OTHER EVENTS..........................................8
14.1. Change of Control Events...................................................8
14.2. The Company................................................................9
14.3. Operating Subsidiary.......................................................9
14.4. Notice.....................................................................9
14.5. Disposition of Stock Following Change of Control of Company................9
14.6. Disposition of Stock Following Change of Control of Subsidiary............10
14.7. Fractional Shares.........................................................11
SECTION 15. AMENDMENT OR TERMINATION...........................................................11
SECTION 16. MISCELLANEOUS......................................................................11
16.1. No Stockholder Rights.....................................................11
16.2. No Contract of Employment.................................................11
16.3. Other Conditions..........................................................12
16.4. Withholding...............................................................12
16.5. Construction..............................................................12
16.6. No "Incentive Stock Option" Treatment.....................................12
16.7. Not Rule 16b-3 Plan.......................................................12
16.8. References................................................................12
</TABLE>
ii
<PAGE> 4
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
SECTION 1.
PURPOSE
The purpose of this Plan is to provide options to purchase
stock to Eligible Employees in order for such Eligible Employees to acquire or
increase their proprietary interest in the Company, and for such Eligible
Employees to share in the success of the Company and to encourage them to remain
in the employ of the Company.
SECTION 2.
DEFINITIONS
Each capitalized term set forth in this Section 2 shall have
the meaning set forth opposite such capitalized term for purposes of this Plan
and, for purposes of such definitions, the singular shall include the plural and
the plural shall include the singular.
2.1. Board -- means the Board of Directors of the Company.
2.2. Code --means the Internal Revenue Code of 1986, as amended.
2.3. Committee -- means the committee appointed by the Board to
administer this Plan and at all times shall consist of two or more members of
the Board.
2.4. Company -- means Medaphis Corporation, a Delaware corporation, and
any successor to such corporation.
2.5. Eligible Employee --means any person who is an employee of the
Company or any of its subsidiaries and who is (in the judgment of the Committee)
neither subject to the
<PAGE> 5
provisions of Section 16 of the Exchange Act nor an executive level employee on
the date an Option is granted to such individual under this Plan.
2.6. Exchange Act -- means the Securities Exchange Act of 1934, as
amended.
2.7. Fair Market Value -- means for any date (i) the closing price for
such date for a share of Stock as reported by The Wall Street Journal under the
New York Stock Exchange Composite Transactions quotation system (or under any
successor quotation system) or, (ii) if the Stock is not traded on the New York
Stock Exchange, as reported for such date by The Wall Street Journal under the
NASDAQ National Market System quotation system or under the quotation system
under which such closing price is reported or, (iii) if The Wall Street Journal
does not report such closing price, such closing price as reported for such date
by a newspaper or trade journal selected by the Committee or, (iv) if no such
closing price is available for such date, such closing price as so reported or
so quoted in accordance with Section 2.7(i), (ii) or (iii) for the immediately
preceding business day, or, (v) if no newspaper or trade journal reports such
closing price or if no such price quotation is available, the price that the
Committee acting in good faith determines through any reasonable valuation
method that a share of Stock might change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts.
2.8. 1933 Act -- means the Securities Act of 1933, as amended.
2.9. Option -- means an option granted under this Plan to purchase
Stock.
2.10. Option Agreement -- means the written agreement that sets forth
the terms of an Option granted to an Eligible Employee under this Plan.
2
<PAGE> 6
2.11. Option Price -- means the price that shall be paid to purchase
one share of Stock upon the exercise of an Option granted under this Plan.
2.12. Plan -- means this Medaphis Corporation Non-qualified Stock
Option Plan for Non-Executive Employees, as amended from time to time.
2.13. Stock -- means the common stock of the Company, par value $.01
per share.
SECTION 3.
SHARES RESERVED UNDER THE PLAN
There shall be 925,000 shares of Stock reserved for issuance under this
Plan, and such shares of Stock shall be reserved to the extent that the Company
deems appropriate from authorized but unissued shares of Stock and from shares
of Stock which have been repurchased by the Company. Furthermore, any shares of
Stock subject to an Option that remain unissued after the cancellation or
expiration of such Option thereafter shall again become available for use under
this Plan.
SECTION 4.
EFFECTIVE DATE
The effective date of this Plan shall be November 19, 1996.
SECTION 5.
ADMINISTRATION
This Plan shall be administered by the Committee. The Board may from
time to time remove members from, or add members to, the Committee. Vacancies on
the Committee shall be filled by the Board and the Board shall designate the
Chairman of the Committee. The Committee shall hold meetings at such times and
places as it may determine. The Committee
3
<PAGE> 7
acting in its absolute discretion shall exercise such powers and take such
action as expressly called for under this Plan and, further, the Committee shall
have the power to interpret this Plan and to take such other action (except to
the extent the right to take such action is expressly and exclusively reserved
for the Board) in the administration and operation of this Plan as the Committee
deems equitable under the circumstances, which action shall be binding on the
Company, on each affected Eligible Employee and on each other person directly or
indirectly affected by such action. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to this Plan or any Option granted under this Plan.
SECTION 6.
ELIGIBILITY
Only Eligible Employees shall be eligible for the grant of Options
under this Plan.
SECTION 7.
GRANT OF OPTIONS
The Committee, acting in its absolute discretion, shall have the right
to grant Options to Eligible Employees under this Plan. Each grant of an Option
shall be evidenced by an Option Agreement, and each Option Agreement shall
incorporate such terms and conditions as the Committee, acting in its absolute
discretion, deems consistent with the terms of this Plan; provided that (unless
the Committee decides otherwise with respect to any Option grant or Option
grants) each Option Agreement shall provide that if the Eligible Employee ceases
to be an employee of the Company or of any parent or subsidiary of the Company
(other than as a result of a transaction contemplated by Section 14) before the
Option is fully vested, any portion of the
4
<PAGE> 8
Option which is not fully vested on the date of such termination of employment
shall be automatically forfeited as of such employment termination date, and the
vested portion of the Option which is unexercised shall expire, terminate and
become unexercisable no later than the earlier to occur of: (i) the expiration
of three (3) months from the date on which the Eligible Employee ceases to be an
employee of the Company or of any parent or subsidiary of the Company for any
reason other than death or disability (within the meaning of Code Section
22(e)(3)), or (ii) the expiration of six (6) months from the date the Eligible
Employee ceases to be employed by the Company or any parent or subsidiary of the
Company for reasons of death or disability (within the meaning of Code Section
22(e)(3)).
SECTION 8.
OPTION PRICE
The Option Price for each share of Stock subject to an Option may (in
the absolute discretion of the Committee) be more or less than or equal to the
Fair Market Value of a share of Stock on the date such Option is granted;
provided, however, that in no event shall the Option Price be less than adequate
consideration as determined by the Committee.
SECTION 9.
EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in whole or
in part at such time or times as set forth in the related Option Agreement,
but no Option Agreement shall make an Option exercisable after the earlier of
(a) the date such option is exercised in full or
forfeited, or
5
<PAGE> 9
(b) the date which is the eleventh anniversary of the
date such Option is granted.
SECTION 10.
NONTRANSFERABILITY
No Option granted under this Plan shall be transferable by an Eligible
Employee other than by will or by the laws of descent and distribution at his or
her death, and an Option shall be exercisable during an Eligible Employee's
lifetime only by the Eligible Employee or, if the Eligible Employee is determine
under applicable law to be incompetent to act on his or her own behalf, by the
person authorized under such applicable law to act on the Eligible Employee's
behalf. The Company shall treat any person to whom an Option is transferred by
will or by the laws of descent and distribution the same as an Eligible Employee
for purposes of exercising such Option.
SECTION 11.
SECURITIES REGISTRATION
Each Option Agreement shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option, the Eligible Employee shall, if
so requested by the Company, hold such shares of Stock for investment and not
with a view to resale or distribution to the public and, if so requested by the
Company, shall deliver to the Company a written statement satisfactory to the
Company to that effect. Each Option Agreement also shall provide that, if so
requested by the Company, the Eligible Employee shall make a written
representation to the Company that he or she will not sell or offer to sell any
of such Stock unless a registration statement shall be in effect with respect to
such stock under the 1933 Act and any applicable state
6
<PAGE> 10
securities law or unless he or she shall have furnished to the Company an
opinion, in form and substance satisfactory to the Company, of legal counsel
acceptable to the Company, that such registration is not required. Certificates
representing the Stock transferred upon the exercise of an Option granted under
this Plan may at the discretion of the Company bear a legend to the effect that
such Stock has not been registered under the 1933 Act or any applicable state
securities law and that such Stock may not be sold or offered for sale in the
absence of an effective registration statement as to such Stock under the 1933
Act and any applicable state securities law or an opinion, in form and substance
satisfactory to the Company, of legal counsel acceptable to the Company, that
such registration is not required.
SECTION 12.
LIFE OF PLAN
No Option shall be granted under this Plan on or after the earlier of
(a) the tenth anniversary of the effective date of this
Plan (as determined under Section 4), in which event
this Plan thereafter shall continue in effect until
all outstanding Options have been exercised in full
or no longer are exercisable, or
(b) the date on which all of the Stock reserved under
Section 3 has (as a result of the exercise of Options
granted under this Plan) been issued or no longer is
available for use under this Plan, in which event
this Plan also shall terminate on such date.
7
<PAGE> 11
SECTION 13.
ADJUSTMENT
The number of shares of Stock reserved under Section 3, the number of
shares of Stock subject to Options granted under this Plan and the Option Price
of such Options shall be adjusted by the Committee in a equitable manner to
reflect any change in the capitalization of the Company, including, but not
limited to, such changes as stock dividends or stock splits, a subdivision or
combination of the Stock, a reclassification of the Stock, a merger or
consolidation of the Company or any like changes in the Stock or in the value of
a share of Stock. If any adjustment under this Section 13 would create a
fractional share of Stock or a right to acquire a fractional share of Stock,
such fractional share shall be disregarded and the number of shares of Stock
reserved under this Plan and the number subject to any Options granted under
this Plan shall be the next lower number of shares of Stock, rounding all
fractions downward. Any adjustment made under this Section 13 by the Committee
shall be conclusive and binding on affected persons.
SECTION 14.
CHANGE OF CONTROL AND CERTAIN OTHER EVENTS
14.1. Change of Control Events. The following events shall constitute
"Change of Control" events for purposes of this Plan: (1) The adoption of a plan
of merger or consolidation of the Company with any other corporation as a result
of which the holders of the outstanding voting stock of the Company as a group
would receive less than fifty percent (50%) of the voting stock of the surviving
or resulting corporation; (2) The adoption of a plan of liquidation or the
approval of the dissolution of the Company; (3) The sale or transfer of
substantially all of the assets of the Company; (4) The sale or transfer of
substantially all of the assets or stock of an
8
<PAGE> 12
operating subsidiary of the Company, other than as security for obligations of
the Company; or (5) The sale or transfer of substantially all of the assets of
an operating division of the Company or its subsidiaries, other than as security
for obligations of the Company.
14.2. The Company. In the event of a Change of Control event described
in Section 14.1(1), (2) or (3), the unexercised portion of all outstanding
Options under this Plan will become fully vested and immediately exercisable and
will remain exercisable until the occurrence of such Change of Control event,
after which time all outstanding Options will immediately terminate as to any
portion thereof not exercised.
14.3. Operating Subsidiary. In the event of a Change of Control event
described in Section 14.1(4) or (5) which results in the Eligible Employees
employed by the affected operating subsidiary or division being terminated from
their current employment with the Company, then the unexercised portion of all
outstanding Options under this Plan held by those affected Eligible Employees
will become fully vested and immediately exercisable. Such Options will remain
exercisable until the earlier of (1) the expiration of the respective terms of
such Options, or (2) six (6) months following such termination of employment.
14.4. Notice. Subject to compliance with applicable federal and state
securities laws, the Committee will undertake to provide applicable Eligible
Employees with reasonable notice of any Change of Control event described in
Section 14.1 prior to the occurrence of such Change of Control event.
14.5. Disposition of Stock Following Change of Control of Company. In
the event of a Change of Control event described in Section 14.1(1), (2) or (3),
each Eligible Employee electing to exercise any outstanding Option will have the
right in connection with the closing of such
9
<PAGE> 13
Change of Control event either to (1) sell to the Company or the surviving or
resulting corporation, the shares of Stock which the Eligible Employee received
upon exercise of such Option at a cash price per share equivalent of the Fair
Market Value of the Stock as of the date of such Change of Control event, or (2)
receive the number and class of shares of stock or other securities or any other
property to which the terms of the agreement of merger, consolidation, or other
reorganization would entitle the Eligible Employee to receive as the holder of
record of the number of shares of Stock which the Eligible Employee received
upon exercise of such Option; provided, however, that in the event a Change of
Control event contemplated by this Section 14.5 involves a merger to be
accounted for under the "pooling of interest" accounting method, then the
Committee shall have the authority hereunder to modify the rights of an Eligible
Employee under this Section 14.5 to the extent necessary in order to preserve
the "pooling of interest" accounting treatment for such merger.
14.6. Disposition of Stock Following Change of Control of Subsidiary.
In the event of a Change of Control event described in Section 14.1(4) or (5),
each affected Eligible Employee electing to exercise any outstanding Option will
have the right to sell to the Company the shares of Stock which the Eligible
Employee received upon exercise of such Option at a price per share equivalent
to the Fair Market Value of the Stock subject to such Option, such payment to be
made in the form of cash or notes or any combination of cash and notes, as
determined by the Committee. The Committee will make reasonable efforts to
assure that an Eligible Employee electing to sell shares of Stock pursuant to
this Section 14.6 receives cash consideration in the amount at least sufficient
to offset the aggregate Option Price paid to the Company by the Eligible
Employee in connection with the exercising of such Option.
10
<PAGE> 14
14.7. Fractional Shares. No Change of Control event contemplated by
this Section 14 shall create a right to acquire a fractional share of Stock, and
any such fractional share shall be forfeited by the Eligible Employee.
SECTION 15.
AMENDMENT OR TERMINATION
This Plan maybe amended by the Committee from time to time to the
extent that the Committee deems necessary or appropriate. The Committee also may
suspend the granting of Options under this Plan at any time and may terminate
this Plan at any time; provided; however, the Committee shall not have the right
unilaterally to modify, amend or cancel any Option granted before such
modification, amendment or cancellation unless the Eligible Employee consents in
writing to such modification, amendment or cancellation.
SECTION 16.
MISCELLANEOUS
16.1. No Stockholder Rights. No Eligible Employee shall have any rights
as a stockholder of the Company as a result of the grant of an Option to him or
to her under this Plan or his or her exercise of such Option pending the actual
delivery of Stock subject to such Option to such Eligible Employee.
16.2. No Contract of Employment. The grant of an Option to an Eligible
Employee under this Plan shall not constitute a contract of employment and shall
not confer on an Eligible Employee any rights upon his or her termination of
employment in addition to those rights, if any, expressly set forth in the
Option Agreement which evidences his or her Option.
11
<PAGE> 15
16.3. Other Conditions. Each Option Agreement may require that an
Eligible Employee (as a condition to the exercise of an Option) enter into any
agreement or make such representations requested by the Company, including any
agreement which restricts the transfer of Stock acquired pursuant to the
exercise of such Option and provides for the repurchase of such Stock by the
Company under certain circumstances.
16.4. Withholding. The exercise of any Option granted under this Plan
shall constitute an Eligible Employee's full and complete consent to whatever
action the Committee deems necessary to satisfy the federal and state tax
withholding requirements, if any, which the Committee acting in its discretion
deems applicable to such exercise.
16.5. Construction. This Plan shall be construed under the laws of the
State of Delaware.
16.6. No "Incentive Stock Option" Treatment. No Option granted under
this Plan shall be treated as an "incentive stock option" within the meaning of
Section 422 of the Code.
16.7. Not Rule 16b-3 Plan. This Plan is not intended to satisfy and
will not satisfy the conditions set forth in Rule 16b-3 under Section 16 of the
Exchange Act.
16.8. References. Any reference in this Plan to a section (ss.) shall
be to a section (ss.) of this Plan unless otherwise specified in such reference.
12
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Plan as of this 19th day of November, 1997 to evidence its
adoption of this Plan.
MEDAPHIS CORPORATION
By: /s/ William R. Spalding
-------------------------------------
13
<PAGE> 1
EXHIBIT 10.24
FIRST AMENDMENT
TO
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
THIS FIRST AMENDMENT (the "First Amendment") is made this 21 day of
January, 1997, by MEDAPHIS CORPORATION, a Delaware corporation (the "Company").
W I T N E S S E T H
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees (the "Plan"); and
WHEREAS, the Board of Directors of the Company has approved an increase
in the number of shares reserved for issuance pursuant to the Plan to 1,025,000
from 925,000 shares (the "First Amendment").
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
"Section 3
SHARES RESERVED UNDER THE PLAN
There shall be 1,025,000 shares of Stock reserved for
issuance under this Plan, and such shares of Stock
shall be reserved to the extent that the Company
deems appropriate from authorized but unissued shares
of Stock and from shares of Stock which have been
repurchased by the Company. Furthermore, any shares
of Stock subject to an Option that remain unissued
after the cancellation or expiration of such Option
thereafter shall again become available for use under
this Plan."
FURTHER, except as specifically amended by this First Amendment, the
Plan shall remain in full force and effect as prior to this First Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
executed on the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ William R. Spalding
--------------------------------
Name: William Spalding
------------------------------
Title: EVP
-----------------------------
ATTEST:
By: /s/ Peggy Sherman
---------------------------------
Name: Peggy Sherman
-------------------------------
Title: VP, AGC
------------------------------
-2-
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO THE MEDAPHIS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
THIS FIRST AMENDMENT (the "Amendment") is effective as of the _____ day
of December, 1996, and is made by MEDAPHIS CORPORATION, a corporation organized
and doing business under the laws of the State of Delaware (the "Company").
W I T N E S S E T H:
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "Committee") has approved an amendment to the Medaphis Corporation
Employee Stock Purchase Plan (the "Plan").
NOW, THEREFORE, the Plan is hereby amended, effective as of the date
first written above, by deleting Sections 2(g), 2(h) and 2(k) in their entirety
and replacing such sections with the following:
"(g) "Enrollment Period" means the period commencing on each
January 1 and ending on the next succeeding December 31.
(h) "Entry Date" means January 1st and July 1st of each
calendar year.
(k) "Purchase Period" means each six-month period ending June
30 and December 31 during an Enrollment Period."
FURTHER, Section 3(b) of the Plan is hereby deleted in its entirety.
FURTHER, Section 3(c) of the Plan shall hereafter be referred to as
Section 3(b).
FURTHER, Section 5(b) of the Plan is hereby amended by deleting Section
5(b) of the Plan in its entirety and replacing the following in lieu thereof:
"(b) The Company shall pay the cash balance of a Participant's
Contribution Account to the Participant as soon as
administratively feasible following (i) the date of processing
of the withdrawal request or (ii) the date a person otherwise
ceases to be a Participant pursuant to Paragraph 3(b), clauses
(1) and (2), as applicable (the events described in this
subparagraph being referred to collectively as a "Termination
Event")."
FURTHER, except as specifically amended by this Amendment, the Plan
shall remain in full force and effect as prior to this Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed as of the date first above written.
MEDAPHIS CORPORATION
By: /s/ William R. Spalding
-------------------------------------
Title:
----------------------------------
ATTEST:
/s/ Peggy Sherman
- ----------------------------------
Title: Assistant Secretary
----------------------------
[CORPORATE SEAL]
-2-
<PAGE> 1
EXHIBIT 10.29
THE MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
THIS INDENTURE made on the ____ day of ______________, 1995, by
MEDAPHIS CORPORATION, a corporation duly organized and existing under the laws
of the State of Delaware hereinafter called the "Primary Sponsor");
W I T N E S S E T H:
WHEREAS, the Primary Sponsor established by indenture dated June 30,
1991, the Medaphis Corporation Employees' Retirement Savings Plan which was last
amended and restated by indenture dated December 22, 1993 (the "Plan"); and
WHEREAS, the Primary Sponsor wishes to amend and restate the Plan to
provide participants an opportunity to invest matching contributions in common
stock of the Primary Sponsor and to make certain other changes in the provisions
of the Plan; and
WHEREAS, the Board of Directors of the Primary Sponsor has approved and
authorized the amendment and restatement of the Plan; and
WHEREAS, the Plan is intended to be a profit sharing plan within the
meaning of Treasury Regulations Section 1.401-1(b)(1)(ii) and also contains a
cash or deferred arrangement as described in Section 401(k) of the Internal
Revenue Code of 1986; and
NOW, THEREFORE, the Primary Sponsor does hereby amend and restate the
Plan, in its entirety, generally effective July 1, 1995, to read as follows:
<PAGE> 2
THE MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1 DEFINITIONS ........................................... -1-
SECTION 2 ELIGIBILITY ........................................... -13-
SECTION 3 CONTRIBUTIONS ......................................... -14-
SECTION 4 ALLOCATIONS ........................................... -16-
SECTION 5 INDIVIDUAL FUNDS AND INVESTMENTS OF TRUST ASSETS ...... -17-
SECTION 6 PLAN LOANS ............................................ -18-
SECTION 7 WITHDRAWALS DURING EMPLOYMENT ......................... -20-
SECTION 8 DEATH BENEFITS ........................................ -22-
SECTION 9 PAYMENT OF BENEFITS ON RETIREMENT OR DEATH ............ -23-
SECTION 10 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT ...... -26-
SECTION 11 ADMINISTRATION OF THE PLAN ............................ -28-
SECTION 12 CLAIM REVIEW PROCEDURE ................................ -30-
SECTION 13 LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS ........ -31-
SECTION 14 PROHIBITION AGAINST DIVERSION ......................... -32-
SECTION 15 LIMITATION OF RIGHTS .................................. -33-
SECTION 16 AMENDMENT TO OR TERMINATION OF THE PLAN AND THE
TRUST ................................................. -33-
SECTION 17 ADOPTION OF PLAN BY AFFILIATES ........................ -34-
SECTION 18 QUALIFICATION AND RETURN OF CONTRIBUTIONS ............. -35-
SECTION 19 INCORPORATION OF SPECIAL LIMITATIONS .................. -35-
APPENDIX A SPECIAL NONDISCRIMINATION RULES ....................... A-1
APPENDIX B LIMITATION ON ALLOCATIONS ............................. B-1
APPENDIX C TOP-HEAVY PROVISIONS .................................. C-1
APPENDIX D SPECIAL RULES ......................................... D-1
</TABLE>
<PAGE> 3
SECTION 1
DEFINITIONS
Wherever used herein, the masculine pronoun shall be deemed to include
the feminine, and the singular to include the plural, unless the context clearly
indicates otherwise and the following words and phrases shall, when used herein,
have the meanings set forth below:
1.1 "Account" means the account established and maintained by the Plan
Administrator to reflect the interest of a Member in the Fund. In addition to
any other accounts as the Plan Administrator may establish and maintain, the
Plan Administrator shall establish and maintain separate accounts (each of which
shall be adjusted pursuant to the Plan to reflect income, gains, losses and
other credits or charges attributable thereto) for each Member to be designated
as follows:
(a) "Employee Deferral Account" which shall reflect a Member's
interest in contributions made by a Plan Sponsor under Plan Sections
3.1 and 3.4.
(b) "Matching Account" which shall reflect a Member's interest
in matching contributions made by a Plan Sponsor under Plan Section
3.2.
(c) "Company Account" which shall reflect a Member's interest
in contributions made by a Plan Sponsor under Plan Section 3.3.
(d) "Voluntary Contribution Account" which shall reflect a
Member's interest in Voluntary Contributions made by a Member to the
Fund pursuant to Plan Section 3.5.
(e) "Rollover Account" which shall reflect a Member's interest
in Rollover Amounts.
In addition, the Plan Administrator shall allocate the interest of a Member in
any funds transferred to the Plan in a trust-to-trust transfer (other than
Rollover Amounts) or pursuant to the merger of another tax-qualified retirement
plan with the Plan among the Member's Accounts as the Plan Administrator
determines best reflects the interest of the Member.
1.2 "Accrued Benefit" means the balance of a Member's Account.
1.3 "Affiliate" means (a) any corporation which is a member of the same
controlled group of corporations (within the meaning of Code Section 414(b)) as
is a Plan Sponsor, (b) any other trade or business (whether or not incorporated)
under common control (within the meaning of Code Section 414(c)) with a Plan
Sponsor, (c) any other corporation, partnership or other organization which is a
member of an affiliated service group (within the meaning of Code Section
414(m)) with a Plan Sponsor, and (d) any other entity required to be aggregated
with a Plan Sponsor pursuant to regulations under Code Section 414(o).
1.4 "Anniversary Date" means the first day of each Plan Year.
<PAGE> 4
1.5 "Annual Compensation" means the amount paid to an Employee by a
Plan Sponsor (and Affiliates for purposes of Appendix B hereto) during a Plan
Year as compensation that would be subject to income tax withholding under Code
Section 3401(a), (but without regard to any rules that limit the remuneration
included in wages based on the nature or location of the employment or the
services performed, such as the exception for agricultural labor in Code Section
3401(a)(2)), to the extent not in excess of $150,000 (for the Plan Year
beginning in 1994), which amount shall be adjusted for changes in the cost of
living as provided in regulations issued by the Secretary of the Treasury.
Notwithstanding the above, Annual Compensation shall be determined as follows:
(a) in determining the amount of contributions under Plan
Section 3 and allocations under Plan Section 4 made by or on behalf of
an Employee and for purposes of applying the provisions of Appendix A
hereto for such Plan Years as the Secretary of the Treasury may allow,
Annual Compensation shall only include amounts received for the portion
of the Plan Year during which the Employee was a Member and shall
exclude income from sources outside the United States whether or not
excludable under Code Section 911;
(b) in determining the amount of contributions under Plan
Section 3 and allocations under Plan Section 4 made by or on behalf of
an Employee, Annual Compensation shall not include reimbursements or
other expense allowances, taxable fringe benefits, amounts realized
from the exercise of non-qualified stock options or when restricted
stock (or property) held by an employee either becomes freely
transferable or is no longer subject to a substantial risk of
forfeiture, moving expense allowances, deferred compensation (except as
provided in Subsection (d) below), and welfare benefits. Further, only
for purposes of Plan Sections 3.1, 3.2, and 3.3, Annual Compensation
shall not include any short-term disability pay and, for the period
beginning April 1, 1994 and ending September 30, 1994 only, any "on
call" income;
(c) for purposes of applying the $150,000 limit, as adjusted,
with respect to Plan Sections 3 and 4 and Appendix A, the rules
contained in Subsection (b) of the Plan Section containing the
definition of the term "Highly Compensated Employee" shall apply,
except that in applying such rules, the term "family" shall include
only the spouse of the Member and any lineal descendants of the Member
who have not attained age 19 before the close of the Plan Year; and
(d) for all purposes under the Plan except Appendix B hereto,
Annual Compensation shall include any amount contributed by a Plan
Sponsor on behalf of an Employee pursuant to a salary reduction
agreement which is not includable in the gross income of the Employee
under Section 125, 402(e)(3), or 402(h) of the Code.
-2-
<PAGE> 5
(e) in determining the amount of contributions under Plan
Sections 3.1 and 3.2 made by or on behalf of an Employee, Annual
Compensation shall include amounts accrued with respect to services
performed in the Plan Year and, but for the Employee's election to
defer such amounts (under this Plan or any other plan of deferred
compensation maintained by the Primary Sponsor or an Affiliate), would
have been received by the Employee in the Plan Year.
1.6 "Beneficiary" means the person or trust that a Member designated
most recently in writing to the Plan Administrator; provided, however, that if
the Member has failed to make a designation, no person designated is alive, no
trust has been established, or no successor Beneficiary has been designated who
is alive, the term "Beneficiary" means (a) the Member's spouse or (b) if no
spouse is alive, the Member's surviving children, or (c) if no children are
alive, the Member's parent or parents, or (d) if no parent is alive, the legal
representative of the deceased Member's estate. Notwithstanding the preceding
sentence, the spouse of a married Member shall be his Beneficiary unless that
spouse has consented in writing to the designation by the Member of some other
person or trust and the spouse's consent acknowledges the effect of the
designation and is witnessed by a notary public or a Plan representative. A
Member may change his designation at any time. However, a Member may not change
his designation without further consent of his spouse under the terms of the
preceding sentence unless the spouse's consent permits designation of another
person or trust without further spousal consent and acknowledges that the spouse
has the right to limit consent to a specific beneficiary and that the spouse
voluntarily relinquishes this right. Notwithstanding the above, the spouse's
consent shall not be required if the Member establishes to the satisfaction of
the Plan Administrator that the spouse cannot be located, if the Member has a
court order indicating that he is legally separated or has been abandoned
(within the meaning of local law) unless a "qualified domestic relations order"
(as defined in Code Section 414(p)) provides otherwise, or if there are other
circumstances as the Secretary of the Treasury prescribes. If the spouse is
legally incompetent to give consent, consent by the spouse's legal guardian
shall be deemed to be consent by the spouse.
1.7 "Board of Directors" means the Board of Directors of the Primary
Sponsor.
1.8 "Break in Service" means the failure of an Employee to perform an
Hour of Service during the twelve consecutive month period commencing on a
Severance Date.
1.9 "Code" means the Internal Revenue Code of 1986, as amended.
1.10 "Company Stock" means a share or shares of any class of stock
issued by the Primary Sponsor (or any of its Affiliates) which constitutes
employer securities within the meaning of Code Section 4978(e)(5).
1.11 "Company Stock Fund" means an Individual Fund that is primarily
invested in Company Stock.
1.12 "CompMed Employee" means an individual who was an Employee of
CompMed, Inc. immediately before January 1, 1994.
-3-
<PAGE> 6
1.13 "CompMed Plan" means the CompMed, Inc. 401(k) Savings Plan.
1.14 "Deferral Amount" means a contribution of a Plan Sponsor on behalf
of a Member pursuant to Plan Section 3.1.
1.15 "Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee."
1.16 "Disability" means a disability of a Member within the meaning of
Code Section 72(m)(7), to the extent that the Member is, or would be, entitled
to disability retirement benefits under the federal Social Security Act or to
the extent that the Member is entitled to recover benefits under any long term
disability plan or policy maintained by the Plan Sponsor. The determination of
whether or not a Disability exists shall be determined by the Plan Administrator
and shall be substantiated by competent medical evidence.
1.17 "Distributee" means an Employee or former Employee. In addition,
the Employee's or former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Code Section 414(p), are
Distributees with regard to the interest of the spouse or former spouse."
1.18 "Early Retirement Age" means age 55.
1.19 "Effective Date" means July 1, 1995.
1.20 "Elective Deferrals" means, with respect to any taxable year of
the Member, the sum of:
(a) any Deferral Amounts;
(b) any contributions made by or on behalf of a Member under
any other qualified cash or deferred arrangement as defined in Code
Section 401(k), whether or not maintained by a Plan Sponsor, to the
extent such contributions are not or would not, but for Code Section
402(g)(1) be included in the Member's gross income for the taxable
year; and
(c) any other contributions made by or on behalf of a Member
pursuant to Code Section 402(g)(3).
1.21 "Eligibility Service" means the completion by an Employee of a
twelve-consecutive-month period beginning on the date on which the Employee
first performs or performed an Hour of Service upon his employment or
reemployment or any anniversary thereof, without reaching a Severance Date;
provided, however:
-4-
<PAGE> 7
(a) if an Employee quits, retires or is discharged and then
performs an Hour of Service within twelve months of his Severance Date,
then such period of severance shall be taken into account in
calculating Eligibility Service;
(b) if an Employee quits, is discharged, or retires during an
absence from service of twelve months or less for any reason other than
quit, discharge or attainment of a Retirement Date and the Employee
then performs an Hour of Service within twelve months of the date the
Employee was first absent from service, then such period of absence
shall be taken into account in calculating Eligibility Service;
(c) in the case of an Employee who remains absent from service
beyond the first anniversary of the commencement of a period of absence
(1) by reason of the pregnancy of the Employee, (2) by reason of the
birth of a child of the Employee, (3) by reason of the placement of a
child with the Employee in connection with the adoption of the child by
the Employee, or (4) for purposes of caring for such child for a period
immediately following its birth or placement, the period between the
first and second anniversaries of such period of absence shall not be
counted as Eligibility Service.
Eligibility Service shall not include, in the case of a rehired
Employee who did not have any vested right at his Severance Date and then incurs
five consecutive Breaks in Service, all periods which would otherwise constitute
Eligibility Service before the first of the five consecutive Breaks in Service
commenced.
1.22 "Eligible Employee" means any Employee of a Plan Sponsor other
than an Employee who is (a) covered by a collective bargaining agreement between
a union and a Plan Sponsor, provided that retirement benefits were the subject
of good faith bargaining, unless the collective bargaining agreement provides
for participation in the Plan, (b) a leased employee within the meaning of Code
Section 414(n)(2), (c) considered a "leased employee" within the meaning of Code
Section 414(n)(2) with respect to a client of a Plan Sponsor and is an active
participant in the tax-qualified retirement plan of the client during any part
of the Plan Year, (d) a participant in another tax-qualified retirement plan
maintained by the Plan Sponsor or Affiliate thereof and who is eligible to
receive benefits under such plan during any part of the Plan Year if he
otherwise satisfies the requirement to either perform a requisite number of
Hours of Service or be employed as of a particular date, or (e) deemed to be an
Employee of a Plan Sponsor pursuant to regulations under Code Section 414(o).
1.23 "Eligible Retirement Plan" means an individual retirement account
described in Code Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section 403(a) or a
qualified trust described in Code Section 401(a) that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an Eligible Rollover
Distribution to the surviving spouse, an Eligible Retirement Plan is an
individual retirement account or individual retirement annuity.
1.24 "Eligible Rollover Distribution" means any distribution of all or
any portion of the balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not
-5-
<PAGE> 8
less frequently than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of the Distributee
and the Distributee's designated Beneficiary, or for a specified period of ten
years or more; any distribution to the extent such distribution is required
under Code Section 401(a)(9); and the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
1.25 "Employee" means any person who is employed by a Plan Sponsor or
an Affiliate for purposes of the Federal Insurance Contributions Act, who is a
leased employee within the meaning of Code Section 414(n)(2) with respect to a
Plan Sponsor, or who is deemed to be an employee of a Plan Sponsor pursuant to
regulations under Code Section 414(o).
1.26 "Employment Date" means that date on which an Employee first
performs an Hour of Service with a Plan Sponsor or, in the alternative, on which
an Employee again performs an Hour of Service following any period of severance
which is not required to be taken into account in determining the Employee's
period of Service.
1.27 "Entry Date" means the first day of January, April, July, and
October. Effective October 1, 1995, "Entry Date" means the first day of each
calendar month.
1.28 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
1.29 "Fiduciary" means each Named Fiduciary and any other person who
exercises or has any discretionary authority or control regarding management or
administration of the Plan, any other person who renders investment advice for a
fee or has any authority or responsibility to do so with respect to any assets
of the Plan or any other person who exercises, or has any authority or control
respecting management or disposition of assets of the Plan.
1.30 "Fund" means the amount at any given time of cash and other
property held by the Trustee pursuant to the Plan.
1.31 "Gottlieb Plan" means the GFS 401(K) Savings Plan.
1.32 "Highly Compensated Employee" means an Employee who is described
in Subsection (a), unless the Plan Sponsor makes an election pursuant to
Subsection (b).
(a) (1) The Employee during the Plan Year immediately
preceding the Plan Year in question:
(A) was at any time an owner of more than
five percent (5%) of the outstanding stock of a Plan
Sponsor or Affiliate or more than five percent (5%)
of the total combined voting power of all stock of a
Plan Sponsor or Affiliate; or
-6-
<PAGE> 9
(B) received Annual Compensation in excess
of $100,000 (for the Plan Year beginning in 1995)
which amount shall be adjusted for changes in the
cost of living as provided in regulations issued by
the Secretary of the Treasury; or
(C) received Annual Compensation in excess
of $66,000 (for the Plan Year beginning in 1995)
which amount shall be adjusted for changes in the
cost of living as provided in regulations issued by
the Secretary of the Treasury, and who was in the
group consisting of the most highly compensated
twenty percent (20%) of the Employees; or
(D) was at any time an officer of the Plan
Sponsor or of any Affiliate whose Annual Compensation
was greater than fifty percent (50%) of the amount in
effect under Code Section 415(b)(1)(A) for the
calendar year in which the Plan Year ends, where the
term "officer" means an administrative executive in
regular and continual service to the Plan Sponsor or
Affiliate; provided, however, that in no event shall
the number of officers exceed the lesser of Clause
(i) or (ii) of this Subparagraph (D), where:
(i) equals fifty (50) Employees;
and
(ii) equals the greater of (I)
three (3) Employees or (II) ten percent
(10%) of the number of Employees during the
Plan Year, with any non- integer being
increased to the next integer.
If for any year no officer of the Plan Sponsor meets
the requirements of this Subparagraph (D), the
highest paid officer of the Plan Sponsor for the Plan
Year shall be considered an officer for purposes of
this Subparagraph (D).
(2) The Employee during the Plan Year in question (A)
is described in Subsection (a)(1)(A), or (B) is both (i)
described in Subsection (a)(1)(B), (a)(1)(C), or (a)(1)(D),
and (ii) one of the 100 Employees who received the most Annual
Compensation during that Plan Year.
The Plan Administrator may make an election to
substitute $66,000 (as adjusted) for $100,000 (as adjusted) in
Paragraph (2) of this Subparagraph (B) of Subsection (a)(1)
provided that at all times during the Plan Year the Plan
Sponsor and its Affiliates maintain significant business
activities and have Employees in at least two significantly
separate geographic areas and satisfy such other conditions as
the Secretary of the Treasury prescribes.
For purposes of Subparagraphs (C) and (D) of this
Subsection (a)(1), the following shall be excluded when
determining the number of Employees in the
-7-
<PAGE> 10
most highly compensated twenty percent (20%) of the Employees
and the number of officers:
(i) Employees who have not completed six (6)
months of service,
(ii) Employees who normally work less than
17 1/2 hours per week,
(iii) Employees who normally work during not
more than six (6) months during any Plan Year,
(iv) Employees who have not attained age 21,
(v) Employees who are included in a unit of
employees covered by an agreement which the Secretary
of Labor finds to be a collective bargaining
agreement between employee representatives and the
Plan Sponsor or its Affiliates, provided 90% or more
of the Employees are covered under collective
bargaining agreements and the Plan only covers
Employees who are not covered under the collective
bargaining agreements.
(b) Notwithstanding the provisions of Subsection (a), the
Primary Sponsor may elect to determine each Highly Compensated Employee
to be each Employee who during the Plan Year in question is described
in Subsection (a), pursuant to the provisions of Treas. Reg. Section
1.414(q)-1T, Q&A-14(b).
(c) For purposes of this Section, if any Employee is a member
of the family of a five percent (5%) owner as defined in Subsection
(a)(1) of this Section or of a Highly Compensated Employee whose Annual
Compensation is such that he is among the ten (10) Highly Compensated
Employees receiving the greatest amount of Annual Compensation during
the Plan Year, then (1) the Employee shall not be considered a separate
Employee, and (2) any Annual Compensation paid to the Employee, and any
applicable contribution or benefit on behalf of the Employee, shall be
treated as if it were paid to, or on behalf of, the five percent (5%)
owner or the Employee who is among the ten (10) Highly Compensated
Employees receiving the greatest amount of Annual Compensation during
the Plan Year. For purposes of this Subsection (c), the term "family"
means with respect to any Employee, the Employee's spouse and lineal
descendants or ascendants and the spouses of lineal descendants or
ascendants.
(d) For purposes of this Section, a former Employee shall be
treated as a Highly Compensated Employee if (1) the former Employee was
a Highly Compensated Employee at the time the former Employee separated
from service with the Plan Sponsor or Affiliate or (2) the former
Employee was a Highly Compensated Employee at any time after the former
Employee attained age 55.
-8-
<PAGE> 11
(e) For purposes of this Section, Employees who are
nonresident aliens and who receive no earned income from the Plan
Sponsor or an Affiliate from sources within the United States shall not
be treated as Employees.
(f) For purposes of this Section, Annual Compensation shall be
determined without regard to the $150,000 limitation, as adjusted.
1.33 "Hour of Service" means:
(a) Each hour for which an Employee is paid, or
entitled to payment, for the performance of duties for a Plan
Sponsor or any Affiliate during the applicable computation
period, and such hours shall be credited to the computation
period in which the duties are performed;
(b) Each hour for which an Employee is paid, or
entitled to payment, by a Plan Sponsor or any Affiliate on
account of a period of time during which no duties are
performed (irrespective of whether the employment relationship
has terminated) due to vacation, holiday, illness, incapacity
(including disability), layoff, jury duty, military duty or
leave of absence;
(c) Each hour for which back pay, irrespective of
mitigation of damages, is either awarded or agreed to by a
Plan Sponsor or any Affiliate, and such hours shall be
credited to the computation period or periods to which the
award or agreement for back pay pertains rather than to the
computation period in which the award, agreement or payment is
made; provided, that the crediting of Hours of Service for
back pay awarded or agreed to with respect to periods
described in Subsection (b) of this Section shall be subject
to the limitations set forth in Subsection (e);
(d) Solely for purposes of determining whether a
Break in Service has occurred, each hour during any period
that the Employee is absent from work (1) by reason of the
pregnancy of the Employee, (2) by reason of the birth of a
child of the Employee, (3) by reason of the placement of a
child with the Employee in connection with the adoption of the
child by the Employee, or (4) for purposes of caring for such
child for a period immediately following its birth or
placement. The hours described in this Subsection (d) shall be
credited (A) only in the computation period in which the
absence from work begins, if the Employee would be prevented
from incurring a Break in Service in that year solely because
of that credit, or (B), in any other case, in the next
following computation period; and
(e) The Plan Administrator shall credit Hours of
Service in accordance with the provisions of Section
2530.200b-2(b) and (c) of the
-9-
<PAGE> 12
U.S. Department of Labor Regulations or such other federal
regulations as may from time to time be applicable and
determine Hours of Service from the employment records of a
Plan Sponsor or in any other manner consistent with
regulations promulgated by the Secretary of Labor, and shall
construe any ambiguities in favor of crediting Employees with
Hours of Service. Notwithstanding any other provision of this
Section, in no event shall an Employee be credited with more
than 501 Hours of Service during any single continuous period
during which he performs no duties for the Plan Sponsor or
Affiliate.
(f) In the event that a Plan Sponsor or an Affiliate
acquires substantially all of the assets of another
corporation or entity or a controlling interest of the stock
of another corporation or merges with another corporation or
entity and is the surviving entity, then service of an
Employee who was employed by the prior corporation or entity
and who is employed by the Plan Sponsor or an Affiliate at the
time of the acquisition or merger shall be counted in the
manner provided, with the consent of the Primary Sponsor, in
resolutions adopted by the Plan Sponsor authorizing the
counting of such service.
(g) Notwithstanding the foregoing, for purposes of
determining whether a Break in Service occurs and whether an
Employee satisfies his Eligibility Period of Service, Hours of
Service shall be calculated on an equivalency based on
earnings, as permitted by Section 2530.200b-3(a) and (f) of
the U.S. Department of Labor Regulations, as follows:
(1) The Employee shall be credited with
hours equal to the Employee's total earnings for the
performance of duties during the applicable
computation period divided by the Employee's lowest
hourly rate of compensation during that computation
period.
(2) 870 hours credited under Subsection (1)
above shall be treated as the equivalent of 1,000
Hours of Service. 435 hours credited under Subsection
(1) above shall be treated as the equivalent of 500
Hours of Service.
1.34 "Individual Funds" means two or more individual subfunds of the
Fund (other than the Loan Fund) as may be established by the Plan Administrator
from time to time for the investment of the Fund.
1.35 "Investment Committee" means a committee which may be established
to direct the Trustee with respect to investments of the Fund.
1.36 "Investment Manager" means a Fiduciary, other than the Trustee,
the Plan Administrator, or a Plan Sponsor, who may be appointed by the Primary
Sponsor:
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(a) who has the power to manage, acquire, or dispose of any
assets of the Fund or a portion thereof; and
(b) who (1) is registered as an investment adviser under the
Investment Advisers Act of 1940; (2) is a bank as defined in that Act;
or (3) is an insurance company qualified to perform services described
in Subsection (a) above under the laws of more than one state; and
(c) who has acknowledged in writing that he is a Fiduciary
with respect to the Plan.
1.37 "Loan Fund" means the separate subfund of the Fund for the
investment of a Member's Account in a note made by the Member evidencing a loan
to the Member from the Fund.
1.38 "Member" means any Employee or former Employee who has become a
participant in the Plan for so long as his vested Accrued Benefit has not been
fully distributed pursuant to the Plan.
1.39 "MMNE Plan" means the Medical Management of New England, Inc.
401(k) Salary Savings Retirement Plan.
1.40 "Named Fiduciary" means only the following:
(a) The Plan Administrator;
(b) The Trustee;
(c) The Board of Directors;
(d) The Investment Committee; and
(e) The Investment Manager.
1.41 "Normal Retirement Age" means age 65.
1.42 "Plan Administrator" means the organization or person designated
to administer the Plan.
1.43 "Plan Sponsor" means individually the Primary Sponsor and any
Affiliate or other entity which has adopted the Plan and Trust.
1.44 "Plan Year" means the calendar year.
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1.45 "Qualified Member" means any Member who (i) is not a Highly
Compensated Employee, (ii) was a participant in the CompMed, Inc. Profit Sharing
Plan and Trust as of December 31, 1993 and (iii) is a remote-site non-exempt
Employee.
1.46 "Records Center Plan" means the Records Center, Inc. Profit
Sharing Retirement Plan.
1.47 "Retirement Date" means the date on which the Member retires on or
after attaining Normal Retirement Age or becoming subject to a Disability.
1.48 "Rollover Amount" means any amount transferred to the Fund by a
Member, which amount qualifies as an Eligible Rollover Distribution under Code
Section 402(c)(4), 403(a)(4), or 408(d)(3)(A)(ii) and any regulations issued
thereunder.
1.49 "Service" means a period commencing on an Employee's Employment
Date and ending on his Severance Date thereafter. The following rules shall
apply:
(a) Notwithstanding the foregoing, if an Employee performs one
Hour of Service within twelve (12) months of (a) a Severance Date
described in Subsection (a) of Plan Section 1.50, or (b) the date the
Employee was first absent from service for any other reason, any period
of severance which would otherwise occur shall be ignored and be
required to be taken into account in computing the Employee's period of
Service.
(b) The period between the first anniversary and second
anniversary of an absence from service for the reasons specified in
Plan Section 1.50(b)(2) shall be neither a period of severance or a
period of Service.
(c) In the event that a Plan Sponsor or an Affiliate acquires
a substantial part of the assets of another corporation, or merges with
another corporation and is the surviving entity, then the Service
performed for such prior corporation or entity by an Employee who
becomes employed by the Plan Sponsor or an Affiliate as a result of the
acquisition or merger shall be credited as service in the manner
provided, with the consent of the Primary Sponsor, in resolutions
adopted by the Plan Sponsor.
1.50 "Severance Date" means the earlier of:
(a) the date on which an Employee quits, is discharged,
retires or dies; or
(b) (1) the first anniversary of the first date of a period in
which an Employee remains absent from service (with or without pay)
with the Plan Sponsor for any other reason, such as vacation, layoff,
or leave of absence; or (2) in the case of an Employee who remains
absent from service beyond the first anniversary of the first day of
absence by reason of the Employee's pregnancy, the birth of the
Employee's child, the placement of a child in the Employee's home or
adoption by the Employee, or the caring for the child for the period
immediately following its birth or adoption, the second anniversary of
the first day of absence from service.
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<PAGE> 15
1.51 "Termination Completion Date" means the last day of the fifth
consecutive Break in Service computation period, determined under the Plan
Section which defines Break in Service, in which a Member completes a Break in
Service.
1.52 "Trust" means the trust established under an agreement between the
Primary Sponsor and the Trustee to hold the Fund or any successor agreement.
1.53 "Trustee" means the trustee under the Trust.
1.54 "Valuation Date" means the last day of March, June, September, and
December or any other date which the Plan Administrator declares to be a
Valuation Date; provided, however, that the Plan Administrator may in its sole
discretion provide for more frequent Valuation Dates with respect to the
Individual Funds.
1.55 "Voluntary Contribution" means a non-deductible contribution to
the Fund made by the Member.
1.56 "Years of Service" means, with respect to each Employee, the
number of years and fractions of a year of Service credited to that Employee.
The following rules shall apply:
(a) In the case of an Employee who incurs a Break in Service,
Years of Service completed prior to the Break in Service shall not be
considered in calculating the Employee's nonforfeitable percentage of
his Accrued Benefit under Plan Section 10.3 until the Employee has
completed a one-year period of Service after such Break in Service.
(b) In the case of an Employee who completes five consecutive
Breaks in Service, all Years of Service in Plan Years after his
Termination Completion Date shall be disregarded in determining the
vested portion of his Accrued Benefit derived from Plan Sponsor
contributions which accrued before his Termination Completion Date.
(c) In the case of an Employee who incurs a Break in Service
and at that time does not have any vested right in Plan Sponsor
contributions, any Years of Service completed by him prior to such
Break in Service shall be disregarded for purposes of determining the
vested percentage of his right to such contributions if the consecutive
period of severance equals or exceeds his prior Years of Service,
whether or not consecutive, completed before such Break in Service.
SECTION 2
ELIGIBILITY
2.1 Each individual who was a member of the Plan as of the date
immediately preceding the Effective Date shall become a Member of the Plan as of
the Effective Date.
2.2 Each Eligible Employee shall become a Member as of the Entry Date
coinciding with or next following the date he completes his Eligibility Service.
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2.3 Each former Member who is reemployed by a Plan Sponsor shall become
a Member as of the date of his reemployment as an Eligible Employee.
2.4 Each former Employee who completes his Eligibility Service but
terminates employment with a Plan Sponsor before becoming a Member shall become
a Member as of the latest of the date he (a) is reemployed, (b) would have
become a Member if he had not terminated employment, or (c) becomes an Eligible
Employee.
2.5 Solely for the purpose of contributing a Rollover Amount to the
Plan, an Eligible Employee who has not yet become a Member pursuant to any other
provision of this Section 2 shall become a Member as of the date on which the
Rollover Amount is contributed to the Plan.
2.6 Notwithstanding anything contained in this Section 2 to the
contrary, in the event that an individual becomes an Eligible Employee of a Plan
Sponsor by reason of an acquisition by the Plan Sponsor of a controlling
interest in or a substantial part of all the assets of the individual's prior
employer with a Plan Sponsor, if the Eligible Employee was covered under a plan
of the prior employer meeting the requirements of Code Section 401(a), such
Eligible Employee shall become a Member as of the date of his employment with
the Plan Sponsor as an Eligible Employee.
SECTION 3
CONTRIBUTIONS
3.1 (a) The Plan Sponsor shall make a contribution to the Fund on
behalf of each Eligible Employee who is a Member and who has elected to
defer a portion of Regular Compensation otherwise payable to him for
the Plan Year and to have such portion contributed to the Fund. The
election must be made before the Annual Compensation is payable and may
only be made pursuant to an agreement between the Member and the Plan
Sponsor which shall be in such form and subject to such rules and
limitations as the Plan Administrator may prescribe and shall specify
the percentage of Annual Compensation that the Member desires to defer
and to have contributed to the Fund. Once a Member has made an election
for a Plan Year, the Member may revoke his election at any time,
effective as of the beginning of the payroll period immediately
following the date timely notice is received by the Plan Administrator;
provided, however, the election to revoke may be effective at a later
date as specified by the Member, but in no event later than seven (7)
months after the election is received by the Plan Administrator. A
Member may modify his election by notifying the Plan Administrator in
the manner and pursuant to rules established by the Plan Administrator.
The contribution made by a Plan Sponsor on behalf of an Eligible
Employee who is a Member under this Section 3.1 shall be in an amount
equal to the amount specified in the Member's deferral election, but
not greater than sixteen percent (16%) of the Member's Annual
Compensation. Notwithstanding the foregoing, the Plan Administrator may
reduce the amount that certain Highly Compensated Employees may elect
to defer in their deferral elections to a uniform percentage less than
sixteen percent (16%) of Annual Compensation, in the event the Plan
Administrator deems such reduction necessary for the Plan to comply
with one or more of the following limitations: (a)
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<PAGE> 17
Section 3.1(b) (relating to the annual limit on salary deferrals set
forth in Code Section 402(g)), (b) Section 3.1(a) and Section 4 of
Appendix A (relating to the non-discrimination testing limitations
under Code Sections 401(k)(3) or 401(m)), and (c) Appendix B (relating
to the limit on "annual additions," within the meaning of Code Section
415).
(b) Elective Deferrals shall in no event exceed $9,240 (for
1995) in any one taxable year of the Member, which amount shall be
adjusted for changes in the cost of living as provided by the Secretary
of the Treasury. In the event the amount of Elective Deferrals exceeds
$9,240 (for 1995) as adjusted, in any one taxable year then, (1) not
later than the immediately following March 1, the Member may designate
to the Plan the portion of the Member's Deferral Amount which consists
of excess Elective Deferrals, and (2) not later than the immediately
following April 15, the Plan may distribute the amount designated to it
under Paragraph (1) above, as adjusted to reflect income, gain, or loss
attributable to it through the date of the distribution, and reduced by
any "Excess Deferral Amounts," as defined in Appendix A hereto,
previously distributed or recharacterized with respect to the Member
for the Plan Year beginning with or within that taxable year. The
payment of the excess Elective Deferrals, as adjusted and reduced, from
the Plan shall be made to the Member without regard to any other
provision in the Plan. In the event that a Member's Elective Deferrals
exceed $9,240, as adjusted, in any one taxable year under the Plan and
other plans of the Plan Sponsor and its Affiliates, the Member shall be
deemed to have designated for distribution under the Plan the amount of
excess Elective Deferrals, as adjusted and reduced, by taking into
account only Elective Deferral amounts under the Plan and other plans
of the Plan Sponsor and its Affiliates.
3.2 The Plan Sponsor proposes to make contributions to the Fund with
respect to each Plan Year on behalf of each Member in an amount equal to fifty
percent (50%) of the amount deferred by the Member pursuant to Plan Section 3.1,
not in excess of six percent (6%) of the Member's Annual Compensation. The Board
of Directors may, at its discretion, increase the percentage contribution under
this Section 3.2 for all members, or for any specified unit, division,
subdivision, or location, or for any Members who participated in a specified
prior plan that was merged into the Plan.
3.3 Effective upon resolution by the Board of Directors, a Plan Sponsor
proposes to make contributions to the Fund with respect to each Plan Year in an
amount determined by the Plan Sponsor.
3.4 The Plan Sponsor proposes to make Qualified Nonelective
Contributions to the Fund with respect to the Plan Year ending December 31, 1994
in an amount determined by the Plan Sponsor.
3.5 Effective upon implementation by the Plan Administrator and subject
to such rules and limitations as the Plan Administrator may from time to time
prescribe, each Eligible Employee who is a Member may contribute as a Voluntary
Contribution to the Fund an amount of his Annual Compensation, which when added
to the amount deferred by the Member pursuant
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<PAGE> 18
to Plan Section 3.1 shall not exceed sixteen percent (16%) of the Member's
Annual Compensation. Voluntary Contributions shall be made to the Fund through
regular payroll deductions or in such other manner as shall be agreed upon by
each Member and the Plan Administrator. Once implemented, the Plan Administrator
may, at any time, suspend the making of any further Voluntary Contributions.
3.6 Forfeitures under Plan Section 3.2 shall be used to reduce Plan
Sponsor contributions and not to increase benefits.
3.7 Any Eligible Employee who is a Member may, with the consent of the
Plan Administrator and subject to such rules and conditions as the Plan
Administrator may prescribe, transfer a Rollover Amount to the Fund; provided,
however, that the Plan Administrator shall not administer this provision in a
manner which is discriminatory in favor of Highly Compensated Employees.
3.8 Contributions may be made only in cash or other property which is
acceptable to the Trustee. In no event will the sum of contributions under Plan
Sections 3.1, 3.2 and 3.3 exceed the deductible limits under Code Section 404.
SECTION 4
ALLOCATIONS
4.1 (a) As soon as reasonably practicable following the date of
withholding by the Plan Sponsor, if applicable, and receipt by the
Trustee, Plan Sponsor contributions made on behalf of each Member under
Plan Sections 3.1 and 3.2 (including forfeitures during the Plan Year
used to reduce such contributions), and Voluntary Contributions and
Rollover Amounts contributed by the Member, shall be allocated to the
Employee Deferral Account, Matching Account, Voluntary Contribution
Account and Rollover Account, respectively, of the Member on behalf of
whom the contributions were made.
(b) As of the last day of each Plan Year, Plan Sponsor
contributions made under Plan Section 3.3 and forfeitures from Company
Accounts shall be allocated to the Company Account of each Eligible
Employee who is a Member who is employed by a Plan Sponsor on the last
day of the Plan Year, or whose death or Retirement Date occurred during
the Plan Year, in the proportion that the Member's Annual Compensation
bears to the Annual Compensation of all Members entitled to an
allocation under this Subsection (b) and Subsection (c) hereof.
(c) As of the last day of each Plan Year, if necessary to
satisfy with respect to the Plan Year, the minimum coverage
requirements prescribed in Code Section 410(b) or the minimum
participation requirements under Code Section 401(a)(26) and
regulations issued thereunder, Plan Sponsor contributions made under
Plan Section 3.3 shall be allocated to the Company Account of Eligible
Employees who are Members and who are not Highly Compensated Employees,
beginning with the individual receiving the least Annual Compensation
for the Plan Year who completed more than 500 Hours of Service during
that Plan Year, but who terminated employment before the last day of
the Plan
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Year, in the proportion set forth in Subsection (b), determined without
regard to the last day of the Plan Year rule in that Subsection in the
case of Plan Sponsor contributions under Plan Section 3.3.
(d) As of December 31, 1994, Plan Sponsor contributions made
under Plan Section 3.4 shall be allocated to the Employee Deferral
Account of each Qualified Member in the proportion that the Qualified
Member's Annual Compensation bears to the Annual Compensation of all
Qualified Members entitled to an allocation under this Subsection (d).
4.2 Except as otherwise provided in the Plan and the Trust, as of each
Valuation Date, the Trustee shall determine the net income or net loss of the
Fund and shall allocate such amounts to the Accounts of Members as hereinafter
set forth.
(a) The net income or net loss of the Individual Funds shall
be allocated as of each Valuation Date to the Account of each Member in
the proportion that the value of the Account invested in the Individual
Fund or Loan Fund as of the preceding Valuation Date, increased by
one-half of the total contributions allocated to that Member's Account
since the preceding Valuation Date and reduced by the full amount of
any withdrawals from that Member's Account since that Valuation Date,
bears to the total value of all Accounts invested in the Individual
Fund or Loan Fund, respectively, as of the preceding Valuation Date.
(b) Notwithstanding the foregoing, in the event Valuation
Dates are changed to a daily basis, the net income or net loss of the
Individual Funds shall be allocated as of each Valuation Date to each
Account in the proportion that the value of the Account invested in
that Individual Fund as of that Valuation Date bears to the value of
all Accounts invested in that Individual Fund as of that Valuation
Date.
SECTION 5
INDIVIDUAL FUNDS AND INVESTMENTS OF TRUST ASSETS
5.1 Until such time as the Plan Administrator may direct otherwise,
each Member may direct the Plan Administrator to invest contributions to his
Account in two or more Individual Funds as the Member shall designate by
providing notice to the Plan Administrator according to the procedures
established by the Plan Administrator for that purpose. Notwithstanding the
foregoing, Members shall not be able to direct the investment of any Account
other than their Matching Accounts into the Company Stock Fund subject to such
rules as the Plan Administrator shall develop, including the Primary Sponsor's
"stock trading policy."
(a) All investment directions shall be in multiples of 1% of
contributions being made at any time. A Member can change the
investment of contributions to his Account once each calendar quarter.
Effective October 1, 1995, a Member can change the investment of
contributions to his Account once each month. A new investment
direction shall be effective as of the first Entry Date after timely
election is received by the Plan Administrator, provided that the
election is made according to the procedures established
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by the Plan Administrator. Notwithstanding the foregoing, a new
investment election may be effective at a later date as specified by
the Member, but in no event later than seven (7) months after the
election is received by the Plan Administrator.
(b) An investment direction, once given, shall be deemed to be
a continuing direction until changed as otherwise provided herein. If
no direction is effective for the date a contribution is to be made,
all contributions which are to be made for such date shall be invested
in such Individual Fund as the Plan Administrator, the Investment
Manager, the Investment Committee, or the Trustee, as applicable, may
determine. To the extent permissible by law, no Fiduciary shall be
liable for any loss, which results from a Member's exercise or failure
to exercise his investment election.
5.2 A Member may elect, once each calendar quarter, by notice to the
Plan Administrator according to the procedures established by the Plan
Administrator for such purpose, to transfer, in multiples of 1%, his Account
between Individual Funds provided that such election is made by the deadline
established by the Plan Administrator for such transfers. Effective October 1,
1995, a Member may elect to transfer the investment of his Account once each
month, subject to the foregoing procedures. An election under this Section 5.2
shall be effective as of the first Entry Date after timely election is received
by the Plan Administrator, provided that the election is made according to the
procedures established by the Plan Administrator. Notwithstanding the foregoing,
an election under this Section 5.2 may be effective at a later date as specified
by the Member, but in no event later than seven (7) months after the election is
received by the Plan Administrator.
5.3 A Member who makes an election pursuant to Plan Section 5.1 or Plan
Section 5.2 may apply the new investment direction to his current Account, all
future contributions, or both his current Account and all future contributions.
5.4 A Loan Fund shall be established by the Trustee on behalf of each
Member for whom a loan is made pursuant to Plan Section 6. The Loan Fund shall
be credited with the amount of any loan made by the Plan to the Member and shall
be debited with all principal and interest repayments of any such loans. Under
rules established by the Plan Administrator, a Member's interest in the
Individual Funds shall be debited by the amount credited to the Member's Loan
Fund. All principal and interest repayments debited to the Loan Fund shall be
invested as contributions to the Member's Account pursuant to Plan Section 5.1.
Each Loan Fund shall be invested in a note or notes made by the Member
evidencing the promised repayment of monies loaned to the Member from the Fund.
SECTION 6
PLAN LOANS
6.1 All loans under the Plan will be subject to the requirements of
this Section and such other rules as the Plan Administrator may from time to
time prescribe, including without limitation any rules restricting the purpose
for which loans will be approved (the "Loan Procedures"). The Loan Procedures
shall be set forth in a separate written document, which shall form a part of
the Plan and is incorporated herein by reference.
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6.2 Subject to the provisions of the Plan and the Trust, each Member
who is an Employee shall have the right, subject to prior approval by the Plan
Administrator, to borrow from the Fund. In addition, each "party in interest,"
as defined in ERISA Section 3(14), who is (a) a Member but no longer an
Employee, (b) the Beneficiary of a deceased Member, or (c) an alternate payee of
a Member pursuant to the provisions of a "qualified domestic relations order,"
as defined in Code Section 414(p), shall also have the right, subject to prior
approval by the Plan Administrator, to borrow from the Fund; provided, however,
that loans to such parties in interest may not discriminate in favor of Highly
Compensated Employees.
6.3 In order to apply for a loan, a borrower must complete and submit
an application to the Plan Administrator in such form and subject to such rules
as the Plan Administrator may prescribe for this purpose.
6.4 Loans shall be available to all eligible borrowers on a reasonably
equivalent basis which shall take into account the borrower's credit worthiness,
ability to repay, and ability to provide adequate security. Loans shall not be
made available to Highly Compensated Employees, officers or shareholders of a
Plan Sponsor in an amount greater than the amount made available to other
borrowers. This provision shall be deemed to be satisfied if all borrowers have
the right to borrow the same percentage of their interest in the Member's vested
Accrued Benefit, notwithstanding that the dollar amount of such loans may differ
as a result of differing values of Members' vested Accrued Benefit.
6.5 Each loan shall bear a "reasonable rate of interest" and provide
that the loan be amortized in substantially level payments, made no less
frequently than quarterly, over a specified period of time. A "reasonable rate
of interest" shall be that rate that provides the Plan with a return
commensurate with the interest rates charged by persons in the business of
lending money for loans which would be made under similar circumstances.
6.6 Each loan shall be adequately secured, with the security for the
outstanding balance of all loans to the borrower to consist of one-half (1/2) of
the borrower's interest in the Member's vested Accrued Benefit, or such other
security as the Plan Administrator deems acceptable.
6.7 Each loan, when added to the outstanding balance of all other loans
to the borrower from all retirement plans of the Plan Sponsor and its Affiliates
which are qualified under Section 401 of the Code, shall not exceed the lesser
of:
(a) $50,000, reduced by the excess, if any, of
(1) the highest outstanding balance of loans made to
the borrower from all retirement plans qualified under Code
Section 401 of the Plan Sponsor and its Affiliates during the
one (1) year period immediately preceding the day prior to the
date on which such loan was made, over
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<PAGE> 22
(2) the outstanding balance of loans made to the
borrower from all retirement plans qualified under Code
Section 401 of the Plan Sponsor and its Affiliates on the date
on which such loan was made, or
(b) one-half (1/2) of the value of the borrower's interest in
the vested Accrued Benefit attributable to the Member's Account.
For purposes of this Section, the value of the vested Accrued Benefit
attributable to a Member's Account shall be established as of the latest
preceding Valuation Date, or any later date on which an available valuation was
made, and shall be adjusted for any distributions or contributions made through
the date of the origination of the loan.
6.8 The entire unpaid principal sum and accrued interest shall, at the
option of the Plan Administrator, become due and payable if (a) a borrower fails
to make any loan payment when due, (b) a borrower ceases to be a "party in
interest", as defined in ERISA Section 3(14), (c) the vested Accrued Benefit
held as security under the Plan for the borrower will, as a result of an
impending distribution or withdrawal, be reduced to an amount less than the
amount of all unpaid principal and accrued interest then outstanding under the
loan, or (d) a borrower makes any untrue representations or warranties in
connection with the obtaining of the loan. In that event, the Plan Administrator
may take such steps as it deems necessary to preserve the assets of the Plan,
including, but not limited to, the following: (1) direct the Trustee to deduct
the unpaid principal sum, accrued interest, and any other applicable charge
under the note evidencing the loan from any benefits that may become payable out
of the Plan to the borrower, (2) direct the Plan Sponsor to deduct and transfer
to the Trustee the unpaid principal balance, accrued interest, and any other
applicable charge under the note evidencing the loan from any amounts owed by
the Plan Sponsor to the borrower, or (3) liquidate the security given by the
borrower, other than amounts attributable to a Member's Employee Deferral
Account, and deduct from the proceeds the unpaid principal balance, accrued
interest, and any other applicable charge under the note evidencing the loan. If
any part of the indebtedness under the note evidencing the loan is collected by
law or through an attorney, the borrower shall be liable for attorneys' fees in
an amount equal to ten percent of the amount then due and all costs of
collection.
6.9 Each loan shall be made only in accordance with regulations and
rulings of the Internal Revenue Service or the Department of Labor. The Plan
Administrator shall be authorized to administer the loan program of this Section
and shall act in his sole discretion to ascertain whether the requirements of
such regulations and rulings and this Section have been met.
6.10 Loans will be made last from amounts invested in the Company Stock
Fund.
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SECTION 7
WITHDRAWALS DURING EMPLOYMENT
7.1 A Member who has attained age 59 1/2 may withdraw all or any
portion of the balance in his Employee Deferral Account, his Rollover Account,
and the vested portion of his Matching Account. A Member who makes a withdrawal
under this Plan Section 7.1 will not be eligible to receive contributions
pursuant to Plan Section 3.2 or any contributions on behalf of the Member to his
Employee Deferral Account with respect to the three month period following the
date of the withdrawal. Any withdrawal under this Plan Section 7.1 shall be made
last from amounts invested in the Company Stock Fund.
7.2 A withdrawal pursuant to this Section 7.2 is designated a "Hardship
Withdrawal" and is subject to the following rules: The Trustee shall, upon the
direction of the Plan Administrator, distribute all or a portion of a Member's
Rollover Account and Employee Deferral Account consisting of Deferral Amounts
(but not earnings thereon) prior to the time such account is otherwise
distributable in accordance with the other provisions of the Plan; provided,
however, that any such distribution shall be made only if the Member is an
Employee and demonstrates that he is suffering from "hardship" as determined
herein. For purposes of this Section, a distribution will be deemed to be an
account of hardship if the distribution is on account of:
(a) medical expenses described in Section 213(d) of the Code
incurred by the Member, his spouse, or any dependents of the Member (as
defined in Section 152 of the Code) or necessary for these persons to
obtain medical care described in Section 213(d) of the Code;
(b) costs directly related to the purchase (excluding mortgage
payments) of a principal residence for the Member;
(c) payment of tuition, related educational fees, and room and
board expenses for the next 12 months of post-secondary education for
the Member, his spouse, children, or dependents;
(d) the need to prevent the eviction of the Member from his
principal residence or foreclosure on the mortgage of the Member's
principal residence; or
(e) any other contingency determined by the Internal Revenue
Service to constitute an "immediate and heavy financial need" within
the meaning of Regulations Section 1.401(k)-1(d).
7.3 In addition to the requirements set forth in Plan Section 7.2, any
distribution pursuant to Plan Section 7.2 shall not be in excess of the amount
necessary to satisfy the need determined under Section 7.2 and shall also be
subject to the requirements of Subsection (a) or (b) of this Section.
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<PAGE> 24
(a) (1) the Member shall first obtain all
distributions, other than hardship distributions, and all
nontaxable loans currently available under all plans
maintained by the Plan Sponsor;
(2) the Plan Sponsor shall not permit Elective
Deferrals or after-tax employee contributions to be made to
the Plan or any other plan maintained by the Plan Sponsor, for
a period of twelve (12) months after the Member receives the
distribution pursuant to this Section; and
(3) the Plan Sponsor shall not permit Elective
Deferrals to be made to the Plan or any other plan maintained
by the Plan Sponsor for the Member's taxable year immediately
following the taxable year of the hardship distribution in
excess of the limit under Plan Section 3.1(b) for the taxable
year, less the amount of the Elective Deferrals made to the
Plan or any other plan maintained by the Plan Sponsor for the
taxable year in which the distribution under this Section
occurs.
(b) The Plan Administrator determines that it can rely on the
Member's written representation, unless the Plan Administrator
has actual knowledge to the contrary, that the need determined
under Plan Section 7.2 cannot reasonably be relieved --
(1) through reimbursement or compensation by
insurance or otherwise,
(2) by reasonable liquidation of the assets of the
Member, his spouse and minor children, to the extent
that the liquidation would not itself cause an
immediate and heavy financial need and to the extent
that the assets of the spouse and minor children are
reasonably available to the Member,
(3) by cessation of Elective Deferrals, or
(4) by other distributions or nontaxable (at the time
of the distribution) loans from plans maintained by
the Plan Sponsor or any other employer, or by
borrowing from commercial sources on reasonable
commercial terms.
Such distribution shall be made only in accordance with such rules,
policies, procedures, restrictions, and conditions as the Plan Administrator may
from time to time adopt. Any determination of the existence of hardship and the
amount to be distributed on account thereof shall be made by the Plan
Administrator (or such other person as may be required to make such decisions)
in accordance with the foregoing rules as applied in a uniform and
nondiscriminatory manner, provided that, unless the Member requests otherwise,
any such withdrawal shall include the amount necessary to pay any federal, state
or local income taxes and penalties reasonably anticipated to result from such
withdrawal. A distribution under this Section shall be made in a lump sum to the
Member, and shall be subject to the Eligible Rollover Distribution requirements
of Section 9.5.
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SECTION 8
DEATH BENEFITS
8.1 Upon the death of a Member who is an Employee at the time of his
death, his Beneficiary shall be entitled to the full value of his Accrued
Benefit.
8.2 Upon the death of a Member who is not an Employee at the time of
his death, prior to the distribution of his vested Accrued Benefit, his
Beneficiary shall be entitled to his vested Accrued Benefit.
8.3 If, subsequent to the death of a Member, the Member's Beneficiary
dies while entitled to receive benefits under the Plan, the successor
Beneficiary, if any, or the Beneficiary listed under Subsection (a), (b) or (c)
of the Plan Section containing the definition of the term "Beneficiary" shall
generally be entitled to receive benefits under the Plan. However, if the
deceased Beneficiary was the Member's spouse at the time of the Member's death,
or if no successor Beneficiary shall have been designated by the Member and be
alive and no Beneficiary listed under Subsection (a), (b) or (c) of the Plan
Section containing the definition of the term "Beneficiary" shall be alive, the
Member's unpaid vested Accrued Benefit shall be paid to the personal
representative of the deceased Beneficiary's estate.
8.4 Any benefit payable under this Section 8 shall be paid in
accordance with and subject to the provisions of Plan Section 9 or Section 10,
whichever is applicable, after receipt by the Trustee from the Plan
Administrator of due notice of the death of the Member.
SECTION 9
PAYMENT OF BENEFITS ON RETIREMENT OR DEATH
9.1 The Accrued Benefit of a Member who has attained a Retirement Date
or has attained Normal Retirement Age or died while an Employee shall be fully
vested and nonforfeitable. As of a Member's Retirement Date or death while an
Employee, he or his Beneficiary shall be entitled to his Accrued Benefit to be
paid in accordance with this Section 9. A Member may elect to delay distribution
until he reaches age 70 1/2. The Accrued Benefit of a Member which is to be paid
under this Section 9 shall be determined as of the Valuation Date coinciding
with or next following the Member's Retirement Date or death, or, if the Member
elects to delay distribution until age 70 1/2, as of the Valuation Date
coinciding with or next following the date the Member reaches age 70 1/2. Such
amount shall be decreased by the amount necessary to satisfy the unpaid
principal, accrued interest and penalties on any loan made to the Member from
the Plan (which loan shall be deemed to be satisfied as a result of such
reduction) and adjusted for a pro rata share of any income, gains, and losses
attributable thereto through the Valuation Date coinciding with or immediately
preceding the date the Accrued Benefit is paid. Payment shall be made as soon as
administratively feasible after the Valuation Date. If the amount of the payment
required to commence on a date cannot be ascertained by that date, payment shall
commence retroactively to that date and shall commence no later than sixty (60)
days after the earliest date on which the amount of payment can be ascertained.
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<PAGE> 26
9.2 Payment to a Member shall be in the form of one lump sum payment in
cash, unless the Accrued Benefit of the Member exceeds $3,500, in which event
the Member or the Beneficiary by written instrument delivered to the Plan
Administrator may elect to have his or her Account distributed in one of the
forms of distribution listed below, as chosen by the Member or Beneficiary:
(a) one lump sum payment in cash;
(c) a combination of one lump sum payment in cash for a
portion of his Account designated by the Member and annual, semiannual,
quarterly, or monthly installments in cash for the remaining portion of
the Member's Account; or
(d) annual, semiannual, quarterly or monthly installments in
cash.
If the Member elects annual, semiannual, quarterly, or monthly installments for
some or all of his Account, such distributions shall be made over a period
specified by the Member not exceeding the life expectancy of the Member or the
joint life expectancies of the Member and his Beneficiary.
9.3 Notwithstanding any provision of the Plan to the contrary,
(a) if a Member's vested Accrued Benefit exceeds $3,500, it
shall not be distributed before the Member's Normal Retirement Age or
death without the consent of the Member; and
(b) the payments to be made to a Member, shall satisfy the
incidental death benefit requirements under Code Section 401(a)(9)(G)
and the regulations thereunder.
9.4 Notwithstanding any other provisions of the Plan,
(a) Prior to the death of a Member, all retirement payments
hereunder shall --
(1) be distributed to the Member not later than the
required beginning date (as defined below) or,
(2) be distributed, commencing not later than the
required beginning date (as defined below)--
(A) in accordance with regulations
prescribed by the Secretary of the Treasury, over the
life of the Member or over the lives of the Member
and his designated individual Beneficiary, if any, or
(B) in accordance with regulations
prescribed by the Secretary of the Treasury, over a
period not extending beyond the life expectancy of
the Member or the joint life and last survivor
expectancy of the Member and his designated
individual Beneficiary, if any.
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<PAGE> 27
(b) (1) If --
(A) the distribution of a Member's
retirement payments have begun in accordance with
Subsection (a)(2) of this Section, and
(B) the Member dies before his entire vested
Accrued Benefit has been distributed to him,
then the remaining portion of his vested Accrued Benefit shall
be distributed at least as rapidly as under the method of
distribution being used under Subsection (a)(2) of this
Section as of the date of his death.
(2) If a Member dies before the commencement of
retirement payments hereunder, the entire interest of the
Member shall be distributed within five (5) years after his
death.
(3) If --
(A) any portion of a Member's vested Accrued
Benefit is payable to or for the benefit of the
Member's designated individual Beneficiary, if any,
(B) that portion is to be distributed, in
accordance with regulations prescribed by the
Secretary of the Treasury, over the life of the
designated individual Beneficiary or over a period
not extending beyond the life expectancy of the
designated individual Beneficiary, and
(C) the distributions begin not later than
one (1) year after the date of the Member's death or
such later date as the Secretary of the Treasury may
by regulations prescribe,
then, for purposes of Paragraph (2) of this Subsection (b),
the portion referred to in Subparagraph (A) of this Paragraph
(3) shall be treated as distributed on the date on which the
distributions to the designated individual Beneficiary begin.
(4) If the designated individual Beneficiary referred
to in Paragraph (3)(A) of this Subsection (b) is the surviving
spouse of the Member, then --
(A) the date on which the distributions are
required to begin under Paragraph (3)(C) of this
Subsection (b) shall not be earlier than the date on
which the Member would have attained age 70 1/2, and
(B) if the surviving spouse dies before the
distributions to such spouse begin, this Subsection
(b) shall be applied as if the surviving spouse were
the Member.
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<PAGE> 28
(c) For purposes of this Section, the term "required beginning
date" means April 1 of the calendar year following the calendar year in
which the Member attains age 70 1/2. Notwithstanding the foregoing, in
the case of a Member who is not described in Section 1(b)(3) of
Appendix C hereto and who has attained age 70 1/2 before January 1,
1988, the term "required beginning date" means April 1 of the calendar
year following the calendar year in which the Member retires or
otherwise terminates employment.
9.5 Notwithstanding any provisions of the Plan to the contrary that
would otherwise limit a Distributee's election under this Section 9, a
Distributee may elect, at the time and in the manner prescribed by the
Administrator, to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the Distributee in a direct
rollover. If the Eligible Rollover Distribution is one to which Code Sections
401(a)(11) and 417 do not apply, such Eligible Rollover Distribution may
commence less than 30 days after the notice required under section
1.411(a)-11(c) of the Income Tax Regulations is give, provided that:
(1) The Plan Administrator clearly informs the
Distributee that the Distributee has a right to a period of at
least 30 days after receiving the notice to consider the
decisions of whether or not to elect a distribution (and, if
applicable, a particular distribution option), and
(2) the Distributee, after receiving the notice,
affirmatively elects a distribution.
SECTION 10
PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT
10.1 Transfer of a Member from one Plan Sponsor to another Plan Sponsor
or to an Affiliate shall not be deemed for any purpose under the Plan to be a
termination of employment of the Member.
10.2 In the event of the termination of employment of a Member for
reasons other than death or attainment of a Retirement Date, the Member's
Accrued Benefit shall be determined as of the Valuation Date coinciding with or
immediately preceding the Member's termination of employment, increased by any
amounts allocated to the Account of the Member since that Valuation Date,
decreased by any distributions made since that Valuation Date from the Mem-
ber's Account, decreased by the amount necessary to satisfy, as of the Member's
termination of employment, the unpaid principal, accrued interest and penalties
on any loan made to the Member from the Plan (which loan shall be deemed to be
satisfied as a result of such reduction) and adjusted for a pro rata share of
any income, gains, and losses attributable thereto through the Valuation Date
coinciding with or immediately preceding the date the Accrued Benefit is paid.
10.3 That portion of a Member's Accrued Benefit in which he is vested
shall be:
(a) his Employee Deferral Account, Voluntary Contribution
Account, and Rollover Account, which shall be fully vested and
nonforfeitable at all times; and
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<PAGE> 29
(b) that portion of the value of his Matching Account and
Company Account computed according to the following vesting schedule
taking into account any Years of Service subsequent to such Valuation
Date until the date of his termination of employment:
<TABLE>
<CAPTION>
Full Years of Percentage
Service Vested
------- ------
<S> <C>
Less than 2 0%
2 50%
3 100%
</TABLE>
10.4 The Member shall be entitled to payment in the form specified in
Plan Section 9.2. Payment shall be made as soon as administratively feasible
after the Valuation Date coinciding with or immediately following the Member's
termination of employment; provided, however, if the Member's vested Accrued
Benefit exceeds $3,500 it will not be distributed before the Member's Normal
Retirement Age or death without the Member's consent. A Member may, however,
elect to have payment of his Accrued Benefit delayed until he attains age 70
1/2. Unless a Member elects to delay commencement of payment of his Accrued
Benefit, in no event shall payment be made later than sixty (60) days after the
end of the Plan Year in which the Normal Retirement Age of the Member occurs.
Payment shall be subject to the minimum distribution requirements set forth in
Plan Section 9. Any distribution under this Section shall be subject to the
Eligible Rollover Distribution requirements of Section 9.5.
10.5 (a) If any portion of a Member's vested Accrued Benefit derived
from Plan Sponsor contributions is paid prior to his Termination
Completion Date, a portion of his Accrued Benefit equal to his total
non-vested Accrued Benefit derived from Plan Sponsor contributions
multiplied by a fraction, the numerator of which is the amount of the
distribution attributable to Plan Sponsor contributions and the
denominator of which is the total vested Accrued Benefit attributable
to Plan Sponsor contributions, shall be immediately forfeited. The
amount forfeited shall not exceed the Members non-vested Accrued
Benefit. Upon the termination of employment of a Member who is not
vested in any part of his Accrued Benefit, the Member shall be deemed
to have received a distribution and his Accrued Benefit shall be
immediately forfeited.
(b) If the Member is reemployed by a Plan Sponsor or an
Affiliate prior to his Termination Completion Date and (a) if the
Member's Accrued Benefit was partially vested and the Member repays to
the Fund no later than the earlier of his Termination Completion Date
or the fifth anniversary of the Member's reemployment all of that
portion of his vested Accrued Benefit which was paid to him or (b) if
the Member's Accrued Benefit was not vested upon his termination of
employment, then any portion of his Accrued Benefit which was forfeited
shall be restored effective on the Valuation Date coinciding with or
next following the repayment or the Member's reemployment,
respectively. The restoration on any Valuation Date of the forfeited
portion of the Accrued Benefit of a Member pursuant to the preceding
sentence shall be made first from forfeitures available for allocation
on that Valuation Date, to the extent available, and
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<PAGE> 30
secondly from additional employer contributions. Only after
restorations have been made shall the remaining net income be available
for allocation under Plan Section 4.
(c) If a Member who is partially vested in his Accrued Benefit
does not receive, prior to his Termination Completion Date, a
distribution of any portion of his vested Accrued Benefit, then no
forfeiture of that Member's non-vested portion of his Accrued Benefit
shall occur until that Member's Termination Completion Date.
10.6 In the event that a Plan amendment directly or indirectly changes
the vesting schedule, the vesting percentage for each Member in his Accrued
Benefit accumulated to the date when the amendment is adopted shall not be
reduced as a result of the amendment. In addition, any Member with at least
three (3) Years of Service may irrevocably elect to remain under the
pre-amendment vesting schedule with respect to all of his benefits accrued both
before and after the amendment.
SECTION 11
ADMINISTRATION OF THE PLAN
11.1 Trust Agreement. The Primary Sponsor shall establish a Trust with
the Trustee designated by the Board of Directors for the management of the Fund,
which Trust shall form a part of the Plan and is incorporated herein by
reference.
11.2 Operation of the Plan Administrator. The Primary Sponsor shall
appoint a Plan Administrator. If an organization is appointed to serve as the
Plan Administrator, then the Plan Administrator may designate in writing a
person who may act on behalf of the Plan Administrator. The Primary Sponsor
shall have the right to remove the Plan Administrator at any time by notice in
writing. The Plan Administrator may resign at any time by written notice of
resignation to the Trustee and the Primary Sponsor. Upon removal or resignation,
or in the event of the dissolution of the Plan Administrator, the Primary
Sponsor shall appoint a successor.
11.3 Fiduciary Responsibility.
(a) The Plan Administrator, as a Named Fiduciary, may allocate
its fiduciary responsibilities among Fiduciaries other than the
Trustee, designated in writing by the Plan Administrator and may
designate in writing other persons (other than the Trustee) to carry
out its fiduciary responsibilities under the Plan. The Plan
Administrator may at any time and from time to time remove any such
person designated to carry out its fiduciary responsibilities under the
Plan by notice in writing to such person.
(b) The Plan Administrator and each other Fiduciary may employ
persons to perform services and to render advice with regard to any of
the Fiduciary's responsibilities under the Plan. Charges for all such
services performed and advice rendered may be directly paid by each
Plan Sponsor but until paid shall constitute a charge against the Fund.
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<PAGE> 31
(c) Each Plan Sponsor shall indemnify and hold harmless each
person constituting the Plan Administrator or the Investment Committee,
if any, from and against any and all claims, losses, costs, expenses
(including, without limitation, attorney's fees and court costs),
damages, actions or causes of action arising from, on account of or in
connection with the performance by such person of his duties in such
capacity, other than such of the foregoing arising from, on account of
or in connection with the willful neglect or willful misconduct of such
person so acting.
11.4 Duties of the Plan Administrator.
(a) The Plan Administrator shall advise the Trustee with
respect to all payments under the terms of the Plan and shall direct
the Trustee in writing to make such payments from the Fund; provided,
however, in no event shall the Trustee be required to make such
payments if the Trustee has actual knowledge that such payments are
contrary to the terms of the Plan and the Trust.
(b) The Plan Administrator shall from time to time establish
rules, not contrary to the provisions of the Plan and the Trust, for
the administration of the Plan and the transaction of its business. All
elections and designations under the Plan by a Participant or
Beneficiary shall be made on forms prescribed by the Plan
Administrator. The Plan Administrator shall have discretionary
authority to construe the terms of the Plan and shall determine all
questions arising in the administration, interpretation and application
of the Plan, including, but not limited to, those concerning
eligibility for benefits and it shall not act so as to discriminate in
favor of any person. All determinations of the Plan Administrator shall
be conclusive and binding on all Employees, Members, Beneficiaries and
Fiduciaries, subject to the provisions of the Plan and the Trust and
subject to applicable law.
(c) The Plan Administrator shall furnish Members and
Beneficiaries with all disclosures now or hereafter required by ERISA
or the Code. The Plan Administrator shall file, as required, the
various reports and disclosures concerning the Plan and its operations
as required by ERISA and by the Code, and shall be solely responsible
for establishing and maintaining all records of the Plan and the Trust.
(d) The statement of specific duties for a Plan Administrator
in this Section is not in derogation of any other duties which a Plan
Administrator has under the provisions of the Plan or the Trust or
under applicable law.
11.5 Investment Manager. The Primary Sponsor may, by action in writing
certified by notice to the Trustee, appoint an Investment Manager. Any
Investment Manager may be removed in the same manner in which appointed, and in
the event of any removal, the Investment Manager shall, as soon as possible, but
in no event more than thirty (30) days after notice of removal, turn over all
assets managed by it to the Trustee or to any successor Investment Manager
appointed, and shall make a full accounting to the Primary Sponsor with respect
to all assets managed by it since its appointment as an Investment Manager.
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<PAGE> 32
11.6 Investment Committee. The Primary Sponsor may, by action in
writing certified by notice to the Trustee, appoint an Investment Committee. The
Primary Sponsor shall have the right to remove any person on the Investment
Committee at any time by notice in writing to such person. A person on the
Investment Committee may resign at any time by written notice of resignation to
the Primary Sponsor. Upon such removal or resignation, or in the event of the
death of a person on the Investment Committee, the Primary Sponsor may appoint a
successor. Until a successor has been appointed, the remaining persons on the
Investment Committee may continue to act as the Investment Committee.
11.7 Action by the Primary Sponsor or a Plan Sponsor. Any action to be
taken by the Primary Sponsor or a Plan Sponsor shall be taken by resolution or
written direction duly adopted by its board of directors or appropriate
governing body, as the case may be; provided, however, that by such resolution
or written direction, the board of directors or appropriate governing body, as
the case may be, may delegate to any officer or other appropriate person of a
Plan Sponsor the authority to take any such actions as may be specified in such
resolution or written direction, other than the power to amend, modify or
terminate the Plan or the Trust or to determine the basis of any Plan Sponsor
contributions.
SECTION 12
CLAIM REVIEW PROCEDURE
12.1 If a Member or Beneficiary is denied a claim for benefits under a
Plan, the Plan Administrator shall provide to the claimant written notice of the
denial within 90 days after the Plan Administrator receives the claim, unless
special circumstances require an extension of time for processing the claim. If
such an extension of time for processing is required, written notice of the
extension shall be furnished to the claimant prior to the termination of the
initial 90-day period. In no event shall the extension exceed a period of 90
days from the end of such initial period. The extension notice shall indicate
the special circumstances requiring an extension of time and the date by which
the Plan Administrator expects to render the final decision.
12.2 If the claimant is denied a claim for benefits, the Plan
Administrator shall provide, within the time frame set forth in Plan Section
12.1, written notice of the denial which shall set forth:
(a) the specific reasons for the denial;
(b) specific references to the pertinent provisions of the
Plan on which the denial is based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of
why the material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
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<PAGE> 33
12.3 After receiving written notice of the denial of a claim, a
claimant or his representative may:
(a) request a full and fair review of the denial by written
application to the Plan Administrator;
(b) review pertinent documents; and
(c) submit issues and comments in writing to the Plan
Administrator.
12.4 If the claimant wishes a review of the decision denying his claim
to benefits under the Plan, he must submit the written application to the Plan
Administrator within sixty (60) days after receiving written notice of the
denial.
12.5 Upon receiving the written application for review, the Plan
Administrator may schedule a hearing for purposes of reviewing the claimant's
claim, which hearing shall take place not more than thirty (30) days from the
date on which the Plan Administrator received the written application for
review.
12.6 At least ten (10) days prior to the scheduled hearing, the
claimant and his representative designated in writing by him, if any, shall
receive written notice of the date, time, and place of the scheduled hearing.
The claimant or his representative may request that the hearing be rescheduled
for his convenience on another reasonable date or at another reasonable time or
place.
12.7 All claimants requesting a review of the decision denying their
claim for benefits may employ counsel for purposes of the hearing.
12.8 No later than sixty (60) days following the receipt of the written
application for review, the Plan Administrator shall submit its decision on the
review in writing to the claimant involved and to his representative, if any;
provided, however, a decision on the written application for review may be
extended, in the event special circumstances such as the need to hold a hearing
require an extension of time, to a day no later than one hundred twenty (120)
days after the date of receipt of the written application for review. The
decision shall include specific reasons for the decision and specific references
to the pertinent provisions of the Plan on which the decision is based.
SECTION 13
LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS
13.1 No benefit which shall be payable under the Plan to any person
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; and no such benefit shall in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements or torts of any person, nor shall it
be subject to
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<PAGE> 34
attachment or legal process for, or against, such person, and the same shall not
be recognized under the Plan, except to such extent as may be required by law.
Notwithstanding the above, this Section shall not apply to a "qualified domestic
relations order" (as defined in Code Section 414(p)), and benefits may be paid
pursuant to the provisions of such an order. The Plan Administrator shall
develop procedures (in accordance with applicable federal regulations) to
determine whether a domestic relations order is qualified, and, if so, the
method and the procedures for complying therewith.
13.2 If any person who shall be entitled to any benefit under the Plan
shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge such benefit under the Plan, then the payment
of any such benefit in the event a Member or Beneficiary is entitled to payment
shall, in the discretion of the Plan Administrator, cease and terminate and in
that event the Trustee shall hold or apply the same for the benefit of such
person, his spouse, children, other dependents or any of them in such manner and
in such proportion as the Plan Administrator shall determine.
13.3 Whenever any benefit which shall be payable under the Plan is to
be paid to or for the benefit of any person who is then a minor or determined to
be incompetent by qualified medical advice, the Plan Administrator need not
require the appointment of a guardian or custodian, but shall be authorized to
cause the same to be paid over to the person having custody of such minor or
incompetent, or to cause the same to be paid to such minor or incompetent
without the intervention of a guardian or custodian, or to cause the same to be
paid to a legal guardian or custodian of such minor or incompetent if one has
been appointed or to cause the same to be used for the benefit of such minor or
incompetent.
13.4 If the Plan Administrator cannot ascertain the whereabouts of any
Member to whom a payment is due under the Plan, the Plan administrator may
direct that the payment and all remaining payments otherwise due to the Member
be cancelled on the records of the Plan and the amount thereof applied as a
forfeiture in accordance with Plan Section 3.6, except that, in the event the
Member later notifies the Plan Administrator of his whereabouts and requests the
payments due to him under the Plan, the Plan Sponsor shall contribute to the
Plan an amount equal to the payment to be paid to him as soon as
administratively feasible.
SECTION 14
PROHIBITION AGAINST DIVERSION
At no time shall any part of the Fund be used for or diverted to
purposes other than the exclusive benefit of the Members or their Beneficiaries,
subject, however, to the payment of all taxes and administrative expenses and
subject to the provisions of the Plan with respect to returns of contributions.
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<PAGE> 35
SECTION 15
LIMITATION OF RIGHTS
Membership in the Plan shall not give any Employee any right or claim
except to the extent that such right is specifically fixed under the terms of
the Plan. The adoption of the Plan and the Trust by any Plan Sponsor shall not
be construed to give any Employee a right to be continued in the employ of a
Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the
employment of any Employee at any time.
SECTION 16
AMENDMENT TO OR TERMINATION OF THE
PLAN AND THE TRUST
16.1 The Primary Sponsor reserves the right at any time to modify or
amend or terminate the Plan or the Trust in whole or in part by notice thereof
in writing delivered to the Trustee; provided, however, that the Primary Sponsor
shall have no power to modify or amend the Plan in such manner as would cause or
permit any portion of the funds held under a Plan to be used for, or diverted
to, purposes other than for the exclusive benefit of Members or their
Beneficiaries, or as would cause or permit any portion of a fund held under the
Plan to become the property of a Plan Sponsor; and provided further, that the
duties or liabilities of the Trustee shall not be increased without its written
consent; and provided further, that the Plan Administrator may amend the Loan
Procedures from time to time without the need for further consent of the Primary
Sponsor. No such modifications or amendments shall have the effect of
retroactively changing or depriving Members or Beneficiaries of rights already
accrued under the Plan. No Plan Sponsor other than the Primary Sponsor shall
have the right to so modify, amend or terminate the Plan or the Trust.
Notwithstanding the foregoing, each Plan Sponsor may terminate its own
participation in the Plan and Trust pursuant to the Plan.
16.2 Each Plan Sponsor other than the Primary Sponsor shall have the
right to terminate its participation in the Plan and Trust by resolution of its
board of directors or other appropriate governing body and notice in writing to
the Primary Sponsor and the Trustee unless such termination would result in the
disqualification of the Plan or the Trust or would adversely affect the exempt
status of the Plan or the Trust as to any other Plan Sponsor. If contributions
by or on behalf of a Plan Sponsor are completely terminated, the Plan and Trust
shall be deemed terminated as to such Plan Sponsor. Any termination by a Plan
Sponsor, shall not be a termination as to any other Plan Sponsor.
16.3 (a) If the Plan is terminated by the Primary Sponsor or if
contributions to the Trust should be permanently discontinued, it shall
terminate as to all Plan Sponsors and the Fund shall be used, subject
to the payment of expenses and taxes, for the benefit of Members and
Beneficiaries, and for no other purposes, and the Account of each
affected Member shall be fully vested and nonforfeitable,
notwithstanding the provisions of the Section of the Plan which sets
forth the vesting schedule.
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<PAGE> 36
(b) In the event of the partial termination of the Plan, each
affected Member's Account shall be fully vested and nonforfeitable,
notwithstanding the provisions of the Section of the Plan which sets
forth the vesting schedule.
16.4 In the event of the termination of the Plan or the Trust with
respect to a Plan Sponsor, the Accounts of the Members with respect to the Plan
as adopted by such Plan Sponsor shall be held subject to the instructions of the
Plan Administrator; provided that the Trustee shall not be required to make any
distribution until it receives a copy of an Internal Revenue Service
determination letter to the effect that the termination does not affect the
qualified status of the Plan or the exempt status of the Trust or, in the event
that such letter is applied for and is not issued, until the Trustee is
reasonably satisfied that adequate provision has been made for the payment of
all taxes which may be due and owing by the Trust.
16.5 In the case of any merger or consolidation of the Plan with, or
any transfer of the assets or liabilities of the Plan to, any other plan
qualified under Code Section 401, the terms of the merger, consolidation or
transfer shall be such that each Member would receive (in the event of
termination of the Plan or its successor immediately thereafter) a benefit which
is no less than the benefit which the Member would have received in the event of
termination of the Plan immediately before the merger, consolidation or
transfer.
16.6 Notwithstanding any other provision of the Plan, an
amendment to the Plan --
(a) which eliminates or reduces an early retirement benefit,
if any, or which eliminates or reduces a retirement-type subsidy (as
defined in regulations issued by the Department of the Treasury), if
any, or
(b) which eliminates an optional form of benefit
shall not be effective with respect to benefits attributable to service before
the amendment is adopted. In the case of a retirement-type subsidy described in
Subsection (a) above, this Section shall be applicable only to a Member who
satisfies, either before or after the amendment, the pre-amendment conditions
for the subsidy.
SECTION 17
ADOPTION OF PLAN BY AFFILIATES
Any corporation or other business entity related to the Primary Sponsor
by function or operation and any Affiliate, if the corporation, business entity
or Affiliate is authorized to do so by written direction adopted by the Board of
Directors, may adopt the Plan and the related Trust by action of the board of
directors or other appropriate governing body of such corporation, business
entity or Affiliate. Any adoption shall be evidenced by certified copies of the
resolutions of the foregoing board of directors or governing body indicating the
adoption and by the execution of the Trust by the adopting corporation, or
business entity or Affiliate. The resolution shall state and define the
effective date of the adoption of the Plan by the Plan Sponsor and, for the
purpose of Code Section 415, the "limitation year" as to such Plan Sponsor.
Notwithstanding the foregoing, however, if the Plan and Trust as adopted by an
Affiliate
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<PAGE> 37
or other corporation or business entity under the foregoing provisions shall
fail to receive the initial approval of the Internal Revenue Service as a
qualified Plan and Trust under Code Sections 401(a) and 501(a), any
contributions by the Affiliate or other corporation or business entity after
payment of all expenses will be returned to such Plan Sponsor free of any trust,
and the Plan and Trust shall terminate, as to the adopting Affiliate or other
corporation or business entity.
SECTION 18
QUALIFICATION AND RETURN OF CONTRIBUTIONS
18.1 If the Plan and the related Trust fail to receive the initial
approval of the Internal Revenue Service as a qualified plan and trust within
one (1) year after the date of denial of qualification (a) the contribution of a
Plan Sponsor after payment of all expenses will be returned to a Plan Sponsor
free of the Plan and Trust, (b) contributions made by a Member shall be returned
to the Member who made the contributions, and (c) the Plan and Trust shall
thereupon terminate.
18.2 If and to the extent permitted by the Code and other applicable
laws and regulations thereunder, upon a Plan Sponsor's request, a contribution
which was made by reason of a mistake of fact or upon the deductibility of the
contribution under Code Section 404, shall be returned to a Plan Sponsor within
one (1) year after the payment of the contribution, or the disallowance of the
deduction (to the extent disallowed), whichever is applicable.
In the event of a contribution which was made by reason of a mistake of
fact or which was conditioned upon the deductibility of the contribution, the
amount to be returned to the Plan Sponsor shall be the excess of the
contribution above the amount that would have been contributed had the mistake
of fact or the mistake in determining the deduction not occurred, less any net
loss attributable to the excess. Any net income attributable to the excess shall
not be returned to the Plan Sponsor. No return of any portion of the excess
shall be made to the Plan Sponsor if the return would cause the balance in a
Member's Account to be less than the balance would have been had the mistaken
contribution not been made.
SECTION 19
INCORPORATION OF SPECIAL LIMITATIONS
Appendices A, B, C, and D to the Plan, attached hereto, are
incorporated by reference and the provisions of the same shall apply
notwithstanding anything to the contrary contained herein.
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<PAGE> 38
IN WITNESS WHEREOF, the Primary Sponsor has caused this indenture to be
executed as of the date first above written.
MEDAPHIS CORPORATION
By: /s/ Michael R. Cote
--------------------
Title:
-----------------
ATTEST:
/s/ Peggy Sherman
- --------------------------
Title:
--------------------
[CORPORATE SEAL]
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<PAGE> 39
APPENDIX A
SPECIAL NONDISCRIMINATION RULES
SECTION 1
As used in this Appendix, the following words shall have the following
meanings:
(a) "Eligible Member" means a Member who is an Employee during
any particular Plan Year.
(b) "Highly Compensated Eligible Member" means any Eligible
Member who is a Highly Compensated Employee.
(c) "Matching Contribution" means any contribution made by a
Plan Sponsor to a Matching Account and any other contribution made to a
plan by a Plan Sponsor or an Affiliate on behalf of an Employee on
account of a contribution made by an Employee or on account of an
Elective Deferral.
(d) "Qualified Matching Contributions" means Matching
Contributions which are immediately nonforfeitable when made, and which
would be nonforfeitable, regardless of the age or service of the
Employee or whether the Employee is employed on a certain date, and
which may not be distributed, except upon one of the events described
under Section 401(k)(2)(B) of the Code and the regulations thereunder.
(e) "Qualified Nonelective Contributions" means contributions
of the Plan Sponsor or an Affiliate, other than Matching Contributions
or Elective Deferrals, which are nonforfeitable when made, and which
would be nonforfeitable regardless of the age or service of the
Employee or whether the Employee is employed on a certain date, and
which may not be distributed, except upon one of the events described
under Code Section 401(k)(2)(B) and the regulations thereunder.
SECTION 2
In addition to any other limitations set forth in the Plan, for each
Plan Year one of the following tests must be satisfied:
(a) the actual deferral percentage for the Highly Compensated
Eligible Members must not be more than the actual deferral percentage
of all other Eligible Members multiplied by 1.25; or
(b) the excess of the actual deferral percentage for the
Highly Compensated Eligible Members over that of all other Eligible
Members must not be more than two (2) percentage points, and the actual
deferral percentage for the Highly Compensated Eligible
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<PAGE> 40
Members must not be more than the actual deferral percentage of all
other Eligible Members multiplied by two (2).
The "actual deferral percentage" for the Highly Compensated Eligible Members and
all other Eligible Members for a Plan Year is the average in each group of the
ratios, calculated separately for each Employee, of the Deferral Amounts
contributed by the Plan Sponsor on behalf of an Employee for the Plan Year to
the Annual Compensation of the Employee in the Plan Year. In addition, for
purposes of calculating the "actual deferral percentage" as described above,
Deferral Amounts of Employees who are not Highly Compensated Employees which are
prohibited by Code Section 401(a)(30) shall not be taken into consideration.
Except to the extent limited by Treasury Regulation section 1.401(k)-1(b)(5) and
any other applicable regulations promulgated by the Secretary of the Treasury,
all or part of the Qualified Matching Contributions and Qualified Nonelective
Contributions made pursuant to the Plan may be treated as Deferral Amounts for
purposes of determining the "actual deferral percentage."
SECTION 3
If the Deferral Amounts contributed on behalf of any Highly Compensated
Eligible Member exceeds the amount permitted under the "actual deferral
percentage" test described in Section 2 of this Appendix A for any given Plan
Year, then before the end of the Plan Year following the Plan Year for which the
Excess Deferral Amount was contributed, (a) the amount of the Excess Deferral
Amount for the Plan Year, as adjusted to reflect income, gain, or loss
attributable to it through the date the Excess Deferral Amount is distributed to
the Member and reduced by any excess Elective Deferrals as determined pursuant
to Plan Section 3.1 previously distributed to the Member for the Member's
taxable year ending with or within the Plan Year, may be distributed to the
Highly Compensated Eligible Member. The income allocable to such Excess Deferral
Amount shall be determined in a similar manner as described in Section 4.2 of
the Plan. The Excess Deferral Amount to be distributed shall be reduced by
Deferral Amounts previously distributed for the taxable year ending in the same
Plan Year, and shall also be reduced by Deferral Amounts previously distributed
for the Plan Year beginning in such taxable year. For all other purposes under
the Plan other than this Appendix A recharacterized amounts shall continue to be
treated as Deferral Amounts. In the event the multiple use of limitations
contained in Sections 2(b) and 5(b) of this Appendix, pursuant to Treasury
Regulations section 1.401(m)-2 as promulgated by the Secretary of the Treasury,
requires a corrective distribution, such distribution shall be made pursuant to
this Section 3, and not Section 6 of Appendix A.
For purposes of this Section 3, "Excess Deferral Amount" means, with respect to
a Plan Year, the excess of:
(a) the aggregate amount of Deferral Amounts contributed by a
Plan Sponsor on behalf of Highly Compensated Eligible Members for the
Plan Year, over
(b) the maximum amount of Deferral Amounts permitted under
Section 2 of this Appendix A for the Plan Year, which shall be
determined by reducing the Deferral
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<PAGE> 41
Amounts contributed on behalf of Highly Compensated Eligible Members in
order of the actual deferral percentages beginning with the highest of
such percentages.
Distribution of the Excess Deferral Amounts for any Plan Year shall be made to
the Highly Compensated Eligible Members on the basis of the respective portions
of the Excess Deferral Amount attributable to each Highly Compensated Eligible
Member. As to any Highly Compensated Employee who is subject to the family
aggregation rules of subsection (b) of the Plan Section containing the
definition of the term "Highly Compensated Employee," any distribution of such
Highly Compensated Employee's allocable portion of the Excess Deferral Amount
for a Plan Year shall be allocated among the family members of such Highly
Compensated Employee who are combined to determine the actual deferral
percentage in proportion to the Deferral Amounts taken into account under this
Section 3.
SECTION 4
The Plan Administrator shall have the responsibility of monitoring the
Plan's compliance with the limitations of this Appendix A and shall have the
power to take all steps it deems necessary or appropriate to ensure compliance,
including, without limitation, restricting the amount which Highly Compensated
Eligible Members can elect to have contributed pursuant to Plan Section 3.1. Any
actions taken by the Plan Administrator pursuant to this Section 4 shall be
pursuant to non-discriminatory procedures consistently applied.
SECTION 5
In addition to any other limitations set forth in the Plan, Matching
Contributions under the Plan and the amount of nondeductible employee
contributions under the Plan, for each Plan Year must satisfy one of the
following tests:
(a) The contribution percentage for Highly Compensated
Eligible Members must not exceed 125% of the contribution percentage
for all other Eligible Members; or
(b) The contribution percentage for Highly Compensated
Eligible Members must not exceed the lesser of (1) 200% of the
contribution percentage for all other Eligible Members, and (2) the
contribution percentage for all other Eligible Members plus two (2)
percentage points.
Notwithstanding the foregoing, for purposes of this Section 5, the terms Highly
Compensated Eligible Member and Eligible Member shall not include any Member who
is not eligible to receive a Matching Contribution under the provisions of the
Plan, other than as a result of the Member failing to contribute to the Plan or
failing to have an Elective Deferral contributed to the Plan on the Member's
behalf. Notwithstanding the foregoing, if Qualified Matching Contributions are
taken into account for purposes of applying the test contained in Section 2 of
this Appendix A, they shall not be taken into account under this Section 5. In
applying the above tests, the Plan Administrator shall comply with any
regulations promulgated by the Secretary of the Treasury which prevent or
restrict the use of the test contained in Section 2(b)
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<PAGE> 42
of this Appendix A and the test contained in Section 5(b) of this Appendix A.
The "contribution percentage" for Highly Compensated Eligible Members and for
all other Eligible Members for a Plan Year shall be the average of the ratios,
calculated separately for each Member, of (A) to (B), where (A) is the amount of
Matching Contributions under the Plan (excluding Qualified Matching
Contributions which are used to apply the test set forth in Section 2 of this
Appendix A or Matching Contributions which are used to satisfy the minimum
required contributions to the Accounts of Eligible Members who are not Key
Employees pursuant to Section 1 of Appendix C to the Plan) and nondeductible
employee contributions made under the Plan for the Eligible Member for the Plan
Year, and where (B) is the Annual Compensation of the Eligible Member for the
Plan Year. Except to the extent limited by Treasury Regulation Section
1.401(m)-1(b)(5) and any other applicable regulations promulgated by the
Secretary of the Treasury, a Plan Sponsor may elect to treat Deferral Amounts
and Qualified Nonelective Contributions as Matching Contributions for purpose of
determining the "contribution percentage," provided the Deferral Amounts,
excluding those treated as Matching Contributions, satisfy the test set forth in
Section 2 of Appendix A.
SECTION 6
If the Matching Contributions and nondeductible employee contributions
and, if taken into account under Section 5 of this Appendix A, the Deferral
Amounts made by or on behalf of Highly Compensated Eligible Members exceed the
amount permitted under the "contribution percentage test" for any given Plan
Year, then, before the close of the Plan Year following the Plan Year for which
the excess aggregate contributions were made, the amount of the excess aggregate
contributions attributable to the Plan for the Plan Year, as adjusted to reflect
any income, gain or loss attributable to such contributions through the date the
excess aggregate contributions are distributed or forfeited, shall be
distributed or, if the excess aggregate contributions are forfeitable,
forfeited. The income allocable to such contributions shall be determined in a
similar manner as described in Section 4.2 of the Plan. As to any Highly
Compensated Employee, any distribution or forfeiture of his allocable portion of
the excess aggregate contributions for a Plan Year shall first be attributed to
any nondeductible employee contributions made by the Member during the Plan Year
for which no corresponding Plan Sponsor contribution is made and then to any
remaining nondeductible employee contributions made by the Member during the
Plan Year and any Matching Contributions thereon. As between the Plan and any
other plan or plans maintained by the Plan Sponsor in which excess aggregate
contributions for a Plan Year are held, each such plan shall distribute or
forfeit a pro-rata share of each class of contribution based on the respective
amounts of a class of contribution made to each plan during the Plan Year. The
payment of the excess aggregate contributions shall be made without regard to
any other provision in the Plan. In the event the multiple use of limitations
contained in Sections 2(b) and 5(b) of this Appendix, pursuant to Treasury
Regulation section 1.401(m)-2 as promulgated by the Secretary of the Treasury,
requires a corrective distribution, such distribution shall be made pursuant to
Section 3 of Appendix A, and not this Section 6.
For purposes of this Section 6, with respect to any Plan Year, "excess
aggregate contributions" means the excess of:
A-4
<PAGE> 43
(a) the aggregate amount of the Matching Contributions and
nondeductible employee contributions and, if taken into account under
Section 5 of this Appendix A, the Deferral Amounts actually made on
behalf of Highly Compensated Eligible Members for the Plan Year, over
(b) the maximum amount of the contributions permitted under
the limitations of Section 5 of this Appendix A, determined by reducing
contributions made on behalf of Highly Compensated Eligible Members in
order of their contribution percentages beginning with the highest of
such percentages.
Distribution or forfeiture of nondeductible employee contributions or Matching
Contributions in the amount of the excess aggregate contributions for any Plan
Year shall be made with respect to Highly Compensated Employees on the basis of
the respective portions of the excess aggregate contributions attributable to
each Highly Compensated Employee. Forfeitures of excess aggregate contributions
may not be allocated to Members whose contributions are reduced under this
Section 6. As to any Highly Compensated Employee who is subject to the family
aggregation rules of subsection (b) of the Plan Section containing the
definition of the term "Highly Compensated Employee," any distribution or
forfeiture of such Highly Compensated Employee's allocable portion of the excess
aggregate contributions for a Plan Year shall be allocated among the family
members of such Highly Compensated Employee which are combined to determine the
contribution percentage in proportion to the contributions taken into account
under this Section 6.
The determination of the amount of excess aggregate contributions under this
Section 6 shall be made after (1) first determining the excess Elective
Deferrals under Section 3.1(b) of the Plan, and (2) then determining the Excess
Deferral Amounts under Section 3 of this Appendix A.
SECTION 7
Except to the extent limited by rules promulgated by the Secretary of
the Treasury, if a Highly Compensated Eligible Member is a participant in any
other plan of the Plan Sponsor or any Affiliate which includes Matching
Contributions, deferrals under a cash or deferred arrangement pursuant to Code
Section 401(k), or nondeductible employee contributions, any contributions made
by or on behalf of the Member to the other plan shall be allocated with the same
class of contributions under the Plan for purposes of determining the "actual
deferral percentage" and "contribution percentage" under the Plan; provided,
however, contributions that are made under an "employee stock ownership plan"
(within the meaning of Code Section 4975(e)(7)) shall not be combined with
contributions under any plan which is not an employee stock ownership plan
(within the meaning of Code Section 4975(e)(7)).
Except to the extent limited by rules promulgated by the Secretary of the
Treasury, if the Plan and any other plans which include Matching Contributions,
deferrals under a cash or deferred arrangement pursuant to Code Section 401(k),
or nondeductible employee contributions are considered as one plan for purposes
of Code Section 401(a)(4) and 410(b)(1), any contributions under the other plans
shall be allocated with the same class of contributions under the Plan for
A-5
<PAGE> 44
purposes of determining the "contribution percentage" and "actual deferral
percentage" under the Plan; provided, however, contributions that are made under
an "employee stock ownership plan" (within the meaning of Code Section
4975(e)(7)) shall not be combined with contributions under any plan which is not
an employee stock ownership plan (within the meaning of Code Section
4975(e)(7)).
A-6
<PAGE> 45
APPENDIX B
LIMITATION ON ALLOCATIONS
SECTION 1
The "annual addition" for any Member for any one limitation year may
not exceed the lesser of:
(a) $30,000 (or, if greater, one-quarter of the dollar
limitation in effect under Code Section 415(b)(1)(A)), adjusted for
changes in the cost of living as provided in regulations issued by the
Secretary of the Treasury); or
(b) 25% of the Member's Annual Compensation.
SECTION 2
For the purposes of this Appendix B, the term "annual addition" for any
Member means for any limitation year, the sum of certain Plan Sponsor and Member
contributions, forfeitures, and other amounts as determined in Code Section
415(c)(2) in effect for that limitation year.
SECTION 3
In the event that a Plan Sponsor maintains a defined benefit plan under
which a Member also participates, the sum of the defined benefit plan fraction
and the defined contribution plan fraction for any limitation year for any
Member may not exceed 1.0.
(a) The defined benefit plan fraction for any limitation year
is a fraction:
(1) the numerator of which is the projected annual
benefit of the Member under the defined benefit plan
(determined as of the close of such year); and
(2) the denominator of which is the lesser of
(A) the product of 1.25, multiplied by the
maximum annual benefit allowable under Code Section
415(b)(1)(A), or
(B) the product of
(i) 1.4, multiplied by
(ii) the maximum amount which may
be taken into account under Section
415(b)(1)(B) of the Code with respect to the
Member under the defined benefit plan for
the limitation year (determined as of the
close of the limitation year).
B-1
<PAGE> 46
(b) The defined contribution plan fraction for any limitation
year is a fraction:
(1) the numerator of which is the sum of a Member's
annual additions as of the close of the year; and
(2) the denominator of which is the sum of the lesser
of the following amounts determined for the year and for all
prior limitation years during which the Member was employed by
a Plan Sponsor:
(A) the product of 1.25, multiplied by the
dollar limitation in effect under Code Section
415(c)(1)(A) for the limitation year (determined
without regard to Section 415(c)(6) of the Code); or
(B) the product of
(i) 1.4, multiplied by
(ii) the amount which may be taken
into account under Code Section 415(c)(1)(B)
(or Code Section 415(c)(7), if applicable)
with respect to the Member for the
limitation year.
SECTION 4
For purposes of this Appendix B, the term "limitation year" shall mean
a Plan Year unless a Plan Sponsor elects, by adoption of a written resolution,
to use any other twelve-month period adopted in accordance with regulations
issued by the Secretary of the Treasury. For purposes of applying the
limitations set forth in this Appendix B, the term "Plan Sponsor" shall mean a
Plan Sponsor and any other corporations which are members of the same controlled
group of corporations (as described in Section 414(b) of the Code, as modified
by Code Section 415(h)) as is a Plan Sponsor, any other trades or businesses
(whether or not incorporated) under common control (as described in Code Section
414(c), as modified by Code Section 415(h)) with a Plan Sponsor, any other
corporations, partnerships, or other organizations which are members of an
affiliated service group (as described in Section 414(m) of the Code) with a
Plan Sponsor, and any other entity required to be aggregated with a Plan Sponsor
pursuant to regulations under Code Section 414(o).
SECTION 5
For purposes of applying the limitations of this Appendix B, all
defined contribution plans maintained or deemed to be maintained by a Plan
Sponsor shall be treated as one defined contribution plan, and all defined
benefit plans now or previously maintained or deemed to be maintained by a Plan
Sponsor shall be treated as one defined benefit plan. In the event any of the
actions to be taken pursuant to Section 6 of this Appendix or pursuant to any
language of similar import in another defined contribution plan are required to
be taken as a result of the annual additions of a Member exceeding the
limitations set forth in Section 1 of this Appendix
B-2
<PAGE> 47
because of the Member's participation in more than one defined contribution
plan, the actions shall be taken first with regard to this Plan.
SECTION 6
In the event that as a result of either the allocation of forfeitures
to the Account of a Member or a reasonable error in estimating the Member's
Annual Compensation, the annual addition allocated to the Account of a Member
exceeds the limitations set forth in Section 1 of this Appendix B or in the
event that the aggregate contributions made on behalf of a Member under both a
defined benefit plan and a defined contribution plan, subject to the reduction
of allocations in other defined contribution plans required by Section 5 of this
Appendix B, cause the aggregate limitation fraction set forth in Section 3 of
this Appendix B to be exceeded, the Plan Administrator shall, in writing, direct
the Trustee to take such of the following actions as the Plan Administrator
shall deem appropriate, specifying in each case the amount or amounts of
contributions involved:
(a) A Member's annual addition shall be reduced by
distributing to the Member Voluntary Contributions made by the Member
which cause the annual addition to exceed such limitations;
(b) If further reduction is necessary, contributions made by
the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.1
with respect to which no contribution is made under Plan Section 3.2
shall be reduced in the amount of the remaining excess and distributed
to the Member;
(c) If further reduction is necessary, contributions made by
the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.1
and contributions of the Plan Sponsor thereon pursuant to Plan Section
3.2 shall be reduced in the amount of the remaining excess. The amount
of the reduction under Plan Section 3.1 shall be distributed to the
Member. The amount of the reduction under Plan Section 3.2 shall be
reallocated to the Matching Accounts of Members who are not affected by
the limitation in the same proportion as the contribution of the Plan
Sponsor for the year is allocated under Plan Section 4.1 to the
Accounts of such Members;
(d) If further reduction is necessary, contributions made by
the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.3
shall be reduced in the amount of the remaining excess. The amount of
the reduction shall be reallocated to the Accounts of Members who are
not affected by the limitations in the same proportion as the
contribution of the Plan Sponsor for the year is allocated under Plan
Section 4.1 to the Accounts of such Members; and
(e) If further reduction is necessary, contributions made by
the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.4
shall be reduced in the amount of the remaining excess. The amount of
the reduction shall be reallocated to the Accounts of Members who are
not affected by the limitations in the same proportion as the
B-3
<PAGE> 48
contribution of the Plan Sponsor for the year is allocated under Plan
Section 4.1 to the Accounts of such Members; and
(f) If further reduction is necessary, forfeitures allocated
to the Member's Account shall be reduced by the amount of the remaining
excess. The amount of the reduction shall be reallocated to the Company
Accounts of Members who are not affected by the limitations in the same
proportions as the contributions of the Plan Sponsor for the year are
allocated to the Company Accounts of such Members;
(g) If the contribution of the Plan Sponsor and forfeitures
would cause the annual addition to exceed the limitations set forth
herein with respect to all Members under the Plan, the portion of such
contribution in excess of the limitations shall be segregated in a
suspense account. While the suspense account is maintained, (1) no Plan
Sponsor contributions under the Plan shall be made which would be
precluded by this Appendix B, (2) income, gains and loses of the Fund
shall not be allocated to such suspense account and (3) amounts in the
suspense account shall be allocated in the same manner as Plan Sponsor
contributions and forfeitures under the Plan as of each Valuation Date
on which Plan Sponsor contributions may be allocated until the suspense
account is exhausted. In the event of the termination of the Plan, the
amounts in the suspense account shall be returned to the Plan Sponsor
to the extent that such amounts may not then be allocated to the
Members' Accounts.
B-4
<PAGE> 49
APPENDIX C
TOP-HEAVY PROVISIONS
SECTION 1
As used in this Appendix, the following words shall have the following
meanings:
(a) "Determination Date" means, with respect to any Plan Year,
the last day of the preceding Plan Year, or, in the case of the first
Plan Year, means the last day of the first Plan Year.
(b) "Key Employee" means an Employee or former Employee
(including a Beneficiary of a Key Employee or former Key Employee) who
at any time during the Plan Year containing the Determination Date or
any of the four (4) preceding Plan Years is:
(1) An officer described in the Subsection of the
Plan Section containing the definition of the term "Highly
Compensated Employee";
(2) One of the ten (10) Employees owning both (A)
more than one-half percent (1/2%) of the outstanding stock of
the Plan Sponsor or an Affiliate, more than one-half percent
(1/2%) of the total combined voting power of all stock of the
Plan Sponsor or an Affiliate, or more than one-half percent
(1/2%) of the capital or profits interest in the Plan Sponsor
or an Affiliate, and (B) the largest percentage ownership
interests in the Plan Sponsor or any of its Affiliates, and
whose Annual Compensation is equal to or greater than the
amount in effect under Section 1(a) of Appendix B to the Plan
for the calendar year in which the Determination Date falls;
or
(3) An owner of more than five percent (5%) of the
outstanding stock of the Plan Sponsor or an Affiliate or more
than five percent (5%) of the total combined voting power of
all stock of the Plan Sponsor or an Affiliate; or
(4) An owner of more than one percent (1%) of the
outstanding stock of the Plan Sponsor or an Affiliate or more
than one percent (1%) of the total combined voting power of
all stock of the Plan Sponsor or an Affiliate, and who in such
Plan Year had Annual Compensation from the Plan Sponsor and
all of its Affiliates of more than $150,000.
Employees other than Key Employees are sometimes referred to in this
Appendix as "non-key employees."
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<PAGE> 50
(c) "Required Aggregation Group" means:
(1) each plan of the Plan Sponsor and its Affiliates
which qualifies under Code Section 401(a) in which a Key
Employee is a participant, and
(2) each other plan of the Plan Sponsor and its
Affiliates which qualifies under Code Section 401 (a) and
which enables any plan described in Subsection (a) of this
Section to meet the requirements of Section 401(a)(4) or 410
of the Code.
(d) (1) "Top-Heavy" means:
(A) if the Plan is not included in a
Required Aggregation Group, the Plan's condition in a
Plan Year for which, as of the Determination Date:
(i) the present value of the
cumulative Accrued Benefits under the Plan
for all Key Employees exceeds 60 percent of
the present value of the cumulative Accrued
Benefits under the Plan for all Members; and
(ii) the Plan, when included in
every potential combination, if any, with
any or all of:
(I) any Required Aggregation
Group, and
(II) any plan of the Plan
Sponsor which is not
part of any Required
Aggregation Group and
which qualifies under
Code Section 401 (a)
is part of a Top-Heavy Group (as defined in
Paragraph (2) of this Subsection); and
(B) if the Plan is included in a Required
Aggregation Group, the Plan's condition in a Plan
Year for which, as of the Determination Date:
(i) the Required Aggregation Group
is a Top-Heavy Group (as defined in
Paragraph (2) of this Subsection); and
(ii) the Required Aggregation Group,
when included in every potential
combination, if any, with any or all of the
plans of the Plan Sponsor and its Affiliates
which are not part of the
C-2
<PAGE> 51
Required Aggregation Group and which qualify
under Code Section 401(a), is part of a
Top-Heavy Group (as defined in Paragraph (2)
of this Subsection).
(C) For purposes of Subparagraphs (A)(ii)
and (B)(ii) of this Paragraph (1), any combination of
plans must satisfy the requirements of Sections
401(a)(4) and 410 of the Code.
(2) A group shall be deemed to be a Top-Heavy Group
if:
(A) the sum, as of the Determination Date,
of the present value of the cumulative accrued
benefits for all Key Employees under all plans
included in such group exceeds
(B) 60 percent of a similar sum determined
for all participants in such plans.
(3) (A) For purposes of this Section, the present
value of the accrued benefit for any participant in a
defined contribution plan as of any Determination
Date or last day of a plan year shall be the sum of:
(i) as to any defined contribution
plan other than a simplified employee
pension, the account balance as of the most
recent valuation date occurring within the
plan year ending on the Determination Date
or last day of a plan year, and
(ii) as to any simplified employee
pension, the aggregate employer
contributions, and
(iii) an adjustment for
contributions due as of the Determination
Date or last day of a plan year.
In the case of a plan that is not subject to the
minimum funding requirements of Code Section 412, the
adjustment in Clause (iii) of this Subparagraph (A)
shall be the amount of any contributions actually
made after the valuation date but on or before the
Determination Date or last day of the plan year to
the extent not included under Clause (i) or (ii) of
this Subparagraph (A); provided, however, that in the
first plan year of the plan, the adjustment in Clause
(iii) of this Subparagraph (A) shall also reflect the
amount of any contributions made thereafter that are
allocated as of a date in such first plan year. In
the case of a plan that is subject to the minimum
funding requirements, the account balance in Clause
(i) and the aggregate contributions in Clause (ii) of
this Subparagraph (A)
C-3
<PAGE> 52
shall include contributions that would be allocated
as of a date not later than the Determination Date or
last day of a plan year, even though those amounts
are not yet required to be contributed, and the
adjustment in Clause (iii) of this Subparagraph (A)
shall be the amount of any contribution actually made
(or due to be made) after the valuation date but
before the expiration of the extended payment period
in Code Section 412(c)(10) to the extent not included
under Clause (i) or (ii) of this Subparagraph (A).
(B) For purposes of this Subsection, the
present value of the accrued benefit for any
participant in a defined benefit plan as of any
Determination Date or last day of a plan year must be
determined as of the most recent valuation date which
is within a 12-month period ending on the
Determination Date or last day of a plan year as if
such participant terminated as of such valuation
date; provided, however, that in the first plan year
of a plan, the present value of the accrued benefit
for a current participant must be determined either
(i) as if the participant terminated service as of
the Determination Date or last day of a plan year or
(ii) as if the participant terminated service as of
such valuation date, but taking into account the
estimated accrued benefit as of the Determination
Date or last day of a plan year. For purposes of this
Subparagraph (B), the valuation date must be the same
valuation date used for computing plan costs for
minimum funding, regardless of whether a valuation is
performed that year. The actuarial assumptions
utilized in calculating the present value of the
accrued benefit for any participant in a defined
benefit plan for purposes of this Subparagraph (B)
shall be established by the Plan Administrator after
consultation with the actuary for the plan, and shall
be reasonable in the aggregate and shall comport with
the requirements set forth by the Internal Revenue
Service in Q&A T-26 and T-27 of Regulation Section
1.416-1.
(C) For purposes of determining the present
value of the cumulative accrued benefit under a plan
for any participant in accordance with this
Subsection, the present value shall be increased by
the aggregate distributions made with respect to the
participant (including distributions paid on account
of death to the extent they do not exceed the present
value of the cumulative accrued benefit existing
immediately prior to death) under each plan being
considered, and under any terminated plan which if it
had not been terminated would have been in a Required
Aggregation Group with the Plan, during the 5-year
period ending on the Determination Date or last day
of the plan year that falls within the calendar year
in which the Determination Date falls.
C-4
<PAGE> 53
(D) For purposes of this Paragraph (3),
participant contributions which are deductible as
"qualified retirement contributions" within the
meaning of Code Section 219 or any successor, as
adjusted to reflect income, gains, losses, and other
credits or charges attributable thereto, shall not be
considered to be part of the accrued benefits under
any plan.
(E) For purposes of this Paragraph (3), if
any employee is not a Key Employee with respect to
any plan for any plan year, but such employee was a
Key Employee with respect to such plan for any prior
plan year, any accrued benefit for such employee
shall not be taken into account.
(F) For purposes of this Paragraph (3), if
any employee has not performed any service for any
Plan Sponsor or Affiliate maintaining the plan during
the five-year period ending on the Determination
Date, any accrued benefit for that employee shall not
be taken into account.
(G) (i) In the case of an "unrelated
rollover" (as defined below) between plans
which qualify under Code Section 401(a), (a)
the plan providing the distribution shall
count the distribution as a distribution
under Subparagraph (C) of this Paragraph
(3), and (b) the plan accepting the
distribution shall not consider the
distribution part of the accrued benefit
under this Section; and
(ii) in the case of a "related
rollover" (as defined below) between plans
which qualify under Code Section 401(a), (a)
the plan providing the distribution shall
not count the distribution as a distribution
under Subparagraph (C) of this Paragraph
(3), and (b) the plan accepting the
distribution shall consider the distribution
part of the accrued benefit under this
Section.
For purposes of this Subparagraph (G), an "unrelated rollover" is a rollover as
defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan transfer which
is both initiated by the participant and made from a plan maintained by one
employer to a plan maintained by another employer where the employers are not
Affiliates. For purposes of this Subparagraph (G), a "related rollover" is a
rollover as defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan
transfer which is either not initiated by the participant or made to a plan
maintained by the employer or an Affiliate.
C-5
<PAGE> 54
SECTION 2
(a) Notwithstanding anything contained in the Plan to the
contrary, except as otherwise provided in Subsection (b) of this
Section, in any Plan Year during which the Plan is Top-Heavy,
allocations of Plan Sponsor contributions and forfeitures for the Plan
Year for the Account of each Member who is not a Key Employee and who
has not separated from service with the Plan Sponsor prior to the end
of the Plan Year shall not be less than 3 percent of the Member's
Annual Compensation. For purposes of this Subsection, an allocation to
a Member's Account resulting from any Plan Sponsor contribution
attributable to a salary reduction or similar arrangement shall not be
taken into account.
(b) (1) The percentage referred to in Subsection (a) of this
Section for any Plan Year shall not exceed the percentage at
which allocations are made or required to be made under the
Plan for the Plan Year for the Key Employee for whom the
percentage is highest for the Plan Year. For purposes of this
Paragraph, an allocation to the Account of a Key Employee
resulting from any Plan Sponsor contribution attributable to a
salary reduction or similar agreement shall be taken into
account.
(2) For purposes of this Subsection (b), all defined
contribution plans which are members of a Required Aggregation
Group shall be treated as part of the Plan.
(3) This Subsection (b) shall not apply to any plan
which is a member of a Required Aggregation Group if the plan
enables a defined benefit plan which is a member of the
Required Aggregation Group to meet the requirements of Code
Section 401(a)(4) or 410.
(4) If the Plan Sponsor maintains a defined benefit
plan which is qualified under Code Section 401(a) and which
would be Top-Heavy within the meaning of the Plan for its plan
year ending within or coincident with the Plan Year, no
allocation shall be made pursuant to Subsection (a) of this
Section on behalf of any Member who participates in the
defined benefit plan and acquires a year of service within the
meaning of paragraphs (4), (5) and (6) of Code Section 411(a)
under the defined benefit plan for the plan year, if the
defined benefit plan provides generally that the accrued
benefit of the member when expressed as an annual retirement
benefit shall not, when expressed as a percentage of the
Member's compensation, be less than the lesser of (A) 2
percent multiplied by the number of such years of service in
plan years during which such plan was Top-Heavy, or (B) 20
percent.
C-6
<PAGE> 55
SECTION 3
In any limitation year (as defined in Section 4 of Appendix B to the
Plan) which contains any portion of a Plan Year in which the Plan is Top-Heavy,
the number "1.0" shall be substituted for the number "1.25" in Section 3 of
Appendix B to the Plan.
C-7
<PAGE> 56
APPENDIX D
SPECIAL RULES
SECTION 1
SPECIAL RULES FOR GOTTLIEB EMPLOYEES
(a) Any Member who was a participant in the Gottlieb Plan immediately
before January 1, 1994 shall have the same number of Years of Service under the
Plan as he had under the Gottlieb Plan. In addition, for the Plan Year beginning
January 1, 1994, any such Member shall be given credit for the greater of the
period of Service he would have received under the terms of the Gottlieb Plan or
the period of Service he would receive as a participant in the Plan. For the
Plan Year beginning January 1, 1995, and for all subsequent years, the Years of
Service for any such Member will be credited in accordance with the terms of the
Plan.
(b) For any Member who was a participant in the Gottlieb Plan
immediately before January 1, 1994, "Normal Retirement Age" means age 59 1/2.
SECTION 2
SPECIAL RULES FOR COMPMED EMPLOYEES
(a) Any Member who was a participant in the CompMed Plan immediately
before January 1, 1994 shall have the same number of Years of Service under the
Plan as he had under the CompMed Plan. In addition, for the Plan Year beginning
January 1, 1994, any such Member shall be given credit for the greater of the
period of Service he would have received under the terms of the CompMed Plan or
the period of Service he would receive as a participant in the Plan. For the
Plan Year beginning January 1, 1995, and for all subsequent years, the Years of
Service for any such Member will be credited in accordance with the terms of the
Plan.
(b) For any CompMed Employee, "Eligibility Service" shall be as defined
in the CompMed Plan.
SECTION 3
SPECIAL RULES FOR MMNE EMPLOYEES
(a) Any Member who was a participant in the MMNE Plan immediately
before January 1, 1994 shall have the same number of Years of Service under the
Plan as he had under the MMNE Plan. In addition, for the Plan Year beginning
January 1, 1994, any such Member shall be given credit for the greater of the
period of Service he would have received under the terms of the MMNE Plan or the
period of Service he would receive as a participant in the Plan. For the Plan
Year beginning January 1, 1995, and for all subsequent years, the Years of
Service for any such Member will be credited in accordance with the terms of the
Plan.
D-1
<PAGE> 57
(b) Any Member who was a participant in the MMNE Plan immediately
before January 1, 1994 shall be 25% vested after the completion of one Year of
Service.
(c) For any Member who was a participant in the MMNE Plan immediately
before January 1, 1994 and who completes 2 Years of Service, such Member may
request a withdrawal of any vested amounts from his Matching Account by
submitting such request to the Plan Administrator according to normal
administrative procedures. Upon receipt of such request, the Plan Administrator
will provide for such distribution at a reasonable time and in a reasonable
manner.
D-2
<PAGE> 1
EXHIBIT 10.30
FIRST AMENDMENT TO THE
MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
THIS AMENDMENT, made as of the 31st day of July, 1996, by MEDAPHIS
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware (hereinafter called the "Primary Sponsor").
W I T N E S S E T H
WHEREAS, the Primary Sponsor adopted the Medaphis Employees' Retirement
Savings Plan (the "Plan") by indenture dated June 30, 1991; and
WHEREAS, the Plan was last amended and restated by indenture effective
July 1, 1995; and
WHEREAS, the Primary Sponsor desires to amend the Plan to preserve
certain "protected benefits" of members of plans of acquired companies which are
merged into the Plan and to extend certain of those benefits to participants
generally.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan,
effective July 31, 1996, as follows:
1. Section 1.1 of the Plan shall be amended by adding the following
definition thereto:
""Prior Company Account"--which shall reflect a Member's
interest in contributions (other than Elective Deferrals) that
are made by a Member's prior employer and which are 100%
vested."
2. Section 6 of the Plan shall be amended by adding the following Section
6.11 thereto:
"Prior to making any loan to a Member pursuant to this
Section, the consent of the requesting Member's spouse as to
the use of the Member's Account as security for any requested
loan and the offset against the Member's Account in the event
of a default on any requested loan must be obtained in
accordance with the notice and consent requirements of Code
Sections 417 and 411(a)(11) and the Regulations promulgated
thereunder."
3. Section 7.1 of the Plan shall be amended by replacing the first
sentence of Section 7.1 with the following:
"A Member who has attained age 59 1/2 may withdraw, in a lump
sum in cash, all or any portion of the balance of his Employee
Deferral Account, his Rollover Account, his Prior Company
Account, and the vested portion of his Matching Account."
<PAGE> 2
4. Section 7.2 of the Plan shall be amended by replacing the first
sentence of Section 7.2 with the following:
"A withdrawal pursuant to this Section 7.2 is designated a
"Hardship Withdrawal" and is subject to the following rules:
The Trustee shall, upon the direction of the Plan
Administrator, distribute, in a lump sum in cash, all or a
portion of a Member's Rollover Account, Employee Deferral
Account consisting of Deferral Amounts (but not earnings
thereon) and Prior Company Account prior to the time such
account is otherwise distributable in accordance with the
other provisions of the Plan; provided, however, that any such
distribution shall be made only if the Member is an Employee
and demonstrates that he is suffering from "hardship" as
determined herein."
5. Section 7 of the Plan shall be amended by adding the following Section
7.4 thereto:
"Prior to making any distribution pursuant to this Section,
the spouse of any Member requesting a distribution from his
Account must consent to the making of such distribution to the
Member in accordance with all notice and consent requirements
of Code Sections 417 and 411(a)(11) and the Regulations
promulgated thereunder."
6. Section 9.2 of the Plan shall be amended by replacing Section 9.2 with
the following:
"Payment to a Member shall be in the form of one lump
sum payment in cash unless the Accrued Benefit of the Member
exceeds $3,500, in which event the Member or the Beneficiary
by written instrument delivered to the Plan Administrator may
elect to have his or her Account distributed in one of the
forms of distribution listed below, as chosen by the Member or
Beneficiary:
(a) one lump sum payment in cash;
(b) a combination of one lump sum payment in cash for
a portion of his Account designated by the Member in annual,
semiannual, quarterly, or monthly installments in cash for the
remaining portion of the Member's Account;
(c) annual, semiannual, quarterly or monthly
installments in cash (If the Member elects annual, semiannual,
quarterly, or monthly installments for some or all of his
Account, such distributions shall be made over a period
specified by the Member not exceeding the life expectancy of
the Member or the joint life expectancies of the Member and
his Beneficiary);
-2-
<PAGE> 3
(d) a single life annuity (If the Member elects to
receive his benefits in the form of a single life annuity and
is married on the date of his death or the date distributions
are to commence, if applicable, the benefit shall
automatically be payable pursuant to Subsection (e) of this
Section unless the Member makes an election pursuant to
Section 9.2A not to receive the applicable annuity under
Subsection (e) during the applicable election period);
(e) an immediate annuity for the life of the Member
with a survivor annuity for the life of his or her spouse
which is fifty percent (50%) of the annuity payable during the
joint lives of the Member and his spouse (hereinafter referred
to as a "Qualified Joint and Survivor Annuity") (If the
Member's Accrued Benefit is payable in the form of a life
annuity, and the Member dies before he begins to receive
payments from the Fund, the Member's spouse shall receive an
immediate annuity for her life (hereinafter referred to as a
"Qualified Preretirement Survivor Annuity"). Notwithstanding
the foregoing, the surviving spouse of a Member who is
entitled to receive a Qualified Preretirement Survivor Annuity
may elect a lump sum payment prior to the date the annuity is
purchased or distributions begin);
(f) a single life annuity with certain periods of
five, ten or fifteen years as selected by the Member (If the
Member elects to receive his benefits in the form provided in
this Subsection and is married on the date of his death or the
date distributions are to commence, if applicable, the benefit
shall automatically be payable pursuant to Subsection (e) of
this Section unless the Member makes an election pursuant to
Section 9.2A not to receive the applicable annuity under
Subsection (e) during the applicable election period); and
(g) a single life annuity with installment refund and
survival percentages for the contingent annuitant designated
by the Member of 50% or 100% (If the Member elects to receive
his benefits in the form provided in this Subsection and is
married on the date of his death or the date distributions are
to commence, if applicable, the benefit shall automatically be
payable pursuant to Subsection (e) of this Section unless the
Member makes an election pursuant to Section 9.2A not to
receive the applicable annuity under Subsection (e) during the
applicable election period).
If an annuity is to be paid from the Plan, such
annuity may be purchased with the Member's Account from an
insurance company designated by the Plan Administrator or its
designee in writing to the insurance company and may be
distributed to the Member or his Beneficiary in full
satisfaction of the benefits to which the Member or his
Beneficiary is entitled under the Plan. The amount of the
annuity shall be the actuarial equivalent of the Member's
Account (reduced by any commissions or other costs charged by
the insurance company) based on factors used by the insurance
company from which the annuity is purchased."
-3-
<PAGE> 4
7. The Plan shall be amended by adding the following Section 9.2A:
"(a) The Plan Administrator shall furnish to the
Member a written explanation of:
(1) the terms and conditions of the Qualified Joint
and Survivor Annuity and the Qualified Preretirement Survivor
Annuity;
(2) the Member's right to make, and the effect of, an
election not to receive the Qualified Joint and Survivor
Annuity or the Qualified Preretirement Survivor Annuity;
(3) the rights of the Member's spouse as described
below; and
(4) the right to make and the effect of an election
pursuant to this Paragraph.
In the case of a Qualified Joint and Survivor
Annuity, the written explanation shall be provided to the
Member within ninety (90) days prior to the first date on
which he is entitled to commencement of payments from the
Fund. In the case of Qualified Preretirement Survivor Annuity,
the written explanation shall be provided to the Member in
whichever of the following periods ends last:
(A) the period beginning with the first day
of the Plan Year in which the Member attains age 32
and ending with the close of the Plan Year preceding
the Plan Year in which the Member attains age 35;
(B) the period beginning one year before and
ending one year after the Employee first becomes a
Member;
(C) the period beginning one year before and
ending one year after the provisions of this
Subsection apply to the Member; or
(D) a reasonable period of time after
separation from service in the case of a Member who
separates from service before attaining age 35.
The Member may elect, during the applicable election
period not to receive the Qualified Joint and Survivor Annuity
or Qualified Preretirement Survivor Annuity by execution and
delivery to the Committee of a form provided for that purpose
by the Committee. The term "applicable election period" shall
mean, with respect to a Qualified Joint and Survivor Annuity,
the 90-day period ending on the first date on which the Member
is entitled to commencement of payment from the Fund and with
respect to a Qualified
-4-
<PAGE> 5
Preretirement Survivor Annuity, the period which begins on the
first day of the Plan Year in which the Employee becomes a
Member and ends on his death. In the case of a married Member
no election shall be effective unless:
(I) the spouse of the Member
consents in writing to the election and the
consent acknowledges the effect of the
election (including, if applicable, the
identity of any Beneficiary other than the
Member's spouse and the alternate form of
payment) and is witnessed by a notary
public, or
(II) it is established to the
satisfaction of the Committee that the
consent required pursuant to Subclause (I)
of this Paragraph may not be obtained
because there is no spouse, the spouse
cannot be located, the Member has a court
order indicating that he is legally
separated or has been abandoned (within the
meaning of local law) unless a qualified
domestic relations order provides otherwise,
or of any other circumstances as permitted
by regulations promulgated by the Department
of the Treasury. If the spouse is legally
incompetent to give consent, consent by the
spouse's legal guardian shall be deemed to
be consent by the spouse.
(b) Any consent by a spouse (or establishment that
the consent of a spouse may not be obtained) shall be
effective only with respect to that spouse. If an election is
made, the Member's vested Accrued Benefit shall be paid in the
alternate form of payment set forth in Plan Section 9.2 chosen
by the Member by written instrument delivered to the
Committee. Any waiver of a Qualified Preretirement Survivor
Annuity made prior to the first day of the Plan Year in which
the Member attains age 35 shall become invalid as of the first
day of the Plan Year in which the Member attains age 35 and a
Qualified Preretirement Survivor Annuity shall be provided,
unless a new waiver is obtained. The Member may revoke any
election not to receive payment in the form of a Qualified
Joint and Survivor Annuity or Qualified Preretirement Survivor
Annuity at any time prior to commencement of payments from the
Fund, and may make a new election at any time prior to the
commencement of payments from the Fund."
8. Section 9.3(a) of the Plan shall be amended by replacing Section 9.3
(a) with the following:
"(a) if a Member's vested Accrued Benefit exceeds
$3,500, it shall not be distributed before the Member's Normal
Retirement Age or death without the consent of the Member, and
if the Member is married and elects a form of payment other
than a Qualified Joint and Survivor annuity, with the consent
of his spouse (of if the Member is deceased, his surviving
spouse)."
-5-
<PAGE> 6
9. Section 10.3(a) of the Plan shall be amended by replacing Section
10.3(a) with the following:
"(a) his Employee Deferral Account, Voluntary
Contribution Account, his Rollover Account, and Prior Company
Account, which shall be fully vested and nonforfeitable at all
times; and"
* * * * *
Except as specifically amended hereby, the Plan shall remain in full
force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Primary Sponsor has executed this First
Amendment as of the date and the year first above written.
MEDAPHIS CORPORATION
By:
-------------------
Title:
-------------------
ATTEST:
By:
---------------------------
Title:
------------------------
-6-
<PAGE> 1
EXHIBIT 10.31
FORM OF AMENDMENT TO
THE MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
THIS AMENDMENT is made on the _____ day of _____________, 1997, by
MEDAPHIS CORPORATION, a corporation duly organized and existing under the laws
of the State of Delaware (hereinafter called the "Primary Sponsor");
WHEREAS, the Primary Sponsor established by indenture dated June 30, 1991,
the Medaphis Corporation Employees' Retirement Savings Plan which was last
amended and restated by indenture effective as of July 1, 1995 (the "Plan");
and
WHEREAS, the Primary Sponsor applied for a favorable determination letter
from the Internal Revenue Service with respect to the July 1, 1995 restatement
of the Plan; and
WHEREAS, by letter dated November 21, 1996, the Internal Revenue Service
conditioned its favorable determination as to the tax-qualified status of the
Plan upon the Primary Sponsor's adopting of the provisions contained in this
Amendment.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan as follows:
1. Section 4.1 of the Plan shall be deleted in its entirety and replaced
with the following:
"4.1 (a) As soon as reasonably practicable following the date of
withholding by the Plan Sponsor, if applicable, and receipt by the
Trustee, Plan Sponsor contributions made on behalf of each Member under
Plan Sections 3.1 and 3.2 (including forfeitures during the Plan Year used
to reduce such contributions), and Voluntary Contributions and Rollover
Amounts contributed by the Member, shall be allocated to the Employee
Deferral Account, Matching Account, Voluntary Contribution Account and
Rollover Account, respectively, of the Member on behalf of whom the
contributions were made.
(b) As of the last day of each Plan Year, Plan Sponsor
contributions made under Plan Section 3.3 and forfeitures from Company
Accounts shall be allocated to the Company Account of each Eligible
Employee who is a Member who is employed by a Plan Sponsor on the last day
of the Plan Year, or whose death or Retirement Date occurred during the
Plan Year, in the proportion that the Member's Annual Compensation bears
to the Annual Compensation of all Members entitled to an allocation under
this Subsection (b).
(c) As of December 31, 1994, Plan Sponsor contributions made
under Plan Section 3.4 shall be allocated to the Employee Deferral
Account of each Qualified Member in the proportion that the Qualified
Member's Annual Compensation bears to the Annual Compensation of all
Qualified Members entitled to an allocation under this Subsection (c)."
<PAGE> 2
IN WITNESS WHEREOF, the Primary Sponsor has caused this amendment to be
executed as of the date first above written.
MEDAPHIS CORPORATION
By:
-----------------------------------
Title:
-------------------------------
ATTEST:
- --------------------------------
Title:
--------------------------
[CORPORATE SEAL]
- 2 -
<PAGE> 1
EXHIBIT 10.37
LEASE AGREEMENT
THIS LEASE, made this 1st day of August, 1989 by and between Financial
Enterprises, III, hereinafter called "Landlord" and Medical Management Sciences
South, Inc. hereinafter called "Tenant".
W I T N E S S E T H
1. PREMISES.
Landlord does hereby lease to Tenant and Tenant hereby leases from
Landlord the office building located at 1030 East 4th Street, Suite A;
Chattanooga, Tennessee hereinafter called the "Premises".
2. TERM.
This Lease shall be for a term of one (1) year beginning on August 1,
1989 and ending on July 31, 1990, both dates inclusive, unless sooner terminated
as herein provided. The lease will automatically renew for one (1) year periods
unless sixty (60) day notice is given by either party.
3. RENT.
The Tenant shall pay to the Landlord the annual rent of Fifty-Two
Thousand Three Hundred Eighty Dollars ($52,380) in legal tender, in equal
monthly installments of Four Thousand Three Hundred Sixty-Five Dollars ($4,365)
in advance, on the first day of each month throughout the term of the Lease. The
rent shall be payable at the office of the Landlord or at such other place as
the Landlord may designate in writing.
<PAGE> 2
4. PAST DUE RENTS.
Tenant hereby recognizes and acknowledges that if rental payments are
not received when due Landlord will suffer damages and additional expense
thereby and Tenant therefore agrees that a late charge equal to five percent
(5%) of the basis monthly rental (including additional rent as hereinafter
provided) may be assessed by Landlord as additional rental if Tenant shall fail
to pay any rent by the 10th of each month.
5. ASSIGNMENT AND SUBLETTING.
Tenant covenants it will not assign this Lease or sublet the Premises
without the prior written consent of Landlord.
6. QUIET ENJOYMENT.
Landlord agrees that upon compliance with the terms and conditions of
this Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the
premises for the term of this Lease and any renewal of said term.
7. USE AND CONDITION.
Tenant shall use the premises only for business or professional office
purposes. Tenant knows the conditions of the Premises and Tenant has confirmed
to its satisfaction that the Premises can be lawfully used for purposes of
Tenant's business. The Premises shall not be used during the term or an
extension or renewal term for any purpose other than those specified herein.
-2-
<PAGE> 3
8. CARE OF PREMISES.
Tenant shall commit no waste and shall take good care of the Premises
and fixtures, and shall, at Tenant's sole cost and to the satisfaction of
Landlord, repair all damage or injury to the Premises, fixtures and Building
resulting from carelessness, omission, neglect or other cause of Tenant, its
servants, employees, agents, visitors, or licensees. Should Tenant fail to
perform such repairs or replacements, Landlord may do so, after ten (10) days
notice and the cost of such repairs or replacements shall become collectible as
additional rent hereunder and shall be paid by Tenant within ten (10) days after
presentation of a statement therefor. Upon the expiration of this Lease, Tenant
shall return all keys and shall surrender the Premises in clean and good
condition, reasonable use and wear excepted.
9. TAXES.
Landlord shall pay all taxes, and assessments upon the leased property
during the term of the Lease.
10. INSURANCE.
The Tenant shall at all times during the term of this Lease, at its own
cost and expense, provide adequate insurance coverage on the premises.
11. UTILITIES.
The Tenant shall be required to furnish all utilities.
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12. REPAIRS.
Landlord shall (to the extent of Landlord's installations therein) keep
the Premises in good working order and condition and shall make all repairs and
replacements not occasioned by the negligence of Tenant, its agents,
contractors, employees or invites. Should Landlord be prevented by Tenant from
making repairs, or replacements during regular hours, Tenant shall bear any
increased expense. Tenant shall repair and maintain all of the Tenant's
installations in the premises. Landlord shall not be liable to Tenant as a
result of damage or loss to Tenant's property, including without limitation,
Tenant's fixtures, furniture and/or equipment, resulting from water damage or
leakage from any pipe within the Building or leakage through the exterior wall,
windows or the roof of the Building; whether or not such damage shall be caused
by or contributed to as a result of Landlord's negligence or omission.
13. PERSONAL PROPERTY.
All personal property and equipment of every kind and description which
may at any time be in the Premises shall be at Tenant's risk, or at the risk of
those claiming under Tenant.
14. DEFAULT.
In the event of the occurrence of any of the following conditions:
(1) The rent (or additional rent) is not paid when due;
(2) The Premises are vacated even though Tenant continues to pay the
stipulated monthly rent;
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<PAGE> 5
(3) Any petition or other action if filed by or against Tenant under
any section or chapter of the Federal Bankruptcy Act;
(4) Tenant shall become insolvent or transfer property in fraud of
creditors;
(5) Tenant shall make an assignment for the benefit of creditors;
(6) A receiver or trustee is appointed for any of Tenant's assets and
such appointment is not vacated within thirty (30) days; or
(7) Tenant fails to comply with any provision or covenant of this Lease
(other than the payment of rent) or any of the Rules and Regulations now or
hereafter established by Landlord and fails to correct or cure the same within
fifteen (15) days after Notice thereof, or, in the event such defect cannot
reasonably be cured within the said fifteen (15) day period, then if Tenant
shall fail to commence to cure said defect within the aforesaid fifteen (15) day
period and thereafter diligently pursue the same to completion;
then in any of such events Landlord shall have all remedies provided at
law all in equity, including the right to (i) terminate the Lease by written
notice to Tenant (in which event Tenant shall immediately surrender the Premises
to Landlord) and retain all deposits, security for rent or other monies received
from Tenant on account of damages, (ii) enter the Premises and remove Tenant and
Tenant's property therefrom with or without force and without being liable to
Tenant in any manner whatsoever for any damages, and attempt to relet the
Premises for Tenant's account on such terms as Landlord alone shall determine or
(iii) to continue this Lease and sue for Tenant's performance hereunder
(including payment of rent and additional rent as they become due). In every
event Landlord shall also be entitled to recover from Tenant all costs of
collection, including attorney's fee at the agreed rate of fifteen (15%) of all
sums due to the Landlord. The proceeds of any reletting
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<PAGE> 6
during the term of this Lease shall be applied first to all expenses occasioned
by such reletting (including, without limitation, attorney's fees and leasing
commissions and such alterations and redecorating of the Premises as the
Landlord's sole judgment may be desirable) and secondly to the rent and
additional rent due hereunder, Tenant shall be liable for any deficiency
(including costs of collection and attorney's fees) but not entitled to any
surplus so arising.
The above stated remedies of Landlord shall be deemed to be in addition
to, and not in lieu of, any other rights and remedies provided Landlord either
at law or in equity each of which shall remain cumulatively available to the
Landlord. No delay in enforcing the provisions of this Lease shall be deemed to
constitute a waiver of such default by Landlord, and the pursuit by Landlord of
one or more remedies shall not be deemed to constitute an election against other
remedies. All remedies provided in this Lease, at law or in equity shall be
cumulatively available to the Landlord. If the Premises are relet following
Tenant's default Landlord shall not be liable for the good faith failure to
collect any such rent.
IN WITNESS WHEREOF, Landlords and Tenant have respectively signed and
sealed this Lease.
LANDLORD
FINANCIAL ENTERPRISES, III
By: S/
----------------------
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TENANT
MEDICAL MANAGEMENT SCIENCES SOUTH, INC.
By: S/
----------------------
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<PAGE> 1
EXHIBIT 10.49
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
as of the 19th day of November, 1996, by and between Medaphis Corporation, a
Delaware corporation (the "Company"), and David E. McDowell (the "Employee").
STATEMENT OF BACKGROUND INFORMATION
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services; (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services: (d) medical coverage information services: and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The Company also provides subrogation and related recovery services
for healthcare payors, including health maintenance organizations, indemnity
insurers. Blue Cross and Blue Shield organizations, third-party
administrators, self-funded employee health welfare benefit plans, and
provider hospital organizations (the "Subrogation Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and
other end users (collectively "Providers"), (i) strategic, operational and
financial information systems and services and decision support tools for
healthcare providers, (ii) software systems which provide claims and
reimbursement services and electronic claims processing, and (iii) software
applications which assist Providers with automated scheduling and resource
management (the items discussed in Sections (a)(i), (a)(ii) and (a)(iii) of
this paragraph are referred to as "Systems"), which Systems include, but are
not limited to, nurse scheduling and management information systems, operating
room patient scheduling and surgery information systems, enterprise wide
patient scheduling and resource management systems, enterprise-wide employee
scheduling and management information systems and related software interfaces
to other information systems: and (b) provides to Providers installation and
support services related to the Company's Systems (the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, designs, documentation, and
related materials, and the development, design, deployment, and operation of
local and wide area computer networks, all in conjunction with the sale,
design, deployment, operation and maintenance of custom computer
<PAGE> 2
processing systems for improvement of operational efficiency or functionality,
through the use of image storage and processing, work flow technology, optical
character recognition or other related technologies (the "System Integration
Business") (the Processing Business, the Subrogation Business, the Systems
Business, the Systems Integration Business and any other distinct business
segment in which the Company engages during Employee's employment are
collectively referred to as the "Business").
The Compensation Committee (the "Committee") of the Board of Directors
of the Company (the "Board") has determined to create certain long-term
retention incentives to reward Employee for successful performance with the
Company.
The Committee has determined that it would be in the best interest of
Medaphis and its stockholders if Employee were employed by Medaphis for a term
of five years.
Employee acknowledges the Company's ownership of its goodwill, and the
necessity of the restrictive covenants contained in this Agreement to protect
the Company's interest in such material asset.
STATEMENT OF AGREEMENT
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, the parties agree as follows:
1. Employment. The Company employs Employee and Employee accepts
such employment upon the terms and conditions set forth in this Agreement. For
purposes of Sections 6, 7 and 8 of this Agreement, "employment" shall mean any
period of time during which the Company is paying the Employee salary under
Section 5(b) of this Agreement, whether or not the Employee is currently
performing services for the Company at the time of such payment. For all other
purposes under this Agreement, "employment" shall have its customary meaning.
2. Duties of Employee. Employee agrees to perform and discharge
the usual duties of a Chairman of the Board of Directors and Chief Executive
Officer of a similarly sized organization, including, without limitation, those
presently set forth in the Bylaws of the Company, and such other duties as may
be reasonably assigned by the Board, and to comply with all of the Company's
policies, standards and regulations. Employee's title shall be Chairman of the
Board of Directors and Chief Executive Officer, and Employee shall report to
the Board. All of Employee's time, attention and energies which are devoted
to business endeavors will be devoted to the Business, and Employee will not,
during the term of this Agreement, be engaged (whether or not during normal
business hours) in any other business or professional activity, whether or not
such activity is pursued for gain, profit or other pecuniary advantage, without
the prior written consent of the Board, which consent will not be unreasonably
withheld. This Section will not be construed to prevent Employee from: (a)
investing personal assets in
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<PAGE> 3
businesses which do not compete with the Company in such form or manner that
will not require any services on the part of Employee in the operation or the
affairs of the companies in which such investments are made and in which
Employee's participation is solely that of an investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market,
provided that Employee at no time owns, directly or indirectly, in excess of
one percent of the outstanding stock of any class of any such corporation
engaged in a business competitive with that of the Company; or (c)
participating in conferences, preparing and publishing papers or books or
teaching, participating on the board of directors of other companies ("Other
Boards") or providing limited advisory services, so long as these activities
are not contrary to the Company's interests, and, with regard to participation
on Other Boards or the provision of limited advisory services, so long as the
Board approves Employee's participation on any such Other Boards or approves
the provision of such limited advisory services, which approval will not be
unreasonably withheld.
3. Term. The term of this Agreement will be for a period of five
years commencing on November 19, 1996 and expiring on the fifth anniversary of
that date, subject to earlier termination as provided for in Section 4.
4. Termination and Suspension.
(a) By the Company. Notwithstanding anything contained in Section
3 to the contrary, the Company has the right to terminate this Agreement and
all of its obligations under this Agreement immediately if the Board takes
action to terminate after any of the following events occurs:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Employee's receipt from the
Company written notice of such breach, which notice describes
in reasonable detail the Company's belief that Employee is in
breach hereof (notwithstanding the foregoing, no cure period
shall be applicable to breaches by Employee of Sections 6, 7
or 8 of this Agreement);
(ii) Employee commits any act in bad faith materially
detrimental to the business or reputation of the Company;
(iii) Employee engages in illegal activities or is
convicted of any crime involving fraud, deceit or moral
turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be materially unable to
perform Employee's duties under this Agreement. Without
limiting the generality of the foregoing. Employee's
inability to adequately perform services under this Agreement
for a period of ninety (90) consecutive days will be
conclusive evidence of such mental or physical
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<PAGE> 4
incapacity or disability, unless such inability to
adequately perform services under this Agreement is
pursuant to a mental or physical incapacity or
disability covered by the Family Medical Leave Act,
in which case such ninety-day period shall be
extended to a one hundred fifty-day period.
(b) By Employee or by the Company other than for Cause. If
Employee terminates this Agreement pursuant to any of clauses (i) - (v) below
or if the Company terminates this Agreement other than pursuant to Section 4(a)
hereof, the Company obligations hereunder to pay Employee the annual salary
under Section 5(b), to provide for the continued vesting of stock option awards
under Section 5(c) hereof and to provide for health insurance benefits to
Employee under Section 5(d) hereof shall continue in accordance with the terms
hereof through November 19, 2001:
(i) the Company materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure its
breach within ten (1O) days after its receipt from Employee of
written notice of such breach, which notice describes in
reasonable detail Employee's belief that the Company is in
breach hereof;
(ii) without Employee's express written consent, the
Company assigns to Employee duties, or significantly reduces
Employee's assigned duties, in a manner inconsistent with
Employee's position with the Company;
(iii) without Employee's express written consent, the
Company requires Employee's relocation outside of the
metropolitan Atlanta, Georgia area.
(iv) the Company fails to obtain the assumption of this
Agreement by any successors to the Company; or
(v) a Change in Control Event (as defined herein) occurs,
and Employee's employment is terminated by Employee or the
Company, for whatever reason, within one hundred twenty (120)
calendar days thereafter. Upon a Change in Control Event, the
applicable provisions of Section 4(e) shall apply. For
purposes of this Agreement a "Change in Control Event" shall
mean the occurrence of any of the following:
(1) the adoption of a plan of merger or
consolidation of the Company with any other
corporation as a result of which the holders of the
outstanding voting stock of the Company as a group
would receive less than 50% of the voting stock of
the surviving or resulting corporation;
(2) the adoption of a plan of liquidation or the
approval of the dissolution of the Company;
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<PAGE> 5
(3) the sale or transfer of substantially all of
the assets of the Company;
(4) the following individuals cease for any
reason to constitute a majority of the number of
directors then serving: individuals who, on the date
hereof, constitute the Board and any new director
(other than a director whose initial assumption of
office is in connection with an actual or threatened
election contest, including but not limited to a
consent solicitation, relating to the election of
directors of the Company) whose appointment or
election by the Board or nomination for election by
the Company's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of
the directors then still in office who either were
directors on the date hereof or whose appointment,
election or nomination for election was previously so
approved or recommended; or
(5) any individual, entity, group (within the
meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, and the rules
promulgated thereunder), or other person acquires in
a single transaction or a series of transactions more
than 30% of the outstanding shares of the Company's
common stock.
(c) Suspension By the Company. If Employee is indicted for any
felony, the Company may immediately suspend Employee without compensation. If
the indictment is dropped, or if Employee is acquitted (the dropping of an
indictment and an acquittal each referred to as an "Acquittal Event"), the
Company shall, within ten (10) days after it receives written notice of any
Acquittal Event, remit to Employee all amounts otherwise payable pursuant to
this Agreement but withheld during the suspension period, together with
interest from each due date paid at the then-current prime rate plus two
percentage points, as reported in The Wall Street Journal. Upon any such
Acquittal Event, the Company's payment obligations to Employee under this
Agreement shall resume and shall continue throughout the remainder of the term
of this Agreement, subject to the terms and conditions of this Agreement, but
the Company shall have the option whether to ask Employee actually to return to
work and to publicly associate with the Company. At the Company's request in
this circumstance, Employee will refrain from working at or for the Company
(notwithstanding his continuing compensation under this Agreement) and will
refrain from representing to any person or entity that he is associated with
the Company.
(d) No Duty to Mitigate. If Employee terminates his employment
under and in accordance with this Agreement or if the Company wrongfully
terminates Employee's employment under this Agreement. Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement
(whether seeking new employment or in any other manner).
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<PAGE> 6
(e) Gross-Up. Upon a Change in Control Event and a termination of
this Agreement by Employee pursuant to Section 4(b)(v), the Company will pay to
Employee (in lieu of an obligation to make further payments to Employee under
or on account of Section 5(b) and to provide benefits to Employee under or on
account of Section 5(d)) the salary that would have been payable to Employee
under this Agreement from the date of termination until November 18, 2001. The
amounts payable to Employee under the previous sentence of this Section 4(e)
shall be paid by the Company in periodic payments or in a lump sum, at the
option of Employee. If any payment or other benefit (a "Termination Payment")
received or to be received by Employee in connection with a Change in Control
Event (whether or not this Agreement is terminated) or Employee's termination
of employment (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, with any person whose actions
result in a Change in Control Event or with any person affiliated with the
Company or such person) is or will be subject to the tax (the "Excise Tax")
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company shall pay to Employee, a Gross-Up Payment (as defined) to
the extent provided by the second paragraph of this Section 4(e).
A Gross-Up Payment (as defined) shall be payable pursuant to this
Section 4(e) on and subject to the following terms and conditions:
(1) At the time the applicable Termination Payment is made, an
additional amount (the "Gross-Up Payment") shall be paid by the Company such
that the net amount retained by Employee, after deduction of any Excise Tax on
such Termination Payment and any federal, state and local income tax,
employment tax and Excise Tax on the Gross-Up Payment, shall be equal to the
amount or value of such Termination Payment. For purposes of determining
whether any such Termination Payment will be subject to the Excise Tax, all
Termination Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 80G(b)(1) of the Code shall be treated as being
subject to the Excise Tax,unless in the opinion of tax counsel reasonably
acceptable to Employee and selected by the accounting firm which, immediately
prior to the Change in Control Event, was the Company's independent
auditors, such payments (in whole or in part) do not constitute "parachute
payments" within the meaning of Section 28OG of the Code or represent
reasonable compensation for services actually rendered in excess of the "base
amount" allocable to such reasonable compensation. The full amount of the
Gross-Up Payment shall be treated as being subject to the Excise Tax. The
value of any non-cash benefits or any deferred payment or benefit shall be
determined in accordance with the principles of Sections 28OG(d)(3) and (4)
of the Code.
(2) For purposes of determining the amount of any Gross-Up
Payment, Employee shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
applicable Termination Payment or Gross-Up Payment is made, and shall be deemed
to pay state and local income taxes at the highest marginal
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<PAGE> 7
rates of taxation in the state and locality of his residence on the date the
applicable Termination Payment or Gross-Up Payment is made, net of the maximum
reduction in federal income taxes that could be obtained from deduction of such
state and local taxes.
(3) If the Excise Tax or income tax payable with respect
to a Gross-Up Payment as finally determined exceeds the amount taken into
account or paid to Employee at the time the applicable Termination Payment or
Gross-Up Payment is made (including by reason of any payment the existence or
amount of which cannot be determined at the time of the applicable Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest payable by Employee with respect to such excess)
at the time that the amount of such excess is finally determined.
5. Compensation and Benefits.
(a) Signing Incentive. As a material inducement to Employee to
enter into this Agreement (including, without limitation, the covenants set
forth in Sections 6, 7 and 8 of this Agreement), the Company will pay Employee,
within five (5) days after Employee's execution of this Agreement, Five Hundred
Thousand Dollars.
(b) Annual Salary. For all services rendered by Employee under
this Agreement, the Company will pay Employee a base salary of a minimum of
Three Hundred Thousand Dollars per annum in equal bi-weekly installments. Such
annual salary may be increased by the Committee.
(c) Stock Option Awards. Employee shall be entitled to receive
under the Amended and Restated Medaphis Corporation Non-Qualified Stock Option
Plan (1) options to purchase 600,000 shares of the Company's common stock for
an exercise price equal to the closing price of the Company's Common Stock on
the Nasdaq National Market on November 19, 1996, which options shall have an
effective grant date of November 19, 1996 and shall vest ratably over five
years, and (2) performance options to purchase 210,000 shares of the Company's
Common Stock for an exercise price equal to the closing price of the Company's
Common Stock on the Nasdaq National Market on November 19, 1996, which
performance options shall have an effective grant date of November 19, 1996 and
shall vest ratably as follows: (i) 1/3 based on 100% appreciation in the market
price of the Company's Common Stock above the closing price of the Company's
Common Stock on the Nasdaq National Market on November 19, 1996, (ii) 1/3
based on 200% appreciation in the market price of the Company's Common Stock
above the closing price of the Company's Common Stock on the Nasdaq National
Market on November 19, 1996, and (iii) 1/3 based on 300% appreciation in the
market price of the Company's Common Stock above the closing price of the
Company's Common Stock on the Nasdaq National Market on November 19, 1996. In
any event, the 210,000 performance stock options will vest on November 19, 2001
and all stock options contemplated by this Section 5(c) shall vest upon a
Change in Control Event. In addition to any other rights provided Employee
under the Amended and Restated Medaphis Corporation Non-Qualified Stock Option
Plan or in the stock options agreement evidencing the
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<PAGE> 1
EXHIBIT 10.50
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 25th day of February, 1997, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and Daniel S. Connors, Jr., a resident of the State
of Pennsylvania (the "Employee").
Statement of Background Information
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services: (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The company also provides subrogation and related recovery services for
healthcare payors, including health maintenance organizations, indemnity
insurers, Blue Cross and Blue Shield organizations, third-party administrators,
self-funded employee health welfare benefit plans, and provider hospital
organizations (the "Subrogation Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and other
end users (collectively "Providers"), (i) strategic, operational and financial
information systems and services and decision support tools for healthcare
providers, (ii) software systems which provide claims and reimbursement services
and electronic claims processing, and (iii) software applications which assist
Providers with automated scheduling and resource management (the items discussed
in Sections (a)(i), (a)(ii) and (a)(iii) of this paragraph are referred to as
"Systems"), which Systems include, but are not limited to, nurse scheduling and
management information systems, operating room patient scheduling and surgery
information systems, enterprise wide patient scheduling and resource management
systems, enterprise-wide employee scheduling and management information systems
and related software interfaces to other information systems; and (b) provides
to Providers installation and support services related to the Company's Systems
(the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, design, documentation, and related
materials, and the development, design, deployment, and operation of local and
wide area computer networks, all in conjunction with the sale, design,
deployment, operation and maintenance of custom computer processing systems for
improvement of operational efficiency or functionality through the use of image
storage and processing, work flow technology, optical character recognition or
other related technologies (the
-1-
<PAGE> 2
"System Integration Business") (the Processing Business, the Subrogation
Business, the Systems Business, the Systems Integration Business and any other
distinct business segment in which the Company engages during Employee's
employment are collectively referred to as the "Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 7 and 8 of this Agreement,
"employment" shall mean any period of time during which the Company is
paying the Employee salary, wages, or any other amounts, whether or not
the Employee is currently performing services for the Company at the
time of such payment. Notwithstanding anything in this Agreement to the
contrary, in the event the Company is paying the Employee salary,
wages, benefits, severance or any other sums of money after termination
of Employee's employment with the Company, and Employee obtains any
other employment for consideration in any capacity, then such payments
will (i) cease immediately if Employee's employment with the Company
was terminated as a result of the occurrence of any events described in
Section 4(a)(i) through 4(a)(iv) hereof ("terminated for cause"), or
(ii) be reduced by an amount equal to the value of consideration
received in connection with or as a result of such other employment if
Employee was terminated other than as a result of the occurrence of any
events described in Section 4(a)(i) through 4(a)(iv) hereof
("terminated without cause").
2. Duties of Employee. Employee's initial title will be Senior Vice
President, Personnel and Administration, and Employee initially will
report directly to the Chief Executive Officer and/or President of the
Company. Employee initially will be responsible for managing and
directing the Company's Corporate Services and Corporate Information
Management Groups and agrees to perform and discharge such other duties
as may be assigned to Employee from time to time by the Company to the
reasonable satisfaction of the Company. Employee also agrees to comply
with all of the Company's policies, standards and regulations and to
follow the instructions and directives of Employee's superiors within
the Company, as promulgated by the officers of the Company. Employee
will devote Employee's full professional and business-related time,
skills and best efforts to such duties and will not, during the term of
this Agreement, be engaged (whether or not during normal business
hours) in any other business or professional activity, whether or not
such activity is pursued for gain, profit or other pecuniary advantage,
without the prior written consent of the President of the Company,
which consent will not be unreasonably withheld. This Section will not
be construed to prevent Employee from (a) investing personal assets in
businesses which do not compete with the Company in such form or manner
that will not require any services on the part of Employee in the
operation or the affairs of the companies in which such investments
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<PAGE> 3
are made and in which Employee's participation is solely that of an
investor; (b) purchasing securities in any corporation whose securities
are listed on a national securities exchange or regularly traded in the
over-the-counter market, provided that Employee at no time owns,
directly or indirectly, in excess of one percent (1%) of the
outstanding stock of any class of any such corporation engaged in a
business competitive with that of the Company; or (c) participating in
conferences, preparing and publishing papers or books or teaching, so
long as the President of the Company approves such participation,
preparation and publication or teaching prior to Employee's engaging
therein.
3. Term. The term of this Agreement will be for a two year period of time,
commencing as of November 20, 1996 and expiring on November 20, 1998,
subject to earlier termination as provided for in Section 4 of this
Agreement.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate this Agreement and all of its obligations hereunder
immediately if any of the following events occur:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Employee's receipt from the
Company of written notice of such breach (notwithstanding the
foregoing, no cure period shall be applicable to breaches by
Employee of Sections 6, 7 or 8 of this Agreement);
(ii) Employee commits any other act materially detrimental to
the business or reputation of the Company;
(iii) Employee engages in dishonest or illegal activities or
commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Employee's duties under this Agreement. Without limiting the
generality of the foregoing, Employee's inability adequately
to perform services under this Agreement for a period of sixty
(60) consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless such
inability adequately to perform services under this Agreement
is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which case such
sixty (60)-day period shall be extended to a one hundred and
twenty (120)-day period.
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(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate Employee's employment pursuant to this Agreement
without cause upon at least thirty (30) days' prior written
notice to Employee. Subject to the provisions of clause (ii)
of Section 1 hereof, in the event Employee's employment with
the Company is terminated by the Company without cause, the
Company shall remain subject to its obligations hereunder as
if Employee remained employed hereunder for the balance of the
term hereof, as provided in Section 3 above.
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Employee under this Agreement, the Company will
pay Employee a base salary of One Hundred Fifty Thousand Dollars
($150,000.00) per annum in equal bi-weekly installments. Such annual
salary will be subject to adjustments by any increases given in the
normal course of business.
b) Incentive Compensation. Beginning on January 1, 1997 and lasting
through the remaining term of the Agreement, Employee shall be entitled
to incentive compensation payments in accordance with the Incentive
Compensation Plan for Medaphis Corporation and its Subsidiary
Corporations (the "Incentive Compensation Plan"). In the event the
Company achieves the parameters set forth in the Plan, such incentive
compensation payments will be limited in the aggregate to 40% of
Employee's base salary.
c) Stock Options. As soon as reasonably practicable after the signing
of this Agreement, and subject to the approval of the Compensation
Committee of the Board of Directors of Medaphis Corporation, the
Company will cause Medaphis to issue to Employee, effective as of the
date approved by the Compensation Committee of the Board of Directors
of Medaphis Corporation, options to purchase Fifty Thousand (50,000)
shares of Medaphis Common Stock pursuant to the terms and conditions of
the Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan ("Stock Option Plan"), as amended. Such options will vest
at the rate of thirty-three percent (33%) per year for a three-year
period beginning on the starting date of this Agreement, subject to the
terms and conditions of the Stock Option Plan. The grant of options
referenced in this Section is the same grant of options which was
previously communicated to Employee via letter from David McDowell on
Tuesday, November 26, 1996, and does not represent an additional grant
of options to Employee. Employee shall be considered for additional
grants of options to purchase shares of Medaphis common stock in a
manner which is consistent with other senior officers of the Company.
However, nothing in this Agreement shall give rise to a contractual
right to Employee to receive grants of additional stock options of
Medaphis. Further, Medaphis has
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<PAGE> 5
no obligation to Employee to create parity with any other Medaphis
executives with respect to any options granted to such other
executives.
d) Other Benefits. Employee will be entitled to such fringe benefits as
may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and
disability insurance, vacations and any other fringe benefits now or
hereafter provided by the Company to its employees, if and when
Employee meets the eligibility requirements for any such benefit. The
Company reserves the right to change or discontinue any employee
benefit plans or programs now being offered to its employees; provided,
however, that all benefits provided for employees of the same position
and status as Employee will be provided to Employee on an equal basis.
e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
g) Relocation Expenses. Provided Employee supplies the Company with
adequate documentation, Employee will be compensated for the following
expenses associated with Employee's relocation from Pennsylvania to
Atlanta, Georgia :
i. Employee will be reimbursed for all reasonable and
customary costs incurred by Employee in connection
with the sale of Employee's existing residence in the
State of Pennsylvania;
ii. Employee will be reimbursed for all reasonable and
customary costs incurred by Employee in connection
with the acquisition of Employee's new residence in
the State of Georgia;
iii. Employee will receive a temporary housing allowance
of $2,000.00 per month, not to exceed three months,
to allow Employee to locate an acceptable residence;
and
iv. Employee will be reimbursed for all reasonable and
customary moving costs incurred by Employee in
connection with his relocation from the State of
Pennsylvania to the State of Georgia.
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h) Tax Gross-Up Payment. Employee will receive a payment from the
Company (the "Tax Gross-Up Payment") in an amount equal to the federal
and state income taxes payable by Employee as a result of the amounts
reimbursed to Employee under Section 5(g) of this Agreement and the Tax
Gross-Up Payment, after taking into consideration any income tax
deductions available to Employee with respect to any such expenses so
reimbursed. Such Tax Gross-Up Payments shall be paid to Employee at
such time or times as Employee shall provide the Company with
sufficient documentation to calculate the same.
i) Attorney's Fees. Employee will be reimbursed for reasonable
attorney's fees, not to exceed Three Thousand Dollars ($3,000.00), in
connection with the review of this Agreement by Employee's legal
counsel.
j) House Loan. The Company agrees to loan Employee Seventy-Five
Thousand Dollars ($75,000.00) for the purpose of securing his Georgia
residence. Employee agrees to secure this loan with a second mortgage
on Employee's residence. The parties agree that this loan will be
forgiven on a pro-rata basis over a five year period (forgiven at a
rate of $15,000.00 per year), so that in the event Employee remains
employed with the Company following the end of five years from the
effective date of this Agreement, he will not be required to repay this
loan. In the event Employee is terminated from the Company for any
reason, that portion of the loan which has not yet been forgiven will
be immediately due and owing to the Company.
k) Departure of David E. McDowell. In the event David E. McDowell, for
whatever reason, leaves his position as the Chairman and Chief
Executive Officer of Medaphis Corporation, Employee will be provided
sixty (60) days within which to decide whether Employee desires to
remain employed by the Company. In the event Employee elects to
continue his employment with the Company following such a departure
from the Company by David E. McDowell, this Agreement will remain in
effect according to all of its terms. In the event Employee elects to
resign following the departure from the Company of David E. McDowell,
Employee will be entitled to have the remaining portion of this
Agreement paid out according to its terms.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and
all physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses. Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information,
Employee agrees that Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish
or otherwise disseminate any Proprietary
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Information, in whole or in part, and will take no action causing, or
fail to take any action necessary to prevent causing, any Proprietary
Information to lose its character as Proprietary Information, nor will
Employee make use of any such information for Employee's own purposes
or for the benefit of any person, firm, corporation, association or
other entity (except the Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, including, but not limited to, any technical or
nontechnical data, formula, pattern, compilation, program, device,
method, technique, drawing, process, financial data, financial plan,
product plan, list of actual or potential customers or suppliers, or
other information similar to any of the foregoing, which derives
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can derive economic value from its disclosure or use. For purposes
of this Agreement, the term "Trade Secrets" does not include
information that Employee can show by competent proof (i) was known to
Employee and reduced to writing prior to disclosure by the Company (but
only if Employee promptly notifies the Company of Employee's prior
knowledge); (ii) was generally known to the public at the time the
Company disclosed the information to Employee; (iii) became generally
known to the public after disclosure by the Company through no act or
omission of Employee; or (iv) was disclosed to Employee by a third
party having a bona fide right both to possess the information and to
disclose the information to Employee. The term "Confidential
Information" means any data or information of the Company, other than
trade secrets, which is valuable to the Company and not generally known
to competitors of the Company. The provisions of this Section 6 will
apply to Trade Secrets for so long as such information remains a trade
secret and to Confidential Information during Employee's employment
with the Company and for a period of two (2) years following any
termination of Employee's employment with the Company for whatever
reason.
7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of
a corporation listed on a national securities exchange or whose stock
is regularly traded in the over-the-counter market, provided that
Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation) any business which provides Business services. For
purposes of this Agreement, the term
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"Geographical Area" means the territory located within a seventy-five
(75) mile radius of each facility for which Employee has management
responsibility during Employee's employment with the Company.
B. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or
in the service of or on behalf of any other individual or entity,
divert, solicit or attempt to solicit any individual or entity (i) who
is a client of the Company at any time during the six (6)-month period
prior to Employee's termination of employment with the Company
("Client"), or was actively sought by the Company as a prospective
client, and (ii) with whom Employee had material contact while employed
by the Company to provide Business services to such Clients or
prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below may,
if it chooses, sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions
of such Section to the remaining portion of the Geographical Area, the
client base or the prospective relationship or prospect list, or the
remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority may, if it chooses, replace each such severed
provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is
the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically enforceable,
the Company shall nevertheless be entitled to bring an action to seek
to recover monetary damages as a result of the breach of such provision
by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on behalf
of any other individual or entity, divert, solicit or hire away, or
attempt to divert, solicit or hire away, to or for any individual or
entity which is engaged in providing Business services, any person
employed by the Company for whom Employee had supervisory
responsibility or with whom Employee had material contact while
employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such
employee is employed pursuant to written agreement and whether or not
such employee is employed for a determined period or at-will.
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<PAGE> 9
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, and any
other properties, files or documents obtained as a result of Employee's
employment with the Company, immediately upon the termination of
Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with the
Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works
of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the
Company's Business (the "Inventions"), whether or not subject to
copyright or patent protection, and which may or may not be considered
Proprietary Information. Employee acknowledges that all such Inventions
will be "works made for hire" under United States copyright law and
will remain the sole and exclusive property of the Company. Employee
also hereby assigns and agrees to assign to the Company, in perpetuity,
all right, title and interest Employee may have in and to such
Inventions, including without limitation, all copyrights, and the right
to apply for any form of patent, utility model, industrial design or
similar proprietary right recognized by any state, country or
jurisdiction. Employee further agrees, at the Company's request and
expense, to do all things and sign all documents or instruments
necessary, in the opinion of the Company, to eliminate any ambiguity as
to the ownership of, and rights of the Company to, such Inventions,
including filing copyright and patent registrations and defending and
enforcing in litigation or otherwise all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to
any business or activity in which the Company is or may reasonably be
expected to become engaged, except that Employee is so obligated if the
same relates to or is based on Proprietary Information to which
Employee will have had access during and by virtue of Employee's
employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which
may be wholly conceived by Employee after Employee leaves
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<PAGE> 10
the employ of the Company, except that Employee is so obligated if such
Invention involves the utilization of Proprietary Information obtained
while in the employ of the Company. Employee is not obligated to assign
any Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was
conceived and reduced to practice by Employee prior to Employee's
employment with the Company, provided that all such Inventions are
listed at the time of employment on the attached Exhibit A.
12. Remedies. Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that
the remedy at law for any such violation or threatened violation
thereof would be inadequate, and that the Company will be entitled, in
addition to any other remedy, to temporary and permanent injunctive or
other equitable relief without the necessity of proving actual damages
or posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
2700 Cumberland Parkway Daniel S. Connors, Jr.
Suite 300 2700 Cumberland Parkway
Atlanta, GA 30339 Suite 300
Attn: General Counsel Atlanta, GA 30339
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as if
such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
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17. Assignment. This Agreement is one for personal services and will not be
assigned by Employee. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company has
its principal place of business and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment
in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either
of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified
exemplified copy of which shall be conclusive evidence of the fact and
amount of such judgment.
19. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ David McDowell /s/ Daniel S. Connors, Jr.
--------------------------------- -----------------------------------
Daniel S. Connors, Jr.
Title: CEO
------------------------------
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EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
DSC, Jr.
-----------------
Employee Initials
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EXHIBIT 10.51
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 25th day of February, 1997, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and Carl James Schaper, a resident of the State of
Georgia (the "Employee").
Statement of Background Information
The Company: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and other
end users (collectively "Providers"), (i) strategic, operational and financial
information systems and services and decision support tools for healthcare
providers, (ii) software systems which provide claims and reimbursement services
and electronic claims processing, and (iii) software applications which assist
Providers with automated scheduling and resource management (the items discussed
in Sections (a)(i), (a)(ii) and (a)(iii) of this paragraph are referred to as
"Systems"), which Systems include, but are not limited to, nurse scheduling and
management information systems, operating room patient scheduling and surgery
information systems, enterprise wide patient scheduling and resource management
systems, enterprise-wide employee scheduling and management information systems
and related software interfaces to other information systems; and (b) provides
to Providers installation and support services related to the Company's Systems
(the "Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in
this Agreement. Notwithstanding anything in this Agreement to the
contrary, in the event the Company is paying Employee salary, wages,
benefits, severance or any other sums of money after termination of
Employee's employment with the Company, and Employee obtains any other
employment for consideration in any capacity, then such payments will
cease immediately if Employee's employment with the Company was
terminated as a result of the occurrence of any events described in
Section 4(a)(i) through 4(a)(iii) hereof ("terminated for cause").
2. Duties of Employee. Employee's title will be Executive Vice President
of Medaphis Corporation and President of Medaphis Healthcare
Information Technology Company and Employee will report directly to the
Chief Executive Officer of the Company. Employee agrees to perform and
discharge such other duties as may be assigned to Employee from time to
time by the Company to the reasonable satisfaction of the Company, and
such duties will be consistent with those duties regularly and
customarily assigned by the Company to the position of Executive Vice
President of Medaphis Corporation and President of Medaphis
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Healthcare Information Technology Company. Employee also agrees to
comply with all of the Company's policies, standards and regulations
and to follow the instructions and directives of Employee's superiors
within the Company, as promulgated by the officers of the Company.
Employee will devote Employee's full professional and business-related
time, skills and best efforts to such duties and will not, during the
term of this Agreement, be engaged (whether or not during normal
business hours) in any other business or professional activity, whether
or not such activity is pursued for gain, profit or other pecuniary
advantage, without the prior written consent of the Chief Executive
Officer of the Company, which consent will not be unreasonably
withheld. This Section will not be construed to prevent Employee from
(a) investing personal assets in businesses which do not compete with
the Company in such form or manner that will not require any services
on the part of Employee in the operation or the affairs of the
companies in which such investments are made and in which Employee's
participation is solely that of an investor; (b) purchasing securities
in any corporation whose securities are listed on a national securities
exchange or regularly traded in the over-the-counter market, provided
that Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation engaged in a business competitive with that of the Company;
or (c) participating in conferences, preparing and publishing papers or
books or teaching, so long as the Chief Executive Officer of the
Company approves such participation, preparation and publication or
teaching prior to Employee's engaging therein.
3. Term. The term of this Agreement will be for a three (3) year period of
time, commencing as of February 25, 1997 and expiring on February 25,
2000, subject to earlier termination as provided for in Section 4 of
this Agreement. Both parties to this Agreement agree that they will
provide ninety (90) days' notice to the other side as to whether they
intend to negotiate to extend the term of this Agreement at the end of
the initial three year term of this Agreement.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate this Agreement and all of its obligations hereunder
immediately if any of the following events occur:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Employee's receipt from the
Company of written notice of such breach (notwithstanding the
foregoing, no cure period shall be applicable to breaches by
Employee of Sections 6, 7 or 8 of this Agreement);
(ii) Employee engages in dishonest or illegal activities or
commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or
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<PAGE> 3
(iii) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Employee's duties under this Agreement. Without limiting the
generality of the foregoing, Employee's inability adequately
to perform services under this Agreement for a period of sixty
(60) consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless such
inability adequately to perform services under this Agreement
is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which case such
sixty (60)-day period shall be extended to a one hundred and
twenty (120)-day period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate Employee's employment pursuant to this Agreement
without cause upon at least thirty (30) days' prior written
notice to Employee. Subject to the provisions of clause (ii)
of Section 1 hereof, in the event Employee's employment with
the Company is terminated by the Company without cause, the
Company shall remain subject to its obligations hereunder as
if Employee remained employed hereunder for the balance of the
term hereof, as provided in Section 3 above.
(c) Change in Control. In the event there is a change in control
of Medaphis Corporation, Employee will be provided thirty (30)
days in which to decide whether Employee desires to remain
employed by the Company under the terms of this Agreement. In
the event Employee elects to continue his employment with the
Company following such a change in control, this Agreement
will remain in effect according to all of its terms. In the
event Employee decides to resign from the Company following
such a change in control, Employee will be entitled to receive
a severance payment equal to the greater of (1) one year of
salary continuation at Employee's then current base salary, or
(2) those payments due and owing to Employee under the
remaining term of this Agreement. For purposes of this
Agreement, a "change in control" of Medaphis Corporation shall
be deemed to occur upon any of the following:
(i) a consolidation or merger of Medaphis Corporation with or
into any other corporation, or any other entity or person,
other than a wholly-owned subsidiary of Medaphis Corporation,
excluding any transaction in which stockholders of Medaphis
Corporation prior to the transaction will maintain voting
control or own at least 50% of the resulting entity after the
transaction;
(ii) any corporate reorganization, including an exchange
offer, in which Medaphis Corporation shall not be the
continuing or surviving entity resulting from such
reorganization, excluding any transaction in which
stockholders of the Medaphis
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Corporation prior to the transaction will maintain voting
control or own at least 50% of the resulting entity after the
transaction; or
(iii) the sale of a substantial portion of Medaphis
Corporation's assets, which shall be deemed to occur on the
date that any one person, or more than one person acting as a
group, acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such
person or persons) assets from Medaphis Corporation that (a)
have a total fair market value equal to more than 50% of the
total fair market value of all the assets of Medaphis
Corporation, immediately prior to such acquisition or
acquisitions, or (b) have a total fair market value equal to
more than 75% of the total fair market value of all the assets
of Medaphis Healthcare Information Technology Company
immediately prior to such acquisition or acquisitions, or (c)
represents a majority of the common stock of any (1)
subsidiary of Medaphis Corporation, the revenues of which, in
the most recent fiscal year, represent more than 75% of the
consolidated gross revenues of Medaphis Corporation and its
subsidiaries. Notwithstanding the foregoing, a transfer of
assets or common stock in a subsidiary by Medaphis Corporation
will not be treated as a sale of a substantial portion of
Medaphis Corporation's assets if the assets are transferred to
an entity, 50% or more of the total value or voting power of
which is owned, directly or indirectly, by Medaphis
Corporation.
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Employee under this Agreement, the Company will
pay Employee a base salary of Two Hundred Fifty Thousand Dollars
($250,000.00) per annum in equal bi-weekly installments. Such annual
salary will be subject to adjustments by any increases given in the
normal course of business.
b) Incentive Compensation. Employee shall be eligible to participate in
the 1997 Medaphis Corporation and its Subsidiary Corporations Incentive
Compensation Plan at a participation category of 80% of Employee's base
salary, payable at the discretion of the Board of Directors of the
Company. At the end of the initial year of the Agreement, Employee
shall be eligible to receive an additional payment of One Hundred
Thousand Dollars ($100,000.00).
c) Stock Options. As soon as reasonably practicable after the signing
of this Agreement, the Company will cause Medaphis to issue to
Employee, effective as of February 25, 1997, options to purchase Two
Hundred and Fifty Thousand (250,000) shares of Medaphis Common Stock
pursuant to the terms and conditions of the Amended and Restated
Medaphis Corporation Non-Qualified Stock Option Plan ("Stock Option
Plan"), as amended. Such options will vest at the rate of thirty-three
and one-third percent (33.33%) per year for a
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three-year period beginning on the starting date of this Agreement,
subject to the terms and conditions of the Stock Option Plan. Employee
shall be considered for additional grants of options to purchase shares
of the Company's common stock in a manner which is consistent with
other senior officers of the Company. However, nothing in this
Agreement shall give rise to a contractual right to Employee to receive
grants of additional stock options of the Company. Further, the Company
has no obligation to Employee to create parity with any other Company
executives with respect to any options granted to such other
executives.
d) Other Benefits. Employee will be entitled to such fringe benefits as
may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and
disability insurance, vacations and any other fringe benefits now or
hereafter provided by the Company to its employees, if and when
Employee meets the eligibility requirements for any such benefit. The
Company reserves the right to change or discontinue any employee
benefit plans or programs now being offered to its employees; provided,
however, that all benefits provided for employees of the same position
and status as Employee will be provided to Employee on an equal basis.
e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
g) Signing Bonus. Upon execution of this Agreement, the Company will
pay Employee a signing bonus in the amount of One Hundred Thousand
Dollars ($100,000.00).
h) Attorney's Fees. Employee will be reimbursed for reasonable
attorney's fees, not to exceed Three Thousand Dollars ($3,000.00), in
connection with the review of this Agreement by Employee's legal
counsel.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and
all physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses. Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information,
Employee agrees that, except with respect to those duties assigned to
him by the Company, Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish
or otherwise disseminate any Proprietary Information, in whole
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or in part, and will take no action causing, or fail to take any action
necessary to prevent causing, any Proprietary Information to lose its
character as Proprietary Information, nor will Employee make use of any
such information for Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, including, but not limited to, any technical or
nontechnical data, formula, pattern, compilation, program, device,
method, technique, drawing, process, financial data, financial plan,
product plan, list of actual or potential customers or suppliers, or
other information similar to any of the foregoing, which derives
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can derive economic value from its disclosure or use. For purposes
of this Agreement, the term "Trade Secrets" does not include
information that Employee can show by competent proof (i) was known to
Employee and reduced to writing prior to disclosure by the Company (but
only if Employee promptly notifies the Company of Employee's prior
knowledge); (ii) was generally known to the public at the time the
Company disclosed the information to Employee; (iii) became generally
known to the public after disclosure by the Company through no act or
omission of Employee; or (iv) was disclosed to Employee by a third
party having a bona fide right both to possess the information and to
disclose the information to Employee. The term "Confidential
Information" means any data or information of the Company, other than
trade secrets, which is valuable to the Company and not generally known
to competitors of the Company. The provisions of this Section 6 will
apply to Trade Secrets for so long as such information remains a trade
secret and to Confidential Information during Employee's employment
with the Company and for a period of two (2) years following any
termination of Employee's employment with the Company for whatever
reason.
7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of
a corporation listed on a national securities exchange or whose stock
is regularly traded in the over-the-counter market, provided that
Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation) any business which provides Business products or services.
For purposes of this Agreement, the term "Geographical Area" means the
territory located within a seventy-five (75) mile
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radius of each facility for which Employee has management
responsibility during Employee's employment with the Company.
B. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or
in the service of or on behalf of any other individual or entity,
divert, solicit or attempt to solicit any individual or entity (i) who
is a client of the Company at any time during the six (6)-month period
prior to Employee's termination of employment with the Company
("Client"), or was actively sought by the Company as a prospective
client, and (ii) with whom Employee had material contact while employed
by the Company to provide Business services or products to such Clients
or prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below may,
if it chooses, sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions
of such Section to the remaining portion of the Geographical Area, the
client base or the prospective relationship or prospect list, or the
remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority may, if it chooses, replace each such severed
provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is
the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically enforceable,
the Company shall nevertheless be entitled to bring an action to seek
to recover monetary damages as a result of the breach of such provision
by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on behalf
of any other individual or entity, divert, solicit or hire away, or
attempt to divert, solicit or hire away, to or for any individual or
entity which is engaged in providing Business services or products, any
person employed by the Company for whom Employee had supervisory
responsibility or with whom Employee had material contact while
employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such
employee is employed pursuant to written agreement and whether or not
such employee is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to
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compete with any such former employer. Employee will not disclose to
the Company or use on its behalf any confidential information of any
other party required to be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, and any
other properties, files or documents obtained as a result of Employee's
employment with the Company, immediately upon the termination of
Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with the
Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works
of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the
Company's Business (the "Inventions"), whether or not subject to
copyright or patent protection, and which may or may not be considered
Proprietary Information. Employee acknowledges that all such Inventions
will be "works made for hire" under United States copyright law and
will remain the sole and exclusive property of the Company. Employee
also hereby assigns and agrees to assign to the Company, in perpetuity,
all right, title and interest Employee may have in and to such
Inventions, including without limitation, all copyrights, and the right
to apply for any form of patent, utility model, industrial design or
similar proprietary right recognized by any state, country or
jurisdiction. Employee further agrees, at the Company's request and
expense, to do all things and sign all documents or instruments
necessary, in the opinion of the Company, to eliminate any ambiguity as
to the ownership of, and rights of the Company to, such Inventions,
including filing copyright and patent registrations and defending and
enforcing in litigation or otherwise all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to
any business or activity in which the Company is or may reasonably be
expected to become engaged, except that Employee is so obligated if the
same relates to or is based on Proprietary Information to which
Employee will have had access during and by virtue of Employee's
employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which
may be wholly conceived by Employee after Employee leaves the employ of
the Company, except that Employee is so obligated if such Invention
involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any
Invention which relates to or would be useful in any
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business or activities in which the Company is engaged if such
Invention was conceived and reduced to practice by Employee prior to
Employee's employment with the Company.
12. Remedies. Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that
the remedy at law for any such violation or threatened violation
thereof would be inadequate, and that the Company will be entitled, in
addition to any other remedy, to temporary and permanent injunctive or
other equitable relief without the necessity of proving actual damages
or posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
2700 Cumberland Parkway Carl James Schaper
Suite 300 2700 Cumberland Parkway
Atlanta, GA 30339 Suite 300
Attn: General Counsel Atlanta, GA 30339
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as if
such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
17. Assignment. This Agreement is one for personal services and will not be
assigned by Employee. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
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18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company has
its principal place of business and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment
in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either
of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified
exemplified copy of which shall be conclusive evidence of the fact and
amount of such judgment.
19. Indemnification. Employee shall be entitled to the indemnification and
exculpation offered through and set forth in the Company's Charter and
By-laws.
20. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ Daniel S. Connors /s/ Carl James Schaper
-------------------------------- -----------------------------------
Carl James Schaper
Title: SVP Personnel & Admin
------------------------------
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EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
CJS
-----------------
Employee Initials
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EXHIBIT 10.52
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 3rd day of January, 1997, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company" or "Medaphis"), and Jerome H. Baglien, a resident of
the State of Illinois (the "Employee").
Statement of Background Information
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services: (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The company also provides subrogation and related recovery services for
healthcare payors, including health maintenance organizations, indemnity
insurers, Blue Cross and Blue Shield organizations, third-party administrators,
self-funded employee health welfare benefit plans, and provider hospital
organizations (the "Subrogation Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and other
end users (collectively "Providers"), (i) strategic, operational and financial
information systems and services and decision support tools for healthcare
providers, (ii) software systems which provide claims and reimbursement services
and electronic claims processing, and (iii) software applications which assist
Providers with automated scheduling and resource management (the items discussed
in Sections (a)(i), (a)(ii) and (a)(iii) of this paragraph are referred to as
"Systems"), which Systems include, but are not limited to, nurse scheduling and
management information systems, operating room patient scheduling and surgery
information systems, enterprise wide patient scheduling and resource management
systems, enterprise-wide employee scheduling and management information systems
and related software interfaces to other information systems; and (b) provides
to Providers installation and support services related to the Company's Systems
(the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, design, documentation, and related
materials, and the development, design, deployment, and operation of local and
wide area computer networks, all in conjunction with the sale, design,
deployment, operation and maintenance of custom computer processing systems for
improvement of operational efficiency or functionality through the use of image
storage and processing, work flow technology, optical character recognition or
other related technologies (the "System Integration Business") (the Processing
Business, the Subrogation Business, the Systems
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Business, the Systems Integration Business and any other distinct business
segment in which the Company engages during Employee's employment are
collectively referred to as the "Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 7 and 8 of this Agreement,
"employment" shall mean any period of time during which the Company is
paying the Employee salary, wages, or any other amounts, whether or not
the Employee is currently performing services for the Company at the
time of such payment. Notwithstanding anything in this Agreement to the
contrary, in the event the Company is paying the Employee salary,
wages, benefits, severance or any other sums of money after termination
of Employee's employment with the Company, and Employee obtains any
other employment for consideration in any capacity, then such payments
will cease immediately if Employee's employment with the Company was
terminated as a result of the occurrence of any events described in
Section 4(b)(i) ("terminated for cause").
2. Duties of Employee. Employee's title will be Senior Vice President and
Chief Financial Officer and Employee will report directly to the Chief
Executive Officer and/or President of the Company. Employee agrees to
perform and discharge such other duties, which are not inconsistent
with such position, as may be assigned to Employee from time to time by
the Company to the reasonable satisfaction of the Company for the
normal professional performance of this position. Employee also agrees
to comply with all of the Company's policies, standards and regulations
and to follow the instructions and directives of Employee's superiors
within the Company, as promulgated by the officers of the Company.
Employee will devote Employee's full professional and business-related
time, skills and best efforts to such duties and will not, during the
term of this Agreement, be engaged (whether or not during normal
business hours) in any other business or professional activity, whether
or not such activity is pursued for gain, profit or other pecuniary
advantage, without the prior written consent of the Chief Executive
Officer or President of the Company, which consent will not be
unreasonably withheld. This Section will not be construed to prevent
Employee from (a) investing personal assets in businesses which do not
compete with the Company in such form or manner that will not require
any services on the part of Employee in the operation or the affairs of
the companies in which such investments are made and in which
Employee's participation is solely that of an investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market,
provided that Employee at no time owns, directly or indirectly, in
excess of one percent (1%) of the outstanding stock of any class of any
such corporation engaged in a business competitive with that of the
Company; or (c) participating in conferences, preparing and publishing
papers or books or teaching, so long as the Chief Executive Officer or
President of the Company approves such participation, preparation and
publication or teaching prior to Employee's engaging therein.
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3. Term. The term of this Agreement will be for a three year period of
time, commencing as of February 7, 1997 and expiring on February 7,
2000, subject to earlier termination as provided for in Section 4 of
this Agreement.
4. Termination.
(a) Termination upon Death or Disability.
If Employee dies during the Term, this Agreement shall
terminate as of Employee's death to the extent described below
in this Section 4. If Employee by virtue of "disability" (as
determined below) is unable to perform substantially all of
the Employee's duties hereunder, the Company shall, to the
extent permitted by law, have the right to terminate the
employment of Employee upon notice in writing to Employee.
Upon death or other termination of employment by virtue of
such disability, (i) Employee (or Employees estate or
beneficiaries in the case of the death of Employee) shall be
entitled to receive any Annual Salary and Benefit Plan
benefits theretofore earned or accrued under this Agreement,
and reimbursement under Section 5 for expenses incurred, prior
to the date of termination, and (ii) this Agreement shall
otherwise terminate upon such death or other termination of
employment and there shall be no further rights with respect
to Employee hereunder; provided that no provision of this
Agreement shall limit any of Employee's rights (or the rights
of Employee's estate or beneficiaries) otherwise set forth
under any insurance, pension or other benefit programs of the
Company for which Employee shall be eligible at the time of
such death or disability. For purposes of this Section 4,
Employee shall be deemed to have incurred a "disability" if,
because of injury or sickness, Employee cannot for a period of
one hundred and twenty (120) days in a consecutive 365-day
period, perform substantially all of the essential duties of
Employee's regular occupation, unless, such inability to
adequately perform services under this Agreement is pursuant
to a mental or physical incapacity or disability covered by
the Family Medical Leave Act, in which case such one hundred
and twenty (120) day period shall be extended to a one hundred
and eighty (180) day period.
(b) Termination for Cause; Termination by Employee without Good
Reason
(i) for purposes of this Agreement, "Cause" shall be
deemed to exist if Employee (i) commits (a) a felony,
(b) a crime of fraud, moral turpitude, dishonesty,
breach of trust or unethical business conduct or (c)
any crime or misdemeanor involving the Company, (ii)
acts, or fails to act, to the detriment of the
Company where such action or inaction constitutes
material misconduct, intentional or gross neglect,
fraud, misappropriation or embezzlement, (iii)
breaches this Agreement in any material respect, and
fails to cure such breach within ten (10) days after
Employee's receipt of written
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notice of such breach (notwithstanding the foregoing,
no cure period shall be applicable to breaches by
Employee of Section 6, 7 or 8 of this Agreement).
(ii) For purposes of this Agreement, "Good Reason" shall
be deemed to exist if, without Employee's express
written consent, (i) the Company materially breaches
this Agreement, (ii) Employee is assigned duties
materially inconsistent with Section 2, or (iii)
Employee's duties and responsibilities are
substantially reduced without Cause. Employee shall
not be deemed to have terminated employment for Good
Reason unless (i) Employee gives the Company notice
of termination of Employee's employment not later
than thirty days after the occurrence of the event or
condition constituting Good Reason; provided that a
continuing event or condition first occurs or arises;
and (ii) such notice specifies an effective date for
the termination which is at least thirty days after
the date of the notice. Notwithstanding the
foregoing, (i) if there exists (without regard to
this clause (i) an event or condition that
constitutes Good Reason, the Company shall have ten
days from the date such notice is given to cure such
event or condition and, if the Company does so, such
event or condition shall not constitute Good Reason
hereunder, and (ii) Good Reason shall not be deemed
to exist at any time which Employee could be
terminated for Cause.
(iii) The Company may terminate Employee's employment
hereunder for Cause. If the Company terminates
Employee's employment for Cause or Employee resigns
or otherwise terminates Employee's employment with
the Company without Good Reason, (i) Employee shall
have no right to receive any compensation or benefit
hereunder on and after the date of Employee's
termination other than Annual Salary and Benefit Plan
benefits theretofore earned and accrued under this
Agreement, and reimbursement under Section 5 for
expenses theretofore incurred and paid, and (ii) this
Agreement shall otherwise terminate upon such
termination of employment and Employee shall have no
further rights hereunder.
(c) Termination Without Cause, Termination for Good Reason
The Company may terminate Employee's employment at any time
for any reason, and Employee may terminate Employee's
employment for Good Reason. If the Company terminates
Employee's employment and such termination is not pursuant to
Section 4(a) or 4(b), or Employee terminates Employee's
employment for Good Reason, (i) Employee will receive the
Annual Salary and the coverage under the Welfare Plans
(provided payments under such Welfare Plans to Employee would
not result in disqualification by the Company or its
participants under such plans) that Employee would have
received and payable at the same times and dates as would have
been applicable in the absence of such termination, (ii)
Employee shall be entitled to receive reimbursement under
Section 5 for expenses incurred prior to the
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date of termination, (iii) Employee shall be entitled to
receive any Annual Salary and Benefit Plan benefits,
theretofore earned to accrued under this Agreement, and (iv)
no payments or benefits provided under this Section shall be
reduced by any amount Employee may earn or receive from
employment with another employer or from any other source.
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Employee under this Agreement, the Company will
pay Employee a base salary of Two Hundred Fifty Thousand Dollars
($250,000.00) per annum in equal bi-weekly installments. Such annual
salary will be subject to adjustments by any increases given in the
normal course of business.
b) Incentive Compensation. During the term of the Agreement, Employee
shall have a target bonus equal to 80% of Employee's base salary,
payable upon the achievement of certain objectives set by the Board of
Directors or the President of the Company. For the first year of the
Agreement, if such objectives are not met, all or a portion of such
bonus still may be paid at the sole discretion of the Board of
Directors of the Company.
c) Stock Options. As soon as reasonably practicable after the signing
of this Agreement, and subject to the approval of the Compensation
Committee of the Board of Directors of Medaphis Corporation, the
Company will cause Medaphis to issue to Employee, effective as of the
date approved by the Compensation Committee of the Board of Directors
of Medaphis Corporation, options to purchase Two Hundred and Fifty
Thousand (250,000) shares of Medaphis Common Stock pursuant to the
terms and conditions of the Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan ("Stock Option Plan"), as amended. Such
options will vest at the rate of thirty-three and one-third percent
(33.33%) per year for a three-year period beginning on the starting
date of this Agreement, subject to the terms and conditions of the
Stock Option Plan. Such options shall vest in full immediately upon the
occurrence of certain change in control events outlined in the Stock
Option Plan. Employee shall be considered for additional grants of
options to purchase shares of Medaphis common stock in a manner which
is consistent with other senior officers of the Company. However,
nothing in this Agreement shall give rise to a contractual right to
Employee to receive grants of additional stock options of Medaphis.
Further, Medaphis has no obligation to Employee to create parity with
any other Medaphis executives with respect to any options granted to
such other executives.
d) Other Benefits. Employee will be entitled to such fringe benefits as
may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and
disability insurance, vacations and any other fringe benefits now or
hereafter provided by the Company to its employees, if and when
Employee meets the eligibility requirements for any such benefit. The
Company reserves the right to change or discontinue any employee
benefit plans or programs now being offered to its employees;
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provided, however, that all benefits provided for employees of the same
position and status as Employee will be provided to Employee on an
equal basis.
e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
g) Relocation Expenses. The Company will engage a relocation firm
chosen by the Company to determine the fair market value of Employee's
primary residence and to be responsible for the ultimate sale of such
residence, all pursuant to the terms of a "home guaranty support"
package to be agreed upon between the Company and the relocation firm
and attached hereto. Such terms will provide that Employee will be able
to borrow from the relocation firm an amount equal to the difference
between Employee's equity ownership in such residence and the fair
market value of such residence as determined by the relocation firm,
and the outstanding balance of any such loan shall be payable from the
proceeds of the sale of the residence. Furthermore, provided Employee
supplies the Company with adequate documentation, Employee will be
compensated for the following expenses associated with Employee's
relocation to Atlanta, Georgia :
i. Employee will be reimbursed for all reasonable and
customary costs incurred by Employee in connection
with the sale of Employee's existing residence;
ii. Employee will be reimbursed for all reasonable and
customary costs incurred by Employee in connection
with the acquisition of Employee's new residence in
the State of Georgia;
iii. Employee will receive a temporary housing allowance
of $3,000.00 per month, not to exceed four months, to
allow Employee to locate an acceptable residence; and
iv. Employee will be reimbursed for all reasonable and
customary moving costs incurred by Employee in
connection with his relocation to the State of
Georgia.
v. Employee will be reimbursed a temporary commuting
allowance of up to $1,000 per month, not to exceed
four months, for travel during the initial start-up
period for travel to and from the employee's existing
home.
h) Tax Gross-Up Payment. Employee will receive a payment from the
Company (the "Tax Gross-Up Payment") in an amount equal to the federal
and state income taxes payable by
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Employee as a result of the amounts reimbursed to Employee under
Section 5(g) of this Agreement and the Tax Gross-Up Payment, after
taking into consideration any income tax deductions available to
Employee with respect to any such expenses so reimbursed. Such Tax
Gross-Up Payments shall be paid to Employee at such time or times as
Employee shall provide the Company with sufficient documentation to
calculate the same.
i) Attorney's Fees. Employee will be reimbursed for reasonable
attorney's fees, not to exceed Three Thousand Dollars ($3,000.00), in
connection with the review of this Agreement by Employee's legal
counsel.
j) Golf Club Membership. The Company will pay for Employee's membership
initiation fee to join the golf club of Employee's choice up to an
amount not to exceed Thirty-Five Thousand Dollars ($35,000.00).
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and
all physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses. Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information,
Employee agrees that Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish
or otherwise disseminate any Proprietary Information, in whole or in
part, and will take no action causing, or fail to take any action
necessary to prevent causing, any Proprietary Information to lose its
character as Proprietary Information, nor will Employee make use of any
such information for Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, including, but not limited to, any technical or
nontechnical data, formula, pattern, compilation, program, device,
method, technique, drawing, process, financial data, financial plan,
product plan, list of actual or potential customers or suppliers, or
other information similar to any of the foregoing, which derives
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can derive economic value from its disclosure or use. For purposes
of this Agreement, the term "Trade Secrets" does not include
information that Employee can show by competent proof (i) was known to
Employee and reduced to writing prior to disclosure by the Company (but
only if Employee promptly notifies the Company of Employee's prior
knowledge); (ii) was generally known to the public at the time the
Company disclosed the information to Employee; (iii) became generally
known to the public after disclosure by the Company through no act or
omission of Employee; or (iv) was disclosed to Employee by a third
party having a bona fide right both to possess the information and to
disclose the information to Employee. The term "Confidential
Information" means any data or information of the
-7-
<PAGE> 8
Company, other than trade secrets, which is valuable to the Company and
not generally known to competitors of the Company. The provisions of
this Section 6 will apply to Trade Secrets for so long as such
information remains a trade secret and to Confidential Information
during Employee's employment with the Company and for a period of two
(2) years following any termination of Employee's employment with the
Company for whatever reason.
7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of
a corporation listed on a national securities exchange or whose stock
is regularly traded in the over-the-counter market, provided that
Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation) any business which provides Business products or services.
For purposes of this Agreement, the term "Geographical Area" means the
territory located within a seventy-five (75) mile radius of each
facility for which Employee has management responsibility during
Employee's employment with the Company.
B. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or
in the service of or on behalf of any other individual or entity,
divert, solicit or attempt to solicit any individual or entity (i) who
is a client of the Company at any time during the six (6)-month period
prior to Employee's termination of employment with the Company
("Client"), or was actively sought by the Company as a prospective
client, and (ii) with whom Employee had material contact while employed
by the Company to provide Business services or products to such Clients
or prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below may,
if it chooses, sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions
of such Section to the remaining portion of the Geographical Area, the
client base or the prospective relationship or prospect list, or the
remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority may, if it chooses, replace each such severed
provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is
the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the
-8-
<PAGE> 9
event that any provision of either such Section is determined not to be
specifically enforceable, the Company shall nevertheless be entitled to
bring an action to seek to recover monetary damages as a result of the
breach of such provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on behalf
of any other individual or entity, divert, solicit or hire away, or
attempt to divert, solicit or hire away, to or for any individual or
entity which is engaged in providing Business services or products, any
person employed by the Company for whom Employee had supervisory
responsibility or with whom Employee had material contact while
employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such
employee is employed pursuant to written agreement and whether or not
such employee is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, and any
other properties, files or documents obtained as a result of Employee's
employment with the Company, immediately upon the termination of
Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with the
Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works
of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the
Company's Business (the "Inventions"), whether or not subject to
copyright or patent protection, and which may or may not be considered
Proprietary Information. Employee acknowledges that all such Inventions
will be "works made for hire" under United States copyright law and
will remain the sole and exclusive property of the Company. Employee
also hereby assigns and agrees to assign to the Company, in perpetuity,
all right, title and interest Employee may have in and to such
Inventions, including without limitation, all copyrights, and the right
to apply for any form of patent, utility model, industrial design or
similar proprietary right recognized by any state, country or
jurisdiction. Employee further
-9-
<PAGE> 10
agrees, at the Company's request and expense, to do all things and sign
all documents or instruments necessary, in the opinion of the Company,
to eliminate any ambiguity as to the ownership of, and rights of the
Company to, such Inventions, including filing copyright and patent
registrations and defending and enforcing in litigation or otherwise
all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to
any business or activity in which the Company is or may reasonably be
expected to become engaged, except that Employee is so obligated if the
same relates to or is based on Proprietary Information to which
Employee will have had access during and by virtue of Employee's
employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which
may be wholly conceived by Employee after Employee leaves the employ of
the Company, except that Employee is so obligated if such Invention
involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any
Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was
conceived and reduced to practice by Employee prior to Employee's
employment with the Company, provided that all such Inventions are
listed at the time of employment on the attached Exhibit A.
12. Remedies. Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that
the remedy at law for any such violation or threatened violation
thereof would be inadequate, and that the Company will be entitled, in
addition to any other remedy, to temporary and permanent injunctive or
other equitable relief without the necessity of proving actual damages
or posting a bond. The Company agrees and acknowledges that the
violation of Employee's rights with respect to the Invention set forth
on Exhibit A would cause irreparable injury to Employee, that the
remedy at law for any such violation or threaten violation thereof
would be inadequate, and that Employee will be entitled, in addition to
any other remedy, to temporary and permanent injunctive or other
equitable relief without the necessity of proving actual damages or
posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
2700 Cumberland Parkway Jerome H. Baglien.
Suite 300 6239 Pinetree Drive
Atlanta, GA 30339 Long Grove, Illinois 60047
Attn: General Counsel
14. Contract Review. Medaphis will reexamine the senior management
employment contract methodology with respect to the terms and
conditions relating to the potential renewal and
-10-
<PAGE> 11
extension of this agreement following completion of the term set forth
herein. It is anticipated that this review will be completed during the
initial 18 months of this Agreement.
15. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as if
such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
16. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
17. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
18. Assignment. This Agreement is one for personal services and will not be
assigned by Employee. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
19. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company has
its principal place of business and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment
in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either
of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified
exemplified copy of which shall be conclusive evidence of the fact and
amount of such judgment.
20. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ Daniel S. Connors /s/ Jerome H. Baglien
----------------------------------- -----------------------------------
Jerome H. Baglien
Title: SVP Personnel & Administration
--------------------------------
-12-
<PAGE> 13
EXHIBIT A
INVENTIONS
Declared Inventions:
The SOFTCARE software and database tools, medical instrument
interface tools (both radio frequency and direct electronic interfaces), and
physicians research and diagnostic database tools.
JHB
--------------------
Employee Initials
-13-
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF PRIMARY AND FULLY PRO FORMA EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DESCRIPTION 1996 1995 1994
- ----------- --------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding during the period....... 71,225 56,591 50,128
Shares issuable upon assumed exercise of stock options, less
amounts assumed repurchased under the treasury stock
method.................................................... -- -- 3,700
Preferred Stock............................................. -- -- 6,417
--------- -------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period................. 71,225 56,591 60,245
========= ======== =======
Pro forma net income (loss)................................. $(123,642) $ (8,504) $30,706
========= ======== =======
Pro forma net income (loss) per common share................ $ (1.74) $ (0.15) $ 0.51
========= ======== =======
FULLY
Weighted average shares outstanding during the period....... 71,225 56,591 50,128
Shares issuable upon assumed exercise of stock options, less
amounts assumed repurchased under the treasury stock
method.................................................... -- -- 4,255
Preferred Stock............................................. -- -- 6,417
Convertible Debentures...................................... -- -- 4,527
--------- -------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period................. 71,225 56,591 65,327
========= ======== =======
Pro forma net income (loss)................................. $(123,642) $ (8,504) $30,706
========= ======== =======
Interest adjustment......................................... -- -- 2,614
--------- -------- -------
$(123,642) $ (8,504) $33,320
--------- -------- -------
Pro forma net income (loss) per common share................ $ (1.74) $ (0.15) $ 0.51
========= ======== =======
</TABLE>
2
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Medaphis Corporation owns 100% of the capital stock of each of the following
corporations:
(i) Healthcare Recoveries, Inc., a Delaware corporation;
(ii) Medaphis Physician Services Corporation, a Georgia corporation;
(iii) Gottlieb's Financial Services, Inc., a Georgia corporation;
(iv) Medical Management Sciences, Inc., a Maryland corporation;
(v) Medaphis Services Corporation, a Georgia corporation;
(vi) Medaphis Services Holding Corporation, a Georgia corporation;
(vii) Medaphis Healthcare Information Technology Company, a Georgia
corporation;
(viii) Automation Atwork, a California corporation;
(ix) Consort Technologies, Inc., a Georgia corporation;
(x) Health Data Sciences Corporation, a Delaware corporation;
(xi) Imonics Corporation, a Georgia corporation;
(xii) Rapid Systems Solutions, Inc., a Maryland corporation; and
(xiii) BSG Corporation, a Delaware corporation.
Medaphis Physician Services Corporation owns 100% of the capital stock of
Medaphis Information Processing Corporation, a Georgia corporation.
Medaphis Services Corporation owns 100% of the capital stock of each of the
following corporations:
(i) ARTRAC Corporation, a Georgia corporation;
(ii) AssetCare, Inc., a Georgia corporation;
(iii) National Healthcare Technologies, Inc., an Indiana corporation;
and
<PAGE> 2
(iv) Central Healthcare Services, Inc., a Georgia corporation.
ARTRAC Corporation owns 100% of the capital stock of ARTRAC Healthcare
Resources, Inc., a Georgia corporation.
AssetCare, Inc. owns 100% of Amerikids, a California corporation.
Central Healthcare Services, Inc. owns 100% of the capital stock of Shure
Communications and Technologies, Inc., a Texas corporation.
Health Data Sciences Corporation owns 100% of the capital stock of Health
Data Sciences, Limited, a foreign subsidiary formed in Canada.
Imonics Corporation owns 100% of the capital stock of Imonics GmbH and 50%
of the capital stock of Bertelsmann Imonics GmbH & Co. KG, both of which are
foreign subsidiaries formed in Germany.
BSG Corporation owns 100% of the capital stock of BSG Alliance/IT, Inc., a
Delaware corporation and BSG Capital, Inc., a Delaware corporation.
BSG Alliance/IT, Inc. owns 100% of the capital stock of SageComm
International Limited, a foreign subsidiary formed in the U.K.
BSG Capital, Inc. owns 51% of the capital stock of alliance/IT L.L.C., a
Delaware Limited Liability Company.
-2-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
No. 333-1800 of Medaphis Corporation on Form S-4 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 March 31, 1997 (which expresses an unqualified opinion
and includes an explanatory paragraph relating to a going concern uncertainty),
appearing in the Annual Report on Form 10-K of Medaphis Corporation for the year
ended December 31, 1996.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,631
<SECURITIES> 0
<RECEIVABLES> 193,880
<ALLOWANCES> 13,260
<INVENTORY> 0
<CURRENT-ASSETS> 269,385
<PP&E> 97,850
<DEPRECIATION> 0
<TOTAL-ASSETS> 815,624
<CURRENT-LIABILITIES> 193,752
<BONDS> 0
0
0
<COMMON> 717
<OTHER-SE> 391,573
<TOTAL-LIABILITY-AND-EQUITY> 815,624
<SALES> 608,313
<TOTAL-REVENUES> 608,313
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 790,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,585
<INCOME-PRETAX> (193,582)
<INCOME-TAX> (68,961)
<INCOME-CONTINUING> (124,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,621)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
<PAGE> 1
EXHIBIT 99.2
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- ----------------------------------------------
: CIVIL ACTION NO.
IN RE 1996 MEDAPHIS CORPORATION : 1:96-CV-2088-FMH
SECURITIES LITIGATION :
: PLAINTIFFS DEMAND
A JURY TRIAL
- ---------------------------------------------- -----------------
CONSOLIDATED SECOND AMENDED CLASS ACTION COMPLAINT
FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
---------------------------------------------
Pursuant to pretrial Order No. 2 entered by the court on October 23,
1996, plaintiffs, on behalf of themselves and all others similarly situated, by
their attorneys, allege the following upon information and belief (except for
those allegations which pertain to plaintiffs and their attorneys, which
allegations are based on personal knowledge). Plaintiffs' information and belief
is based, inter alia, on the investigation made by and through plaintiffs'
attorneys, which investigation included, without limitation, a review and
analysis of various public filings made by and articles concerning Medaphis
Corporation and related entities, press releases, reports of securities
analysts, press reports, and other investigatory efforts.
NATURE OF THE ACTION
1. This is a class action brought against Medaphis Corporation
("Medaphis" or the "Company"), and certain of its officers and directors, on
behalf of a plaintiff class (the "Class") consisting of all persons who
purchased or otherwise acquired Medaphis common stock between February 6, 1996
and October 21, 1996, inclusive (the "Class Period"), and who
<PAGE> 2
sustained damages thereby. On behalf of themselves and the members of the Class,
plaintiffs seek to recover damages caused by defendants' violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act").
Certain plaintiffs also assert claims under the Securities Act of 1933 (the
"Securities Act") on behalf of a sub-class (the "Sub-Class") consisting of
persons and entities who, in connection with the HDS Merger (described below),
acquired Medaphis stock during the Class Period pursuant to a registration
statement and prospectus issued by the Company.
2. Medaphis sells outsourced business management services to
doctors and hospitals, primarily for the management of billing and accounts
receivable. For several years, Medaphis has been pursuing a strategy of
aggressive growth through acquisitions, reportedly having acquired more than 40
companies that provide business management services and systems primarily to
physicians and hospitals. For the most part, Medaphis used its common stock as
currency in connection with this acquisition strategy.
3. In order for Medaphis to be able to continue to grow by
making acquisitions through exchanges of its stock, it was imperative that the
company's stock be maintained at high prices. Defendants maintained and
increased the price of Medaphis stock by presenting continued growth in the
Company's reported revenues and earnings, as well as positive developments in
Medaphis' business operations and strategies.
4. One of the ways in which defendants touted the Company's
business and prospects was to boast of the historical and anticipated future
success of Imonics, Inc. ("Imonics"), which was acquired by the Company in
December of 1994. Imonics specialized in systems integration and client service
computing; that is, Imonics helped companies to
- 2 -
<PAGE> 3
coordinate different types of computer systems to work together and to connect
numerous (and sometimes different) desktop computers to a single "server"
technology. Defendants publicly represented that Imonics was a major contributor
of profits and revenues to Medaphis' overall results. Medaphis also placed
Imonics in charge of the "re-engineering" of Medaphis' core physician billing
business, known as Medaphis Physicians Services Corporation ("MPSC"), in which
it provided critical software integration services that would supposedly make
MPSC more efficient. According to defendants, Imonics provided Medaphis with an
"immense competitive advantage." These and other positive statements of similar
import concerning Imonics and the MPSC re-engineering project permeated
defendants' public statements during the Class Period. At the time these
representations were made, however, and as the investment community was unaware
until the end of the Class Period, Imonics was experiencing severe operational
problems including, among other things, excessive staffing and payroll,
inadequate cost controls and significant cost overruns, and poor operating
performance and shoddy execution on critical projects. Unbeknownst to the
investing public, these problems were so severe that they negated Imonics'
ability to perform as positively portrayed by defendants.
5. Yet another way in which defendants ensured that Medaphis
remained a darling of the investment community was to boast of the acquisitions
made by the Company over the years, and the successful and synergistic
integration of the acquired companies into Medaphis' overall business
operations, especially the Imonics operations. However, defendants knew, but
concealed from the public until the close of the Class Period, that at the time
these statements were being made by defendants, the integration of many of the
newly acquired
- 3 -
<PAGE> 4
subsidiaries with the operations of Imonics was failing, and doomed to ultimate
failure in view of the dilapidated operating condition of Imonics.
6. Defendants also realized that, in order to maintain
Medaphis' stock price, it was important that the Company meet earnings estimates
being made by and for it by securities analysts. Therefore, on February 6, 1996
(the beginning of the Class Period), the Company reported record operating
results for the fourth quarter and year ended December 1995, results which were
precisely in line with analysts' expectations. It was not until the close of the
Class Period, in October of 1996, that the investment community was stunned to
learn, by the Company's own admission, that these results were materially false
and misleading as a result of defendants' employment of improper and deceptive
accounting practices.
7. Having artificially propped up reported earnings for the
fourth quarter and year ended December 31, 1995, defendants were under enormous
pressure to continue the trend of reporting increased earnings for the first
quarter of 1996. The opportunity to do so arose in February 1996, when Medaphis,
through Imonics, entered into a joint venture (the "Joint Venture") with a
subsidiary of the German conglomerate Bertelsmann AG ("Bertelsmann"), to develop
systems integration projects for customers in Europe. In turn, the Joint Venture
then signed a multi-year systems integration contract (the "Systems Integration
Contract") to provide services to a major telecommunications company.
8. Immediately upon entering into the Systems Integration
Contract, Medaphis recognized $12.5 million of earnings before income taxes and
approximately $7.6 million in net earnings -- earnings which represented a
majority of total reported net income for its first quarter ended March 31,
1996, and which enabled the Company on April 23, 1996 to
- 4 -
<PAGE> 5
report record revenues and earnings for the quarter. Predictably, in reaction to
these results, Medaphis common stock soared to a near-record high of $48.50 per
share. However, the investment community was not aware until the end of the
Class Period that the first quarter results (like those reported only two months
earlier) were materially false and misleading, and that the recognition of $12.5
million as net income from the Joint Venture at the time of the contract's
signing violated Generally Accepted Accounting Principles as well as the
Company's own stated policy relating to the recognition of revenue. The earnings
had been recognized albeit artificially -- for the purpose of prolonging the
illusion of growth and success.
9. The facade that defendants had created began to crumble on
August 14, 1996, when -- contrary to the expectations theretofore fostered by
the Company -- Medaphis surprised the investment community by reporting that it
would suffer a substantial loss for the quarter ended September 30, 1996. This
reversal was attributable to the need to take write-offs in the total amount of
$35 to $40 million which resulted, among other factors, from: the Company's
falsification of its reported earnings by over $9 million for the first quarter
of 1996; and a $15 million write-off arising from the need to reorganize Imonics
due to the significant operational problems that were known internally but
concealed throughout the Class Period.
10. The Company also disclosed on August 14, 1996 that,
contrary to its previous representations that the Company's technology division
(which included Imonics) was "offsetting" margin and other pressures being
experienced by MPSC, Imonics was suffering from severe operational problems such
that it was not and could not offset pressures adversely affecting MPSC. In
addition to Imonics' problems, the Company revealed for the first time that yet
another highly touted subsidiary, Automation Atwork ("Atwork"), was experiencing
weak
- 5 -
<PAGE> 6
sales and serious problems with one of its new product lines, and that such
problems had existed since late 1995.
11. The Company further surprised the market on August 14,
1996 by announcing that, as a result of Imonics' severe operational difficulties
and problems associated with the merger of Imonics with other newly acquired
companies, Medaphis could no longer pursue a "growth through acquisitions"
strategy, which had previously been touted by defendants as the key to the
Company's success and the engine of future earnings growth. This acknowledgment
stood in contrast to defendants' numerous earlier statements, which portrayed
Imonics as the Company's great revenue and profit engine and boasted that the
various mergers involving Imonics were progressing seamlessly. It was also
revealed on August 14, 1996 that the operational problems at Imonics were so
significant that Imonics was completely unable to perform its existing
obligations under the Joint Venture and that (unbeknownst to the investing
public), well before the end of the Class Period, the problems were so severe
that Bertelsmann, Imonics' partner in the Joint Venture, insisted that Medaphis
either renegotiate the terms of the Systems Integration Contract or abandon the
agreement altogether.
12. Predictably, the day after these negative announcements,
the market price of Medaphis common stock plummeted by $21.375 per share, or
60%, on extraordinarily high volume of almost 43 million shares, representing
approximately 60% of all such shares then outstanding, to close at $14.25 per
share on August 15, 1996.
13. Yet, as surprising as it was, the company's August 14,
1996 release was itself false and misleading and was only the tip of the
iceberg. After the surprising August 14, 1996 announcement, defendants
represented to analysts and investors that the Company had
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identified all of the problems affecting Medaphis and "concluded that all of the
potential problems have been reserved against."
14. In light of these assurances, the market was shocked on
October 22, 1996, when the Company issued a press release announcing for the
first time that its previously reported revenues and earnings for the fourth
quarter and full year of 1995 were false and had to be restated. The October 22,
1996 announcement also revealed: that the company had written-off additional
previously concealed amounts totalling in the millions of dollars relating to a
reorganization of Imonics; and that the entire senior management of Imonics had
been fired. As a result of these stunning developments, Medaphis would suffer
nearly double the loss announced only two months earlier for the third quarter
1996, and was forced to reduce earnings projections for 1997.
15. The October 22, 1996 press release explained that the
restatements of earnings for the fourth quarter and full year of 1995 were the
result of improperly recorded revenues booked in connection with a major license
agreement executed in December 1995, and other unspecified transactions. In
summary, in its zeal to report growing revenues and profits, the Company
fraudulently recognized earnings and revenues from one or more license
agreements during 1995 on the basis that the agreements were unconditional,
while secretly sending the customers involved side letters relieving the
customer of obligations under the agreement. The revelation that the previously
reported earnings were false reduced -- with the stroke of a pen -- reported
fourth quarter 1995 operating results from net income of approximately $4
million to a loss of $1.1 million for the quarter (a shocking 120% reversal). In
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a similar vein, the previously reported loss of $3.4 million for full year 1995
more than doubled to a restated loss of approximately $8.5 million.
16. Not surprisingly, the October 22 announcements devastated
the market price of Medaphis stock, this time erasing an additional $450 million
in market value as the stock plunged in a single day by $6.375 (or 38%) from
$16.75 to $10.375 per share, which represented a 52-week low. Prior to the
August and October 1996 disclosures, Medaphis common stock traded at prices in
the range of $32.75 to $53.25 per share.
17. In addition to pummeling the price of the Company's stock,
the surprise announcements issued at the end of the Class Period shattered the
credibility of Medaphis with the investment community. Indeed, in commenting
upon these startling disclosures, securities analysts issued blistering
criticisms of the defendants' credibility. One firm, Deutsche Morgan
Grenfell/CJL, complained in an October 23, 1996 report that [t]here were clearly
more negative issues at hand within the Company than were delineated in the
August pre-announcement," and that "we don' t believe management has been as
forthcoming as we would like with operational issues." (emphasis added). Another
firm, Donaldson, Lufkin & Jenrette, complained that Medaphis "management had
suggested that MPSC had turned the corner in the second quarter" and, as a
result, now "have no credibility with investors." Cowen & Co. termed these
developments a "complete shocker" in view of the Company's contrary
representations during the Class Period.
18. Plaintiffs and the other members of the Class and the
Sub-Class, who purchased or otherwise acquired Medaphis stock at artificially
inflated prices, have suffered substantial damages by reason of defendants'
wrongful conduct.
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JURISDICTION AND VENUE
19. The claims asserted herein arise pursuant to Sections
10(b) and 20(a) of the Exchange Act, as amended, 15 U.S.C. Sections 78j(b) and
78t(a), and Rule l0b-5 promulgated thereunder by the Securities and Exchange
Commission ("SEC"), 17 C.F.R. Section 240.10b-5; and Sections 11, 12(a) (2) and
15 of the Securities Act, 15 U.S.C. Sections 77k, 771(a) (2), and 77o.
20. This Court has jurisdiction over the subject matter of
this action pursuant to Section 22 of the Securities Act, 15 U.S.C. Section 77v;
Section 27 of the Exchange Act, 15 U.S.C. ss.78aa; and 28 U.S.C. Sections 1331
and 1337, as amended.
21. Venue is proper in this District under Section 22 of the
Securities Act and Section 27 of the Exchange Act, 15 U.S.C. Section 78aa.
Many of the acts and transactions giving rise to the violations of law
complained of herein, including the preparation and dissemination to the
investing public of false and misleading information, occurred in this
District. Further, defendant Medaphis has its principal place of business in
this District.
22. In connection with the acts, conduct and other wrongs
complained of herein, the defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the United States mails and
interstate telephone communications, and the facilities of the national
securities exchanges.
ORGANIZATION OF THE COMPLAINT
23. Counts I and II of this Complaint are brought on behalf of
the Class, identified in paragraph 31 hereof, pursuant to Sections 10(b) and
20(a) of the Exchange Act.
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24. Counts III, IV and V of this Complaint are brought on
behalf of the Sub- Class, identified in paragraph 31 hereof, and are based only
on the false and misleading statements made in the Registration Statement and
Prospectus issued in connection with Medaphis' merger with Health Data Sciences
Corporation (the "HDS Merger"). These claims are brought pursuant to Sections
11, 12 (a) (2) and 15 of the Securities Act.
THE PARTIES
PLAINTIFFS
25. The following representative plaintiffs appointed by the
Court as Lead Plaintiffs purchased or otherwise acquired Medaphis stock during
the Class Period as identified in their certifications previously filed with the
Court, and were damaged thereby: Carley Capital Group ("Carley"); Catherine
Baker knoll, State Treasurer of the Commonwealth of Pennsylvania, as custodian
of the Pennsylvania School Employees Retirement System Pension Fund; Vicki Mann;
Leonard C. Mead, Jr.; Dennis McDowell; PBHG Growth Fund; Raymond E. and Deborah
J. Smith, Trustees of the Smith Trust; Deborah Ann Smith; and Management Group,
L.P. ("WME"). In connection with their purchases of Medaphis Stock, the Lead
Plaintiffs suffered losses in excess of $35 million.
26. Additional persons who have filed complaints and/or signed
certifications in connection with this consolidated action, but who were not
named as lead plaintiffs are as follows: Samuel 8. Cinnamon; Robert Dawes; Efim
Derevayanny; Deborah M. Dowd; Kenneth W. Gross; Carol Ann Hayes; James V. Hayes;
Carol Ann Hayes and Vincent Brogna, Trustees of the VRB Irrevocable Trust dated
April 1, 1970; Susan Heslip; Murray Lazar; Werner Levy;
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Frederick R. Adler; Nicholas G. Metcalf; Michel Neiman by Loic Lamoureux,
attorney-in-fact; Joanne M. Noumi; Arthur Rosen; Abraham L. Slomovics; Sarah K.
Steiner; Eric Stewart; Ezriel Tauber; Hal Wickey; Angela Witt; Joseph F.
Anzlovar; Hamilton Lee Durning; Lisa Shepley; Carole Shepley; and William Yates.
These persons purchased or otherwise acquired Medaphis stock during the Class
Period as identified in certifications previously filed with the Court and were
damaged thereby.
27. While the persons identified in paragraph 26 above were
not appointed lead plaintiffs by the Court, they remain ready and willing to
serve as class representatives and lead plaintiffs if necessary.
DEFENDANTS
28. Defendant Medaphis is a corporation organized and existing
under the laws of the State of Delaware. Medaphis maintains its principal
executive offices at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia.
Medaphis common stock is and was, at all relevant times, actively traded on the
NASDAQ National Market System, under the symbol "MEDA," and was registered
pursuant to Section 12 of the Exchange Act. As of August 12, 1996, there were
reportedly more than 71 million shares of Medaphis common stock outstanding.
Pursuant to the requirements of the Exchange Act and the regulations promulgated
thereunder by the SEC, Medaphis files annual, quarterly and other reports with
the SEC.
29. (a) Defendant Randolph G. Brown ("Brown") was, at all
relevant times until his resignation on October 31, 1996, the President, Chief
Executive Officer and a Director of Medaphis. Defendant Brown also served as a
member of the Executive Committee of
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Medaphis' Board of Directors, which possesses the power and authority of the
Board in the management of the business and affairs of the Company.
(b) Defendant Michael R. Cote ("Cote") is and was, at
all relevant times, Senior Vice President-Finance and Chief Financial Officer of
the Company. Press releases issued by defendants during the Class Period
consistently identified Cote as the contact person at the Company for purposes
of communications with the investment community.
(c) Defendant James S. Douglass ("Douglass") is and
was, at all relevant times, Vice President, Corporate Controller, and Chief
Accounting Officer of the Company.
(d) The individual defendants identified in the
foregoing subparagraphs are sometimes referred to herein collectively as the
"Individual Defendants."
30. The Individual Defendants, because of their directorial,
officer and/or stockholder positions with the Company, controlled and/or
possessed the power and authority to control the contents of its quarterly and
annual reports and filings, press releases and presentations to securities
analysts and, thereby, the investing public. Each Individual Defendant attended
management and/or board meetings and was provided with copies of the Company's
reports and press releases alleged herein to be misleading, before or shortly
after their issuance, and each had the ability and opportunity to prevent their
issuance or cause them to be corrected.
CLASS ACTION ALLEGATIONS
31. All plaintiffs bring this class action pursuant to Fed. R.
Civ. P. 23(a) and (b)(3) on behalf of a Class consisting of all persons who
purchased or otherwise acquired
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Medaphis common stock between February 6, 1996 and October 21, 1996, inclusive,
and who were damaged thereby. Lead Plaintiffs Carley and WME assert Counts III,
IV and V herein on behalf of a Sub-Class consisting of all persons who acquired
Medaphis common stock pursuant to the HDS Merger, described below. Excluded from
the Class and Sub-Class are the defendants; members of the immediate families of
the Individual Defendants; any entity in which any defendant or excluded person
has or had a controlling interest; the officers and directors of Medaphis; and
the legal affiliates, representatives, heirs, controlling persons, successors,
and predecessors in interest or assigns of any such excluded party.
32. The members of the Class and Sub-Class are so numerous and
geographically dispersed that joinder of all members is impracticable. While the
exact number of Class and Sub-Class members is unknown at this time and can only
be determined by appropriate discovery, plaintiffs believe that there are
thousands of members of the Class and Sub-Class located throughout the United
States. As of August 12, 1996, there were 71,848,856 shares of Medaphis common
stock outstanding. The shares outstanding include approximately 6.2 million
shares of Medaphis common stock that were issued by the Company to hundreds of
HDS shareholders in connection with the HDS merger. Throughout the Class Period,
Medaphis shares were actively traded on the NASDAQ National Market System. Many
millions of shares of Medaphis common stock were traded during the Class Period.
Record owners and other members of the Class and Sub-Class may be identified
from records maintained by the Company and/or its transfer agent and may be
notified of the pendency of this action by mail and publication, using forms of
notice similar to those customarily used in securities class actions.
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33. Plaintiffs' claims are typical of the claims of the
members of the Class and the Sub-Class, because all members of the Class and
Sub-Class acquired Medaphis stock at artificially inflated prices and were
damaged as a result of the defendants' violations of the federal securities laws
complained of herein.
34. Plaintiffs will fairly and adequately protect the
interests of the Class and the Sub-Class and have retained counsel who are
experienced and competent in class and securities litigation. Plaintiffs have no
interest that is contrary to or in conflict with those of the members of the
Class or the SubClass.
35. A class action is superior to all other available methods
for the fair and efficient adjudication of this controversy, since joinder of
all members of the Class and SubClass is impracticable. Furthermore, as the
damages suffered by individual members of the Class and Sub-Class may be
relatively small, the expense and burden of individual litigation make it
virtually impossible for the members of the Class and Sub-Class individually to
seek redress for the wrongs done to them. There will be no difficulty in the
management of this action as a class action.
36. Questions of law and fact common to the members of the
Class and Sub- Class predominate over any questions that may affect only
individual members because defendants have acted on grounds generally applicable
to the entire Class and Sub-Class. Among the common questions of law and fact
are:
(a) Whether defendants violated the federal
securities laws as alleged herein;
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(b) Whether the Company's publicly disseminated
releases and statements omitted and/or misrepresented material facts, and
whether defendants breached any duty to convey material facts or to correct
material facts previously disseminated;
(c) Whether defendants participated in and pursued
the common course of conduct complained of herein;
(d) Whether defendants acted willfully or recklessly
in omitting and/or misrepresenting material facts;
(e) Whether the market prices of Medaphis stock
during the Class Period were artificially inflated due to the material
nondisclosures and/or misrepresentations complained of herein; and
(f) Whether the members of the Class and SubClass
have sustained damages and, if so, what is the appropriate measure of damages.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD ON THE MARKET DOCTRINE
37. Members of the Class rely upon the presumption of reliance
afforded by the "fraud-on-the-market" doctrine. At all relevant times, the
market for Medaphis common stock was an efficient market. Medaphis stock met the
requirements for listing and was listed and actively traded on the NASDAQ
National Market system, a highly efficient and automated market. Medaphis was
also registered pursuant to Section 12 of the Exchange Act (15 U.S.C. Section
78e) and filed periodic public reports with the SEC and the NASD. Further,
Medaphis regularly communicated with public investors by means of established
market communication
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mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide ranging
public disclosures such as communications with financial press, Dow Jones and
other similar reporting services. Additionally, Medaphis stock was followed by
securities analysts employed by major brokerage firms who wrote reports which
were distributed to the sales force and customers of their respective brokerage
firms and which were publicly available and entered the public marketplace.
Among the various securities firms that regularly followed Medaphis during the
Class Period were Alex. Brown & Sons, Inc.; Bear, Stearns & Co.; Cowen &
Company; Dean Witter Reynolds; Donaldson Lufkin & Jenrette; Hambrecht & Quist;
J.C. Bradford; Jefferies & Company; Mason Cabot; Montgomery Securities; Needham
& Co.; Oppenheimer & Co.; Prudential Securities; Salomon Brothers; Smith Barney;
and UBS Securities.
38. As a result, the market for Medaphis stock promptly
digested current information regarding the Company from all publicly-available
sources and reflected such information in the price of the stock. Moreover,
Medaphis' stock price responded quickly and decisively to adverse Company news
identified in this Complaint, further evidencing the efficiency of the market
for Medaphis stock. Under these circumstances, all persons who purchased or
acquired Medaphis stock during the Class Period suffered similar injury through
their purchase or acquisition of such securities at artificially inflated
prices, and a presumption of reliance applies.
FACTUAL BACKGROUND
1. MEDAPHIS' BUSINESS OPERATIONS AND
METEORIC GROWTH THROUGH ACQUISITIONS
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39. Medaphis has consistently described itself as a leading
provider of business management systems and services to the healthcare industry.
The Company's original and core business consists of billing, collection, and
other outsourced financial services designed to assist its physician clients
with the business management functions associated with providing medical
services. Medaphis also provides subrogation and related recovery services
primarily to healthcare payers, scheduling information management systems to
hospitals and emerging integrated healthcare delivery stems, and systems
integration and work flow engineering systems and services.
40. Medaphis reportedly provides business management systems
and services to over 19,000 physicians and over 2,000 hospitals across the
United States, subrogation and recovery services to healthcare plans covering in
excess of 23 million people nationwide, and systems integration and work flow
engineering systems and services in the United States and abroad. The Company's
operations are organized into two principal operating units: Medaphis Services
Corporation, which includes all doctor and hospital transaction processing
companies, including MPSC; and Medaphis Systems Corporation, which includes all
of Medaphis' technology companies, including its systems integration businesses
(such as Imonics) and its healthcare information businesses (such as Atwork).
41. Over the past several years, a key component of Medaphis'
stated business strategy involved growth through acquisitions of other
businesses, using its stock as currency. Indeed, Medaphis built its reputation
in the investment community by representing itself as a fast-growing company
with an aggressive acquisition program and a successful history of integrating
those acquisitions smoothly into its overall business operations. such
representations
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- -- which, as will be shown herein, were demonstrably false and misleading --
convinced the investment community that the Company's strategy was successful
and poised Medaphis for future earnings growth. Indeed:
Analysts liked the flawless way Medaphis assimilated these
firms [it acquired], which formed the core of the company's
40-plus acquisitions over eight years. As revenue grew
fivefold, Medaphis gained Wall Street stardom. The Atlanta
Journal and Constitution, September 8, 1996.
42. The Company's rising stock price financed Medaphis' growth
strategy. Because Medaphis paid for most of its acquisitions with stock, the
higher the price of the stock, the fewer shares the Company had to exchange to
acquire target businesses.
43. Prior to and during the Class Period, defendants left no
doubt that Imonics -- a company acquired by Medaphis in late 1994 -- was one of
the keys to the Company's success which would enable the Company to continue its
strategy of growth through acquisitions. Medaphis consistently represented that
the Imonics acquisition allowed it to diversify its operations from primarily
billing and accounts receivable management and enabled the Company to offer
integration services to various health care providers and other businesses.
Imonics was also put in charge of re-engineering the physician billing business
of Medaphis, which falls under MPSC, the Company's largest operating unit, which
reportedly accounts for approximately 60% of the Company's total services
revenues. Indeed, with the acquisition of Imonics, Medaphis began a
much-publicized project to re-engineer the paper and labor intensive business of
MPSC in order to significantly reduce personnel-related costs, upgrade the
Company's systems to the
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level of other service industries, and provide for economies of scale.
Defendants have referred to this project as the "Re-Engineering Project".
44. The Re-Engineering Project was designed to allow for the
consolidation of the processing operations of MPSC that had previously been
conducted in over 300 local physician backoffice operations into fewer than 10
large regional data processing centers. The Re-Engineering Project involved
designing and installing software through Imonics to automate the Company's
billing process and reduce the quantity of paper processed.
FALSE AND MISLEADING STATEMENTS
DURING THE CLASS PERIOD
1. DEFENDANT MOTIVATION AND METHODOLOGIES
45. The defendants were aware that in order for Medaphis to
preserve its status as a Wall Street "star," it would have to continue its
aggressive acquisition of high-profit technology companies to generate revenues
sufficient to maintain its growth and cover the high costs of its Re-Engineering
Project. Moreover, to continue its acquisition strategy, Medaphis would have to
use its stock as currency. To this end, beginning at the end of 1995, defendants
set out to increase the price of Medaphis stock and thereby ensure that the
Company's acquisition pipeline remained robust by issuing a series of materially
false and misleading public statements.
46. The materially false and misleading public statements
issued by defendants related in large part to reported financial results and
financial statements that did not comply with Generally Accepted Accounting
Principles ("GAAP"). GAAP encompasses the rules, conventions and practices
recognized and employed by the accounting profession for the preparation of
financial statements. Statements of Financial Accounting Standards are
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promulgated by the profession's Financial Accounting Standards Board, and are
considered the highest authority of GAAP. SEC Regulation S-X (17 C.F.R. Section
210. 4-01(a) (1)) provides that financial statements filed with the SEC which
are not prepared in compliance with GAAP are presumed to be misleading and
inaccurate.
47. Defendants' false and misleading statements also related
to narrative misrepresentations concerning: Medaphis' business operations and
the Re-Engineering Project; Medaphis' earnings growth; the operating
performance, condition and prospects of Imonics; and Medaphis' acquisition and
integration of several companies into the operations of Imonics.
48. Defendants issued these statements directly, through press
releases, SEC filings, and annual and quarterly reports to shareholders.
Defendants also provided guidance to securities analysts and used them as
conduits to provide false and misleading information to the investment
community.
49. In writing their reports, several of which are referred to
herein at paragraphs 52, 53, 54, 85, 89, 106 and 107, securities analysts relied
in substantial part upon information provided to them privately by the Company.
Indeed, it was the Company's practice to have key members of its management
team, including defendants Brown and Cote, communicate with securities analysts
on a regular basis to discuss the Company's business, operations, performance
and prospects. Defendants knew that by disseminating information to the
investment community, investors would rely and act upon such information and
that such information would have an effect on the market price of the Company's
stock.
2. FEBRUARY 6, 1996 PRESS RELEASE ANNOUNCING FOURTH
QUARTER AND YEAR-END 1995 RESULTS AND RELATED
ANALYSTS REPORTS
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50. On February 6, 1996, the start of the Class Period,
defendants issued a press release announcing the Company's results for the
fourth quarter and year ended December 31, 1995. The Company reported fourth
quarter earnings of $11.4 million or $0.22 per share before one-time merger and
other charges. These results, which were in line with analysts' estimates,
represented a more than 50% increase over reported earnings of $0.14 per share
in the fourth quarter of 1994. For the full year of 1995, Medaphis reported
operating earnings of $41.9 million or $0.82 per share before charges,
representing an increase of approximately 80% over reported operating earnings
for the full year of 1994. The Company also reported in the February 6, 1996
release that operating revenues grew 29% in the fourth quarter, to $122.5
million, also in line with analysts' projections. Revenue for the year ended
December 31, 1995 was reportedly $467.8 million, up 47% from $319.1 million in
the same period in 1994.
51. In this press release, defendant Brown noted that the
Re-Engineering Project was progressing well and achieving "significant
milestones," and that the Company's technology division (which includes Imonics
and Atwork) "continued to grow rapidly and show positive operating results
outperforming our expectations in the second half of 1995" and was "effectively
offsetting the margin pressure and results" being experienced by MPSC.
52. Securities analysts following Medaphis, while taking note
of the margin pressures at MPSC, recommended the purchase of Medaphis stock
based on defendants' representations and other information provided by the
Company. For example, on February 7, 1996, one day after the quarterly and
annual operating results were issued, Donaldson, Lufkin & Jenrette issued a
research report which stated:
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Medaphis reported Q4 and year end 1995 results from continuing
operations of $0.22 and $0.82, respectively.... Based on the
results... it is becoming clear that the higher-growth
technology businesses (such as Imonics, Atwork and Consort)
are more than offsetting the margin pressures at MPSC. As MEDA
essentially hit our EPS projections, we remain comfortable
with our $1.07 EPS estimate for this year and a range of $1.40
-1.50 for 1997.
53. In a similar vein, a research report issued by Hambrecht &
Quist on February 7, 1996, again prepared on the basis of information provided
by the Company and/or its senior management, stated:
Management indicates that, in addition to the technology
units, several of the recent acquisitions are experiencing
growth that is well-above the corporate average. Overall, the
Company's internal growth has largely been moderated by a lack
of growth in the MPSC unit. Looking forward, this unit should
see better growth as the re-engineering effort winds down.
MPSC's growth, when combined with the other units, should
accelerate Medaphis' internal growth rate.... The company
continues to progress on the reengineering front.... To
reiterate, while Medaphis' re-engineering is modestly
depressing margins in the near-term, we believe the long term
efficiencies gained will more than offset any pricing pressure
in the core billing and receivables market and fuel
significant EBITDA margin expansion in 1997.
54. Likewise, a report issued by the firm of Morgan Stanley on
February 6, 1996, on the basis of information provided by the Company and/or its
senior management, stated in relevant part:
MEDA's overall fundamentals continue to be buoyed by its
strong technology divisions. We estimate that the companies
Atwork, Imonics, and recently acquired Consort divisions will
be the driving force to margins. We estimate that these
divisions are on the order of 1-2 times more profitable than
MEDA's core A/R, billing business. As evidence of MEDA's
conviction here, it has significantly added to staff at the
Imonics subsidiary, increasing headcount from 80 to 300 in
1995.
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55. The February 6, 1996 press release announcing operating
results for the fourth quarter and full year, 1995, and the information provided
by defendants to the market through the analysts' reports referred to in
paragraphs 50-54 were materially false and misleading in at least the following
respects:
(a) The financial results incorporated and discussed
therein were false and had been achieved only through the use of improper
accounting practices in violation of GAAP. As was ultimately disclosed at the
close of the Class Period, the operating results reported for this period were
improperly and materially overstated by at least $5 million as a result of the
reporting of revenues and profits under software license agreements entered into
by Imonics, which is permissible under GAAP only where customers are
unconditionally obligated to perform under the agreements. In fact, unbeknownst
to the public, in order to create the illusion that more customers had signed
such license agreements than was actually the case, the Company had aggressively
enlisted one or more major customers, but then provided them with secret side
letters, enabling the customer(s) to avoid paying all of the fees payable under
the agreements. This was improper under GAAP, in the following respects:
Accounting Research Bulletin ("ARB") 13, Chapter 1, section A:
Profit is deemed to be realized when a sale in the ordinary
course of business is effected, unless the circumstances are
such that the collection of the sale price is not reasonably
assured. (Emphasis added).
Financial Accounting Standards Board ("FASB") Statement of
Concepts ("CON"), paragraph 83 (a): Revenues and gains are
generally not recognized until realized or realizable.
Revenues and gains are realized when products (goods or
services), merchandise, or other assets are exchanged for cash
or claims to cash. Revenues and gains are realizable when
related assets received or held are readily convertible to
known amounts of cash or claims to cash. (Emphasis added).
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FASB Statement of Standards No. 5, paragraph 27: Contingencies
that might result in gains usually are not reflected in the
accounts since to do so might be to recognize revenue prior to
its realization.
FASB Statement of Standards No. 48 ("FAS48"), paragraph 6: If
an enterprise sells its product but gives the buyer the right
to return the product, revenue from the sales transaction
shall be recognized at time of sale only if all of the
following conditions are met: (I) The seller's price to the
buyer is substantially fixed or determinable at the date of
sale; (2) The buyer has paid the seller, or the buyer is
obligated to pay the seller and the obligation is not
contingent on resale of the product; (3) The buyer's
obligation to the seller would not be changed in the event of
theft or physical destruction or damage of the product; (4)
The buyer acquiring the product for resale has economic
substance apart from that provided by the seller; (5) The
seller does not have significant obligations for future
performance to directly bring about resale of the product by
the buyer; and the amount of future returns can be reasonably
estimated.
Where resolution of a significant contingency is part of a license agreement,
then "a sale in the ordinary course of business" has not been "effected." (ARB
43). Additionally, if the contingency is not resolved, then "related assets
received or held are [not] readily convertible to known amounts of cash or
claims to cash." (FASB CON 5). Further, if the non-satisfaction of the
contingency results in the "return" of the product or the absence of any
obligation of the buyer to pay for the license fee, then the buyer is not
"obligated to pay the seller" and revenue may not permissibly be recognized
under the license agreement. (FAS48). As detailed in paragraphs 125-129, the
falsification of reported revenue in the fourth quarter of 1995 ultimately
required the Company, at the end of the Class Period, to restate the results to
reduce reported net income by $5.1 million, resulting in a net loss of $1.1
million rather than the previously reported net income of $4 million for the
quarter, and a net loss of $8.5 million for 1995, over double the previously
reported net loss of $3.4 million for the year.
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(b) In addition, the representations that the
technology division (consisting primarily of Imonics and Atwork) was
"effectively offsetting" the margin pressures and results at MPSC were
materially false and misleading when made because the technology division was
not able to offset revenue, growth and margin pressures affecting MPSC because:
(i) Imonics was experiencing severe operational problems including, among other
things, excessive staffing, inadequate cost controls, and poor operating
performance so severe that they negated Imonics' ability to perform as
represented; and (ii) Atwork's sales pipeline had been in decline since
September of 1995, and there were significant operating flaws, or "bugs," in
certain of the Atwork division's software products introduced at year end 1995.
3. PUBLIC STATEMENTS RELATING TO
THE RAPID SYSTEMS AND BSG MERGERS
56. Having disseminated its materially false and misleading
press release of February 6, which included false financial results showing
increasing net income rather than the true losses the Company was actually
suffering, Medaphis implemented its scheme to use its stock (the price of which
was artificially inflated as a result of defendants' misstatements) as currency
for additional acquisitions.
57. Thus, on February 29, 1996, defendants caused Medaphis to
file with the SEC a Form 5-4 Registration Statement (the "February 1996
Registration Statement"), which was signed by defendants Brown, Cote and
Douglass. Defendants filed the February 1996 Registration Statement in order to
issue 2 million shares of Medaphis common stock which the Company reported "may
be offered by Medaphis from time to time in connection with acquisitions of
other businesses or properties."
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58. On March 13, 1996, the defendants issued a press release
announcing that Medaphis had signed a definitive agreement to acquire all of the
outstanding capital stock of Rapid Systems Solutions, Inc. ("Rapid Systems") (a
closely-held, Columbia, Maryland based computer systems integration company) in
exchange for 1,135,000 shares of Medaphis common stock, worth approximately $43
million (the "Rapid Systems Merger"). Defendant Brown stated that Rapid Systems
was acquired specifically because it complemented "the work Imonics is doing on
the Medaphis re-engineering project."
59. Two days later, on March 15, 1996, defendants issued a
press release announcing yet another acquisition, this time reporting that
Medaphis had executed a definitive agreement to acquire all of the outstanding
capital stock of BSG Corporation ("BSG") for approximately $350 million in
stock, including 7.5 million shares of Medaphis common stock and assumption by
Medaphis of BSG stock options and stock rights representing an additional 2.66
million shares of Medaphis common stock (the "BSG Merger"). This transaction
represented the largest acquisition yet for Medaphis. According to the March 15
announcement, the Company's "existing systems integration and information
technology (IT) services companies -- including Imonics Corporation and Rapid
Systems Solutions Inc. -- will come under the BSG umbrella, thereby creating the
industry's largest IT services company focused purely on client/server
technology and applications."
60. Significantly, defendant Brown, in emphasizing the
importance of the BSG Merger, assured investors that BSG had the necessary
infrastructure to manage successfully the integration of both Imonics and Rapid
Systems to create successfully the largest client/server technology services
company in the country:
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The merger with BSG is a major milestone in increasing our
technology capabilities. Working with Imonics and Rapid
Systems Solutions, BSG will lead our systems integration
efforts and we believe will accelerate transformation of the
way transaction processing is performed in the healthcare
industry.
. . . We are excited about our newly acquired capabilities in
client/server consulting and systems integration. Imonics and
Rapid Systems Solutions combined with BSG have created. we
believe. the largest pure client/server technology services
company in the country. (Emphasis added).
61. A March 18, 1996 Wall Street Journal article reported in
connection with the planned BSG Merger that:
[t]he company said it decided to make a bigger push into
systems integration following the successful 1994 acquisition
of Imonics, which has seen its profit double since the
purchase and its employees increase, according to Michael
Cote, Medaphis' chief financial officer.
62. As a result of the foregoing positive announcements, on
March 20, 1996, Medaphis shares hit a 52-week high of $53.25, a 40% increase
over the stock's March 12, 1996 close of $37.50.
63. The statements concerning the synergies and efficiencies
of the Rapid Systems and BSG Mergers, and the Company's integration of the
operations of Rapid Systems and BSG into its overall business identified in
paragraphs 57-61 above were materially false and misleading. Among other
reasons, because of the severe operational problems at Imonics summarized at
paragraphs 55(b) and 69 hereof, there was no reasonable basis for the
representations concerning the synergies offered by the merger of Imonics and
Rapid Systems with BSG's operations. Defendant Cote's representations concerning
the supposed profitability of Imonics were false and misleading for the same
reason, as well as for the added reason that, as
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set forth in greater detail at paragraph 55(a) above, Medaphis' publicly
reported profits were materially false and misleading as a result of improper
revenue recognition practices relating specifically to improprieties at Imonics.
64. On April 3, 1996, in connection with the BSG Merger,
Medaphis filed with the SEC a Registration Statement on Form 5-4 (The "BSG
Registration Statement") and a Proxy Statement/Prospectus (the "BSG
Prospectus"). The BSG Registration Statement was signed by defendants Brown,
Cote and Douglass.
65. The BSG Prospectus, which was included as part of the BSG
Registration Statement filed with the SEC, incorporated by reference Medaphis'
Annual Report on Form 10-K for the fiscal year ended December 31, 1995,
including the audited financial statements incorporated by reference therein,
(discussed at paragraphs 70-80 herein), and incorporated the false and
misleading statements of the Company's year-end and fourth quarter 1995 results
as reported in the February 6, 1996 press release referred to at paragraph 50
above. These documents represent that the financial results presented therein
"include all adjustments ... that are necessary for a fair presentation of the
financial position and results of operations for such periods."
66. In addition, the BSG Prospectus repeated defendants'
misleading statements regarding the successful consolidation of Imonics, BSG and
Rapid Systems, stating that the merger "will position Medaphis as the leading
client/server systems integration and workflow engineering company in the United
States." The BSG Prospectus also falsely stated that:
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Finally, management believes that BSG, Rapid Systems and
Imonics complement each other and that the combination of
these three organizations within Medaphis should produce
synergies. . . . Imonics possesses extremely talented object
oriented programming expertise, an existing library of object
codes and proprietary pricing methodologies. Management of
Medaphis believes that each of the foregoing attributes of
BSG, Rapid Systems and Imonics are complimentary [sic] in
nature and together position Medaphis to take advantage of
systems integration and workflow engineering projects within
and outside the healthcare industry.
67. The BSG Prospectus also provided the following highly
positive description of the Re-Engineering Project:
In order to increase efficiency and position Medaphis to take
advantage of the opportunities being created by ongoing
changes in the healthcare industry, Medaphis has commenced a
re-engineering project which will involve, among other things,
the consolidation of the billing and accounts receivable
processing function of its billing and accounts receivable
management business, which is currently operated out of
approximately 300 local business offices around the country,
into approximately 10 remote processing centers. In addition
to the consolidation of processing operations, the
re-engineering project will involve the establishment of
advanced client/server computing at the local sales and
service offices and at remote processing centers. This
computing infrastructure will be designed to significantly
reduce paper handling and greatly increase the speed of record
recovery while permitting communication over a wide-area
network and across geographic markets and linking together all
of Medaphis' operating divisions . .
68. The BSG Prospectus continued:
Medaphis believes the re-engineering project will provide its
customers and employees with the full information processing
and communications power of an advanced distributed computing
system. The re-engineering project is designed to enable
Medaphis to continue to grow and achieve economies of scale in
several areas, including training, client service, patient and
payor relations, transaction processing operations and
electronic data interchange capabilities. The project is
expected to be substantial Iv completed during 1997. Although
the re-engineering project will involve
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consolidation of the processing functions of its billing and
accounts receivable management services. Medaphis intends to
continue to maintain and place increased emphasis on the sales
and customer service functions of this business on a local
basis. (Emphasis added).
69. (a) The representations contained in the BSG Registration
Statement and Prospectus, which incorporated Medaphis' operating results for the
fourth quarter and full year 1995 by reference, as well as the May 7, 1996 press
release, were materially false and misleading in the manner and for the reasons
specified in paragraph 55(a) above.
(b) In addition, defendants' representations regarding the
progress, positive results, and expected completion date of the Re-Engineering
Project were materially false and misleading and lacked a reasonable basis when
made in that they misrepresented and/or failed to disclose that: (i) progress on
the Re-Engineering Project was being impeded by, among other things, the serious
management, operational, and other problems being experienced by Imonics, set
forth above, and the Company's inability to successfully integrate and
coordinate the acquisitions of BSG and Rapid Systems; (ii) the software designed
to automate the billing process at MPSC was not appropriate for large volume
processing, thus requiring further software development and causing a deferral
of the office consolidation element of the Re- Engineering Project; and (iii) in
light of these problems, the Re-Engineering Project was not likely to be
completed until 1997, if not 1998, contrary to defendants' representations.
(c) Further, defendants' statements regarding the
synergies to be derived from the BSG and Rapid Systems mergers, and the ability
of Medaphis and Imonics to successfully integrate and coordinate these
acquisitions, were materially false and misleading in
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<PAGE> 31
that they misrepresented and/or failed to disclose: (i) the adverse facts
regarding Imonics, identified above at paragraph 55(b); and (ii) that the
integration of Imonics' operations with 8SG and Rapid Systems was not proceeding
well in view of Imonics dilapidated condition, and could not be accomplished
without a complete reorganization of Imonics.
(d) Moreover, defendants' representation that the Company
would "continue to maintain and place increased emphasis on the sales and
customer service functions" of the Company's MPSC division was false and
misleading. As defendants knew or recklessly disregarded, the Company's focus on
the Re-Engineering Project at MPSC was done at the expense of customer service
and customer retention, which was leading to significant revenue declines and
reductions in profitability for Medaphis.
(e) In addition, the increasing staff levels at Imonics,
cited by analysts as a positive growth factor based on defendants'
representations, was, in reality, excessive, as evidenced by the October 22,
1996 disclosure that the Company had terminated 430 employees, including the
entire Imonics senior management team.
4. REPRESENTATIONS CONTAINED IN
THE 1995 10-K AND ANNUAL REPORT
70. On or about April 1, 1996, Medaphis filed with the SEC its
Form 10-K for the fiscal year ended December 31, 1995 (the "1995 l0-K"). The
1995 10-K was signed by, among others, defendants Brown, Cote and Douglass.
71. The 1995 10-K incorporated, at page 19, the same reported
financial results for the fourth quarter and full year of 1995 as were announced
on February 6, 1996 as set forth in paragraph 50 herein. The 1995 10-K also
incorporated by reference the financial
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<PAGE> 32
presentations set forth in the Company's 1995 Annual Report, which is discussed
in greater detail in paragraphs 75-80 hereof. The 1995 10-K further stated, in
relevant part, that such financial presentations therein "include all
adjustments ... that are necessary for a fair presentation of the financial
position and results of operations for such periods."
72. The 1995 10-K boasted of the "core competencies in the
systems integration and work flow engineering fields," and went on to state that
although MPSC was experiencing some "revenue and margins pressures", these
pressures were being "offset" by growth in Medaphis' information management and
systems integration services business (for which Imonics was responsible), and
that the Re-Engineering Project was easing such pressures.
73. The 1995 l0-K also contained a description of the
Re-Engineering Project virtually identical to that set forth in the BSG
Prospectus quoted at paragraphs 65-67 above.
74. With respect to the Company's revenue recognition policy,
the 1995 10-K stated:
REVENUE RECOGNITION. . . .
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.
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<PAGE> 33
Revenues from systems integration contracts are recorded on
the percentage of completion method of accounting. (Emphasis
added).
75. At or about the time that it filed the 1995 10-K, the
Company also issued its 1995 Annual Report. Like the 1995 l0-K, the 1995 Annual
Report incorporated the same reported financial results for the fourth quarter
and full year of 1995 as were announced on February 6, 1996. The 1995 Annual
Report represented that the financial statements set forth therein:
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 cash
flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting
principles.
76. In the 1995 Annual Report, the defendants again touted the
benefits and "positive results" of the Re-Engineering Project, and set forth a
description thereof virtually identical to that set forth in the BSG Prospectus
(see paragraphs 65-67 herein), and in the 1995 l0-K (see paragraphs 70-74
herein). The 1995 Annual Report also represented that:
The positive results of this progressive effort are already in
evidence. Today, Medaphis is a leading provider of information
management systems and systems integration and work flow
engineering systems and services to the healthcare industry
and other industries.
77. The 1995 Annual Report also emphasized the positive
contributions that Imonics had made to the Company's business, stating that,
because of Imonics, the Company had gained an "immense competitive advantage"
and had "re-engineered its future." Defendants assured investors that Imonics
would allow the Company to recognize efficiencies that "will dramatically change
the way business is done." The following excerpt appeared in the 1995 Annual
Report:
IMONICS: A LEADER IN BUSINESS PROCESS
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<PAGE> 34
RE-ENGINEERING AND SYSTEMS INTEGRATION.
With the 1994 acquisition of Imonics. Medaphis re-engineered
its future. A leader in business process re-engineering and
systems integration, Imonics will enable Medaphis to create
internal efficiencies, while being able to offer the same
cost-effective solutions to others throughout the healthcare
industry, and in other industries. For Medaphis, or for any
other customer service or business operation that processes
large volumes of paper, fax and phone calls, Imonics' software
solutions provide an immense competitive advantage. The first
signs of these increased efficiencies are already in evidence
in our Pittsburgh office. And as they are applied to an even
greater extent in the coming months, our belief is that they
will dramatically change the way business is done throughout
our transaction processing operations and, hopefully, our
entire industry. (Emphasis added.)
78. The Annual Report also stated that the progress of the
Re-Engineering project "has been nothing short of remarkable," and that [t]he
impact on customer service is immeasurable."
79. The 1995 Annual Report also praised the Company's 1995
acquisition of Atwork, which was described as "the leading provider of
information systems that schedule the activities of patients and employees in
healthcare." The 1995 Annual Report offered a highly upbeat assessment of
Atwork:
Atwork solves complex scheduling problems in healthcare
management, and they have historically enjoyed a high level of
client satisfaction. Atwork markets four leading products to
healthcare providers. The first, ANSOS, automates nurse
staffing and scheduling, and, as the market leader, is the
most widely used system of its kind. The second, ORSOS, used
for operating room scheduling and inventory management, is the
market leader as well. The third product, One-Call, is used
for enterprise-wide patient scheduling. And finally, One-Staff
is used to schedule and manage all employees throughout the
healthcare enterprise.
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80. The letter to stockholders, included in the 1995 Annual
Report and signed by defendant Brown, stated, among other things, that:
Medaphis has embarked on an aggressive technology initiative
to increase its own internal efficiencies, as well as those of
its clients.
The positive results of this progressive effort are
already in evidence. Today, Medaphis is a leading provider of
information management systems and systems integration and
work flow engineering systems and services to the healthcare
industry and other industries.
***
In the course of solving our own technology problems, we have
discovered a major business opportunity -- the lack of next
generation distributed processing platforms and user-oriented
applications to solve business and information processing
needs of industry in general, particularly healthcare.
81. The representations contained in the 1995 10-K and Annual
Report and the documents incorporated therein by reference, incorporating
Medaphis' operating results for the fourth quarter and full year of 1995, and
Medaphis' revenue recognition policies, were materially false and misleading in
the manner and for the reasons set forth in paragraph 55(a) above. The
representations concerning the finances and operations of Imonics, the progress
of the Re-Engineering Project at MPSC, and the ability of Medaphis and Imonics
to successfully integrate and coordinate the acquisitions of BSG and Atwork were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics and Atwork specified at paragraphs 55(b) and 69 above.
5. REPRESENTATIONS CONCERNING THE BERTELSMANN
JOINT VENTURE AND MEDAPHIS' RESULT. FOR THE
FIRST QUARTER OF 1996 ENDED MARCH 30. 1996
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82. In February 1996, Medaphis, through Imonics, entered into
a Joint Venture with a subsidiary of Bertelsmann, a German corporation.
According to the Company, the Joint Venture was formed to pursue custom software
development and systems integration projects for customer service systems in
Europe, primarily in Germany, over a multi-year period, with each partner
holding a 50% interest in the Joint Venture. The Joint Venture partnership
agreement was signed on March 13, 1996, eighteen days before the close of the
Company's fiscal 1996 first quarter.
83. On or about March 31, 1996, the last day of the first
quarter of fiscal 1996, the Joint Venture concluded an agreement with a German
telecommunications entity to provide systems integration and work flow
engineering systems and services (the "Systems Integration Contact").
Immediately upon entering into the Systems Integration Contract on March 31,
1996, the Company recognized $12.5 million of Joint Venture net earnings,
thereby dramatically improving reported revenues and net earnings for the first
quarter of 1996.
84. On April 23, 1996, Medaphis issued a press release to
announce its first quarter results, which included the $12.5 million in net
earnings recognized in connection with the Systems Integration Contract the
Company rushed to enter into at the close of first quarter. The Company reported
that revenues had increased by 24.1% over results for the first quarter of 1995,
from $110.1 million to $136.6 million, and that reported net income had
increased from a reported loss of over $8.2 million for the quarter ended March
31, 1995, to a reported Profit of $13.2 million for the first quarter of 1996.
Commenting on these reported results, defendant Brown noted that Medaphis was
"pleased with the first quarter," adding:
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The performance of our client/server IT services business was
excellent and included formation of a joint-venture with a
subsidiary of Bertelsmann A.G. in Germany. The joint venture
signed a large contract with a telecommunications company
during the quarter.
85. The market recognized the Joint Venture and the new
Systems Integration Contract as an important step for Medaphis, adding
significantly to the Company's value to an investor. In an April 30, 1996 Smith
Barney report, for example, which was prepared based on information provided by
defendants, the Joint Venture was specifically cited as an example of one of the
areas in which Medaphis had "displayed strong growth":
Imonics announced a joint venture with Bertelsmann, AG to
provide systems integration services overseas. Bertelsmann's
BMG Music Club has been a client of Imonics for several years.
In the same announcement, the JV disclosed a major, multi-year
contract with a foreign telecommunications company. Although
Imonics is performing most of the work on [Medaphis']
re-engineering, its headcount has grown to over 400 to also
staff the growth in its outside business.
86. On May 14, 1996, defendants caused Medaphis to file its
first quarter Form 10-Q with the SEC (the "First Quarter 10-Q"), which was
signed by defendants Cote and Douglass, in which it incorporated and provided
additional details concerning first quarter 1996 financial results for the
quarter previously announced on April 23, 1996 (see paragraph 84 herein).
87. The First Quarter 10-Q represented that the financial
information contained therein was "prepared in accordance with the Company's
customary accounting policies and practices."
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<PAGE> 38
88. In addition, the First Quarter 10-Q expressly incorporated
the representations contained in the 1995 10-K, including the representation
that "[r]evenues from systems integration contracts are recorded on the
percentage of completion method of accounting," and also contained management's
representation that the financial statements included therein reflect "all
adjustments . . . necessary for a fair presentation of the results of operations
of the interim period."
89. At or about the time defendants publicly announced
Medaphis' first quarter 1996 operating results and filed the First Quarter 10-Q,
several bullish reports were issued by securities analysts based on information
provided by the Company:
(a) "Over the next several quarters, we expect the
re-engineering program in its core Medaphis Physician Services
Corporation to begin to have an impact while the growth in its
technology businesses continues continues [Sic] to
accelerate." (May 16, 1996 report by Donaldson, Lufkin &
Jenrette Securities Corporation);
(b) "Near-term, we have confidence in our quarterly
estimates as well as our $1.05 - $1. 10 estimate for the full
year." (May 16, 1996 report by Donaldson, Lufkin & Jenrette
Securities Corporation); and
(c) "Based on our conversation with management yesterday, our
comfort level on near-term earnings prospects have increased.
While management did not endorse a specific estimate, it
appears as though there have been some fundamental positive
changes.... While there remains consolidation challenges, we
believe that these are the early signs that the large software
development project is beginning to pay off...." (June 4, 1996
report by Donaldson, Lufkin & Jenrette Securities
Corporation).
90. The representations contained in Medaphis' announcements
concerning the Bertelsmann Joint Venture and the Company's financial results for
the quarter ended March 31, 1996, as set forth in paragraphs 82-88 herein, were
materially false and misleading in that the
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<PAGE> 39
financial results set forth therein were falsified and had been achieved only
through the use of improper accounting practices which violated GAAP. Indeed,
the reported net income for this period of $13.2 million was improperly and
materially overstated by virtue of the recognition of $12.5 million in profits
from the Systems Integration Contract immediately upon the execution of the
contract in violation of relevant accounting principles, including GAAP.
Defendants knew or recklessly disregarded, at the time the contract was entered
into, that: (i) Imonics was experiencing serious problems, including
over-staffing, poor management, inadequate cost controls and poor operational
performance (as detailed in paragraphs 55(b) and 69 hereof); and (ii) that, as
is also detailed at paragraphs 55(b) and 69 hereof, Imonics was unable to
perform its obligations under the Systems Integration Contract and the Joint
Venture. Under such circumstances, the recognition of $12.5 million in Joint
Venture net earnings was improper. ARB 43 provides that "profit is deemed to be
realized when a sale in the ordinary course of business is effected, unless the
circumstances are such that the collection of the sale price is not reasonably
assured." Additionally, the Company could not in good faith consider the Systems
Integration Contract to result in "actual or expected cash flow that ha[s]
accrued or will eventuate as a result of the entity's ongoing major or central
operations," if, at the time the contract was entered into, defendants were
aware that there was no basis for the belief that Imonics could fulfill its
obligations under the Contract as proscribed by paragraph 78 of FASB CON 6.
Finally, recognition of the revenues from the contract under such circumstances
was improper under FASB CON 5, paragraph 83, which provides:
Revenues are not recognized until earned. An entity's revenue
earning activity involves delivering or producing goods,
rendering services, or activities that constitute its major or
central operations,
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and revenues are considered to have been earned when the
entity has substantially accomplished what it must do to be
entitled to the benefits represented by the revenues.
Accordingly, in recognizing $12.5 million in Joint Venture net earnings in March
of 1996, the Company violated these provisions of GAAP.
91. Second, defendants improperly recognized $12.5 million in
Joint Venture net earnings in the first quarter because if these revenues could
have been properly recognized at all, they should have been recognized ratably
over the period the services were performed under the Systems Integration
Contract in accordance with the percentage-of-completion method of accounting.
As noted above, FASB CON 5, paragraph 83, provides that "revenues are not
"earned," and therefore should not be recognized, until an "entity has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues." (Emphasis added).
92. In addition, the First Quarter 10-Q, having incorporated
by reference the 1995 10-K (and derivatively the 1995 Annual Report), was
materially false and misleading for the same reasons, specified in paragraph 81
herein, as the 1995 10-K and Annual Report were false and misleading. In
addition, the First Quarter 10-Q expressly incorporated the additional
representation contained in the 1995 10-K that "[r]evenue from systems
integration contracts are recorded on the percentage-of-completion method of
accounting." (Emphasis added). Thus, in recognizing first quarter revenues from
the System Integration Contract, defendants violated the Company's own disclosed
revenue recognition policy, rendering this specific statement false.
6. ADDITIONAL PUBLIC STATEMENTS RELATING
TO IMONICS AND THE HDS MERGER
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93. In April 1996, Medaphis officials attended a
Robinson-Humphrey Co. conference at which they touted the success at Imonics,
declaring that it was "going like gangbusters."
94. Seeking to continue its practice of acquiring companies
utilizing overvalued Medaphis stock, on or about May 24, 1996, Medaphis
announced its intention to acquire Health Data Sciences Corporation ("HDS") in
exchange for 6,125,000 Medaphis common shares and assumption or issuance by
Medaphis of stock options representing an additional 556,000 shares. Based on
the May 24, 1996 closing price of Medaphis stock of $40.938, the HDS Merger was
valued at approximately $273.5 million.
95. HDS was a developer and supplier of health care
information systems to institutions, payers, health care networks, and
providers. HDS' main product offering was a line generally known as ULTICARE
(R), an integrated information system which allows doctors and hospitals in
large health care systems to enter and access immediately clinical information
on patients. The ULTICARE system can also schedule medical procedures, such as
surgery.
96. According to an article published in the Atlanta Journal
and Constitution on May 25, 1996, defendant Brown stated that, with the planned
acquisition of HDS, "I think we now have the pieces we need .... This is where
we've been aiming with our business."
97. A definitive Merger Agreement was executed by Medaphis and
HDS on May 23, 1996 (the "HDS Merger"). Under the terms of the HDS Merger,
stockholders of HDS were entitled to receive .7912 of a share of Medaphis common
stock for each share of HDS common stock and HDS preferred stock. In connection
therewith, the defendants were specifically motivated to keep the price of
Medaphis stock artificially high in order to complete
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<PAGE> 42
the acquisition of HDS. Indeed, the Merger Agreement explicitly provided that,
if the average closing price of Medaphis stock for a period of time dropped
below $37 per share, HDS could unilaterally terminate the deal. Thus, defendants
knew that it was imperative that the company continue to tout its many
"successes" while concealing the true facts about Medaphis' business.
98. On May 31, 1996, in connection with the HDS Merger,
Medaphis filed an Amendment No. 1 to its Form 5-4 Registration Statement with
the SEC (the "HDS Registration Statement"). The Registration statement included
a Proxy statement/Prospectus, also dated May 31, 1996, which was issued in
connection with a special meeting of HDS stockholders to be held on June 29,
1996 (the "HDS Prospectus"). The HDS Registration Statement was signed by
defendants Brown, Cote and Douglass.
99. The HDS Prospectus included, inter alia, a detailed
description of the background of the HDS Merger, the reasons for the HDS Merger,
and the terms of the Merger. The HDS Prospectus also included an upbeat
description of Medaphis' Re-engineering Project which was substantially similar
to the statements contained in the BSG Prospectus, the 1995 l0- K and the 1995
Annual Report. The defendants again represented in the HDS Prospectus that
"[t]he [Re-Engineering] project is expected to be substantially completed during
1997."
100. As they had in the BSG Prospectus, the defendants also
continued to tout the benefits of the BSG and Rapid Systems mergers in the HDS
Prospectus, stating that:
Management believes that the acquisition of workflow
engineering operations, will position Medaphis as the leading
client/server systems integration and workflow engineering
companies in the United States.
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101. The HDS Registration Statement and Prospectus explicitly
incorporated by reference Medaphis' 1995 Annual Report, filed on April 1, 1996,
and its First Quarter 10-Q, filed on May 15, 1996, relevant excerpts of which
are set forth at length at paragraphs 70-80, 87- 88, and 92, respectively. As
such, the HDS Registration Statement and Prospectus was materially false and
misleading for the same reasons the 1995 Annual Report and First Quarter 10-Q
were misleading, as specified in paragraphs 81 and 90-93, respectively.
102. The additional representations in the HDS Prospectus, set
forth in paragraphs 99-100, concerning the finances and operations of Imonics,
the progress of the Re- Engineering Project at MPSC, and the ability of Medaphis
and Imonics to successfully integrate the Company's various acquisitions were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics specified at paragraphs 55(b) and 69 hereof.
103. Had the full truth about Medaphis been disclosed at the
time, the company never would have been able to complete the HDS Merger. Based
on recent trading prices of Medaphis stock (approximately $8.50 per share), the
acquisition of HDS, which cost the Company just over 6 million shares, would
have cost nearly five times that amount, or 28 million shares. Based on recent
trading prices, defendants' fraudulent conduct enabled the Company to purchase
HDS -- a company valued at $230 - $260 million in the HDS Merger -- for stock
now worth just $53 million, costing HDS shareholders hundreds of millions of
dollars in losses.
7. PUBLIC STATEMENTS RELATING TO
SECOND QUARTER 1996 RESULTS
104. On July 23, 1996, defendants issued a press release
announcing Medaphis' financial results for the second quarter of 1996, ending on
June 30, 1996. The Company reported
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that revenue for the three months ended June 30, 1996 was $175.2 million, up 24%
from the $141.3 million in the year-earlier period, and that, excluding merger
and other one-time costs, net income was $18.7 million, up 159%, with earnings
per share of $0.25, up 150%. For the six months ended June 30, 1996, Medaphis
reported a 255% increase in revenues over the six months ended June 30, 1995,
from $274.4 million to $338.8 million, and a 500% increase in net income and
earnings per share, from a loss of $4.6 million or $.08 per share in 1995 to net
income of $16.4 million or $.22 per share in 1996.
105. Defendant Brown continued to assure the investment
community that Medaphis' technology companies were "generat[ing] strong
results," and he explained that much of these "strong results" were attributable
to the recent acquisitions of HDS, Rapid Systems and BSG:
We are pleased with the second quarter and underlying results
of our technology and services businesses. The technology
companies continue to generate strong results, especially our
latest additions: Health Data Sciences Corporation ("HDS"),
BSG Corporation and Rapid systems Solutions, Inc. I am
thrilled with the recent addition of HDS to our technology
capabilities and am excited about the opportunities that it
affords us to offer patient- centered information technology
in the healthcare industry. Medaphis Physician Services
Corporation continued to adversely affect results of the
Services Division in the second quarter; however its operating
results improved slightly over the first Quarter of 1996. We
continue to assess and evaluate the technology and processes
necessary to ensure our long-term success and remain
cautiously optimistic that the re-engineering project and
related management initiatives are positioning the Company for
important improvements in operating results.
(Emphasis added).
106. The defendants' representations concerning the second
quarter of 1996 had their intended effect on the investment community. On July
24, 1996, Bear Stearns issued a
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research report based on information provided by the Company which stated, in
relevant part, that:
Importantly, management is confident that the top line and
cost pressures in the physician billing business (which we
estimate to be 25% -30% of total revenue) may have bottomed.
These pressures are expected to continue to moderate over the
third and fourth quarters of 1996 allowing for a stabilization
of this business segment. DURING 1997, we expect to see the
benefits of the re- engineering which we believe will pave the
way for earnings acceleration."
In a similar vein, a Cowen & Co. report dated July 23, 1996, based on
information provided by the Company, stated:
Technology Strategy A Winner - Virtually all of the revenue
growth was derived from terrific performances in the
technology companies (+82% at $70MM). Strongest performers
include Consort Technologies (radiology information systems),
Atwork (medical software), BSG, RSSI and Imonics
(client/server systems integration)."
Likewise, on July 24, 1996, Donaldson Lufkin & Jenrette issued a research report
based on information provided by the Company which stated:
EPS for the next two quarters should be $0.28 and $0.30,
respectively. Management indicated comfort with street
estimates for the third and fourth quarter of this Year. This
is in sharp contrast to previous statements about the last few
quarters when management consistently hedged about its
near-term operating results. (Emphasis Added).
107. The representations contained in the July 23, 1996 press
release, which incorporated and reflected Medaphis' operating results for the
first quarter of 1996 (see paragraph 84 herein), were materially false and
misleading for the reasons set forth in paragraph 90 herein. The representations
concerning the finances and operations of Imonics, the progress of the Re-
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engineering Project at MPSC, and the ability of Medaphis and Imonics to
successfully integrate the Company' s various acquisitions were materially false
and misleading for failing to disclose the adverse material facts concerning
Imonics specified at paragraphs 55(b) and 69 hereof. Moreover, defendants'
forecasts of $0.28 and $0.30 per share for the third and fourth quarters of
1996, respectively, were contradicted by the adverse facts set forth above in 55
and P. 69, and were issued by defendants, through analysts' reports endorsed and
adopted by the Company, without any reasonable basis.
THE TRUTH BEGINS TO EMERGE
1. THE AUGUST 14, 1996 DISCLOSURES
108. On August 14, 1996, after the close of trading, Medaphis
finally began to disclose the severe problems which it had been experiencing
with Imonics, as well as the difficulties being encountered with MPSC, Atwork,
the BSG Merger and the Re-engineering Project during the Class Period. On that
day, it issued a press release announcing that it expected to report a in the
range of $0.28 to $0.33 per share in the third quarter of 1996, which would
include substantial charges in the range of $35 to $40 million. It also
announced that it expected earnings per share in the range of only $0.75 to
$0.90 for fiscal 1997, compared with analyst expectations of earnings per share
of $0.27 for the third quarter and $1.42 for fiscal 1997. The press release
stated:
The Company's near-term earnings will be impacted by continued
weakness in Medaphis Physician Services Corp.'s business and
the reorganization of Imonics. Medaphis' near-term outlook
also has been affected by slower than expected sales of some
of the Company's enterprise-wide scheduling products [sold by
Atwork]. The third quarter earnings estimate includes charges
in the range of $35 to $40 million relating primarily to the
reorganization of
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Imonics and the re-engineering and consolidation program at
MPSC.
109. A substantial portion of the Company's difficulties, and
the resulting third quarter charges, were reported to have arisen from the need
to reorganize its Imonics subsidiary and the Company's problems with the Systems
Integration Contract, so positively reported by Medaphis during the Class
Period. Explaining the situation, Medaphis reported:
Management has commenced the process of reorganizing the
Imonics systems integration business. This reorganization
resulted from a review by BSG of Imonics' overall operations
and an assessment of recent difficulties encountered by
Imonics with a large systems integration agreement entered
into by its European joint venture.
The reorganization of Imonics will include efforts to more
closely align Imonics' business practices with those of BSG.
The BSG model is structured to manage client/server
information technology projects with experienced project
management. It is currently anticipated that Imonics' European
joint venture will continue with its system integration
project on terms and conditions mutually satisfactory to the
parties, but that the agreement relating to the project will
be restructured.
110. Medaphis further disclosed that approximately $9 million
of charges would be made in the third quarter to account for the restructuring
of the Systems Integration Contract entered into by the Joint Venture, with
another $15 million in charges relating to the reorganization of Imonics.
111. In addition, the Company revealed that, contrary to its
July 23, 1996 representations, its MPSC unit was continuing to experience poor
results, due in part to delays in the Re-Engineering Project. The Company
disclosed that as a result of these problems, it would
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take a restructuring charge of approximately $11 million, and "up to $5 million
of other costs." The Company stated:
The Company expects to incur charges in the third quarter in
the range of $35 to $40 million. These charges are expected to
consist of approximately $9 million relating to the
restructuring of a large systems integration agreement entered
into by Imonics' European joint venture, approximately $15
million relating to reorganization of Imonics, approximately
$11 relating to additional restructuring costs associated with
MPSC's re-engineering and consolidation program and up to $5
million of other costs.
112. Defendant Brown was quoted as stating:
We are extremely disappointed with these developments. The
problems that we have identified at MPSC and Imonics are being
addressed by a new operating management team which possesses
the process and technology expertise and experience we need to
execute our plan.
113. Moreover, in sharp contrast to defendants' previous
statements that Medaphis would continue to grow through acquisitions -- the key
to its success -- the company announced that it had abandoned its acquisition
strategy: "We're focused on re-engineering MPSC's business for future growth,
and not on expanding the business through acquisitions in the near term,"
defendant Douglass stated.
114. As reported in Bloomberg News on August 15, 1996,
Bertelsmann officials had called Medaphis in late July to complain about the
computer integration project which Imonics was working on with the Joint
Venture. In particular, Bertelsmann offered two choices to Medaphis: quit or
renegotiate the contract. According to Cowen & Co. analyst Charles Trafton, the
news of problems with Imonics came as "a complete shocker" and "Imonics was not
delivering."
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<PAGE> 49
115. On the same day it announced its anticipated losses for
the third quarter, Medaphis filed its Form 10-Q for the fiscal 1996 second
quarter (the "Second Quarter 10-Q"). In it, the Company disclosed for the first
time that the Joint Venture had begun discussions with its European Partner,
Bertelsmann, and the related customer on July 25. 1996 regarding difficulties
that had been encountered with certain aspects of the Systems Integration
Contract. As a result of these difficulties, which were not disclosed until
August 14, 1996, Medaphis reported that it had been forced to negotiate "the
restructuring of the operating relationships and economics underlying the
Contract," adding:
Although a restructured arrangement among the parties is
subject to the negotiation and execution of definitive
agreements, the Company anticipates that the contract will be
amended and a restructured arrangement will be executed that
will position the Joint Venture to move forward with the
project and to pursue other opportunities and projects on
terms and conditions that are mutually beneficial to the
parties. The Company anticipates recording a loss related to
the restructured arrangement of approximately $9 million
during the third quarter of 1996.
116. With respect to the Imonics' restructuring, the Company
disclosed in the Second Quarter l0-Q that, contrary to previous statements to
the effect that the Company had the necessary infrastructure to create
tremendous business opportunities, the Company would need to take a charge of
$15 million to reorganize Imonics because of over-staffing, inadequate internal
cost controls and poor operating performance. The Second Quarter l0-Q stated:
Many changes have and will continue to occur at Imonics
Corporation ("Imonics") including: headcount reductions,
increased focus on project management, increased cost controls
and implementation of the BSG business model. In addition to
the expected $9 million loss related to the restructured
arrangement noted above, the Company anticipates recording
losses in the third
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<PAGE> 50
quarter of 1996 related primarily to the reorganization of
Imonics of approximately $15 million.
117. The market reacted sharply and dramatically to Medaphis'
August 14 announcement, with its share price plunging the following day,
decreasing the value of the Company by $1.6 billion. The stock price closed at
$14-1/4 per share, after dropping by $21-3/8, or approximately 60 percent. More
than 42 million shares of Medaphis stock changed hands during the day, making it
the most active U.S. issue on NASDAQ that day and representing the sixth-highest
single trading day in NASDAQ history, excluding penny stocks.
2. THE OCTOBER 22, 1996 DISCLOSURES
118. Despite the startling disclosures of August 14, 1996, and
the resulting drop in the Price of Medaphis stock, defendants had not yet
disclosed the full extent of the company's problems known to or recklessly
disregarded by defendants at the time. Instead, defendants continued to mislead
investors about the current and future business Prospects of Medaphis and
represented that all of the Company's problems had been identified and
adequately reserved against.
119. For example, after a meeting with Medaphis senior
management on August 21, 1996, an analyst with Bear, Stearns & Co. ("Bear
Stearns") reported that:
[a]fter uncovering the problems at Imonics and MPSC,
management undertook a rigorous examination of all business
units in order to assess [the] possibility [of additional
charges and a further reduction in earnings expectations] and
concluded that all of the potential problems have been
reserved against. (Emphasis added).
120. Based largely on this positive meeting with Medaphis
management, Bear Stearns forecast third quarter earnings per share of $0.02
excluding charges of $35 - $40 million,
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<PAGE> 51
and continued to give Medaphis stock an "Attractive" rating. Other analysts
issued similar cautiously optimistic reports following the August 21, 1996
meeting, and, based on guidance from Medaphis management, projected earnings per
share of approximately $0.02 for the third quarter, excluding charges, or a loss
of about $0.27 per share including charges.
121. On October 22, 1996, Medaphis shocked the market for the
second time in as many months, issuing a press release announcing third quarter
results that were far worse than analysts' diminished expectations and the
Company's previous projections. The Company also reduced its earnings
projections for 1997 even further, announced even larger charges associated with
the reorganization of Imonics, and revealed that due to improper revenue
recognition practices in the Imonics division. the Company would have to restate
its financial results for the fourth quarter and year ended December 31. 1995.
122. In contrast to its August 16, 1996 forecast of losses in
the range of $.28 - $.33 per share, including charges, Medaphis reported a loss
of $.51 per share, or $36.4 million for the 1996 third quarter. These results
compared to a net loss per share of $0.05 in the year-ago quarter. The Company
reported that revenue fell 10% in the third quarter, to $126.7 million, from
$140.8 million a year ago.
123. In addition, the Company disclosed that rather than
taking charges of between $35 - $40 million, Medaphis reported total charges of
approximately $50 million in the third quarter, relating primarily to the
reorganization of Imonics and the write-off of revenue from the Systems
Integration Contract. The October 22, 1996 press release stated:
The results for the three months ended September 30, 1996
include a charge against revenue of $16.8 million relating
primarily to the reorganization of Imonics, including the
renegotiation of a large
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<PAGE> 52
systems integration contract entered into by Imonics' European
joint venture in March 1996. In addition, approximately $8.5
million was included in salaries and wages relating to
employees and contractors, who are no longer providing
services to the Company, costs to complete certain Imonics
contracts and certain other nonrecurring items. In addition, a
$24.3 million restructuring charge was recorded during the
quarter relating to the reorganization of Imonics. The charge
consists of approximately $10.7 million relating to the write
down of Imonics' assets, $3.7 million of severance costs
primarily for former Imonics' employees, $3.2 million in exit
costs for lease terminations and $6.7 million of legal and
other costs.
124. While Medaphis had stated in August that it expected 1997
earnings per share to fall between $0.75 and $0.90, defendant Brown lowered that
range to just $0.60 to $0.75 in connection with the October 22 press release. At
the same time, however, defendant Brown hinted that 1997 earnings are likely to
come in even lower still, stating: "I believe there are risks inherent in the
business which could cause us to fall short of that goal."
125. In yet another stunning disclosure, the Company announced
in the press release that it would restate 1995 results to reflect an actual
loss for the year ended December 31. 1995 of 58.5 million. compared with a
previously reported loss of $3.4 million. For the 1995 fourth quarter, the
Company said it expected to post a loss of $1.1 million. compared with a
previously reported profit of $4 million.
126. Medaphis stated that the 1995 restatements were the
result of improper revenue recognition practices in the Company's Imonics
division, including the improper recognition of $5.1 million in earnings in the
fourth quarter of 1995. According to the Company, the Imonics unit had booked
revenue on a license agreement it had executed in December 1995 despite the
existence of "unauthorized correspondence" which improperly "created a
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<PAGE> 53
contingency" under the license agreement. The revenue recognized on this
contract, "together with previously deemed immaterial amounts," reduced net
income for the quarter and year ended December 31, 1995 by $5.1 million. As
disclosed in the press release:
The Company also announced that it intends to restate its
financial results for the year and three months ended December
31, 1995. This restatement relates primarily to a license
agreement entered into by Imonics in December 1995 and
unauthorized correspondence discovered in connection with the
Imonics reorganization which created a contingency upon
license fees payable under the agreement. The license fee
revenue payable under the agreement and recognized by the
Company during the fourth quarter of 1995, together with
previously deemed immaterial amounts, are expected to result
in an aggregate reduction to net income for the quarter and
year ended December 31, 1995 of $5.1 million. After
appropriate adjustments for such items, it is currently
anticipated that the Company's restated results for the year
ended December 31, 1995 will be a net loss of $8.5 million as
compared with a previously reported net loss of $3.4 million.
In addition, it is anticipated that restated results for the
quarter ended December 31, 1995 will reflect a net loss of
$1.1 million, as compared with previously reported net income
of $4.0 million.
127. Continuing the stream of devastating disclosures that
day, Medaphis reported in the press release that during the third quarter it had
laid off 430 employees, including the entire senior management team at Imonics.
This was in stark contrast to defendants' prior statements portraying the growth
in the number of Imonics employees as a positive factor. The Company also
announced it was attempting to negotiate its credit line from $250 million to
$300 million.
128. In a lengthy statement accompanying the October 22 press
release, defendant Brown admitted that BSG had been preoccupied with the
restructuring of Imonics, and
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that the Company's strategic acquisition program had "ended," and that "[w]e
have no ongoing plans to make acquisitions at this time."
129. The adverse disclosures of October 22, 1996 drove the
Company's stock down $6.375 or 38%, to close at just $10.375 per share, a
52-week low for the stock. The drop in the market capitalization of the Company
was approximately $450 million. The trading volume of Medaphis stock on October
22 was more than 13 million shares, making it the most actively traded stock in
the United States that day. DURING the Class Period, Medaphis shares,
artificially inflated by defendants' wrongful conduct, had closed as high as $52
1/2 per share (on March 20, 1996).
130. On October 31, 1996, Medaphis announced that it had named
David E. McDowell the Company's new Chairman and Chief Executive, replacing
defendant Brown. According to the Company, defendant Brown had resigned for
"personal" reasons.
SUMMARY OF FALSE AND MISLEADING
NATURE OF DEFENDANTS' STATEMENTS
DURING THE CLASS PERIOD
131. All of defendants' representations set forth above, as
well as other substantially similar representations, made during the Class
Period, were materially false and misleading and misrepresented and/or failed to
disclose material adverse information, including that:
(a) The revenues and earnings of Medaphis were materially
and improperly overstated during the Class Period due to defendants' utilization
of improper accounting methods, including by means of "side letters" in the
fourth quarter and year ended
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<PAGE> 55
December 31, 1995 and in connection with the recognition of $12.5 million in
Joint Venture net earnings under the Systems Integration Contract in the first
quarter ended March 31, 1996;
(b) The Company's revenues, net income, and earnings per
share for the year and three months ended December 31, 1995 were materially
inflated and overstated by $5.1 million as a result of improper revenue
recognition practices in the Company's Imonics division which were violative of
GAAP and other accounting rules and regulations, as set forth above;
(c) The Imonics division, which was responsible for
re-engineering the Company's physician billing business, was over-staffed and
poorly managed, thereby adversely affecting any purported success of the
Re-Engineering Project, and the Imonics division would have to be substantially
reorganized, which would result in a substantial charge in the many millions of
dollars;
(d) The Imonics division would not be able to actively
seek new license revenue opportunities, which had been expected to yield
approximately $50 million in revenue in 1997, until after the division can be
reorganized (through a full integration with BSG), and its serious internal
deficiencies are corrected. Since software license revenue has a high operating
margin, much of the impact of this reduced revenue will fall directly to the
pretax line;
(e) With regard to the Re-Engineering Project, the
software designed to automate the billing process at MPSC was not appropriate
for large volume processing thus requiring further software development and
causing a deferral of the office consolidation element of the Re-Engineering
Project. Thus, the Company would not achieve the expected increase in
profitability which would have resulted from such consolidation;
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<PAGE> 56
(f) Medaphis' physician billing business, MPSC, was
performing poorly and the Re-Engineering Project was suffering from multiple
problems;
(g) Due to the severe problems being experienced by the
Company's MPSC subsidiary and the Re-Engineering Project, there was no
reasonable basis for the defendants' statements made in connection with the
report of second quarter 1996 results that MPSC was "improv[ing]" and that the
Re-Engineering Project was "positioning the Company for important improvements
in operating results";
(h) With respect to the Joint Venture's Systems
Integration Contract (executed in the first quarter of 1996 and touted in the
Company's First Quarter l0-Q), Medaphis improperly recognized, in violation of
GAAP, millions of dollars in revenue because: (1) the Contract was subject to
significant contingencies and ongoing obligations, thus making revenue
recognition improper; and (2) the revenue should have been recognized, if at
all, ratably over the life of the Contract, based on the
percentage-of-completion method of accounting, rather than up front upon signing
the Contract. This improper recognition of revenue caused revenue, net income
and earnings per share to be materially overstated in the Company's financial
statements for the quarters ended March 3l, 1996 and June 30, 1996 in violation
of GAAP. Moreover, as a result of Medaphis' failure to meet milestone deadlines,
Medaphis has been forced to reverse at least $9 million in recognized revenues
to reserve for the reduction in Contract terms during the third quarter of 1996;
(i) Further, with respect to the Systems Integration
Contract, Imonics had failed to meet milestone deadlines in implementation of
the Contract due to, inter alia, weak project management, a poor infrastructure
at Imonics, and a failure to provide adequate staffing
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<PAGE> 57
with the skills necessary to perform the project. As a result, the German
customer had chosen to renegotiate the contract on terms substantially less
favorable to the Company;
(j) Contrary to defendants' representations that the
Re-Engineering Project would be substantially completed by fiscal year 1997,
such that the Company would begin to experience operating leverage, i.e.,
enhanced margins in the services division, by the beginning of 1997, defendants
knew or recklessly disregarded but failed to disclose that the Re- Engineering
Project was suffering from numerous problems and thus was not likely to be
completed until late 1997, if not 1998, at which time any benefits therefrom
would only begin to be realized;
(k) The Atwork division's sales pipeline had been in
decline since September 1995, and significant bugs in the Atwork division's
Windows-based scheduling software introduced at year-end 1995 were not corrected
until May 1996. As a result, Atwork's sales were at least 9 months behind
Company forecasts;
(l) Because of the extensive problems at Imonics, BSG
would have to focus all of its attention on reorganizing Imonics and integrating
Imonics and Rapid Systems, and would be unable to pursue any significant revenue
opportunities of its own, thereby negatively impacting results for at least the
remainder of 1996; and
(m) Contrary to defendants' representations, Imonics,
Atwork, and the Company's other technology businesses were not in fact able to
offset revenue, growth, and margin pressures adversely affecting MPSC;
(n) Contrary to defendants' statements regarding the
synergies to be derived from the BSG and Rapid Systems Mergers, the integration
of Imonics' operations with
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BSG and Rapid Systems was not proceeding well, could not be accomplished without
a complete reorganization of Imonics, and would require Medaphis to take
substantial charges against earnings in the third quarter of 1996;
(o) The Company's focus on the Re-Engineering Project at
MPSC was done only at the expense of customer service and customer retention,
which was leading to significant revenue declines and reductions in
profitability for Medaphis;
(p) The increasing staff levels at Imonics, cited by
analysts as a positive growth factor based on defendants' representations, was,
in reality, excessive, as evidenced by the October 23, 1996 disclosure that the
Company had terminated 430 employees, including the entire Imonics senior
management team; and
(q) Defendants' forecasts of $0.28 and $0.30 per share for
the third and fourth quarters of 1996, respectively, were contradicted by the
adverse facts set forth above and were issued by defendants, through analysts'
reports endorsed and adopted by the Company, without any reasonable basis.
COUNT I
ON BEHALF OF ALL PLAINTIFFS, THE CLASS AND
THE SUB-CLASS FOR VIOLATIONS OF
SECTION 10(B) OF THE EXCHANGE ACT AND RULE L0B-5
PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
132. Plaintiffs incorporate by reference and reallege all
paragraphs previously alleged herein and assert these claims against all
defendants.
133. During the Class Period, defendants, individually and in
concert, engaged in a plan, scheme and course of conduct, pursuant to which they
knowingly and/or recklessly
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<PAGE> 59
engaged in acts, transactions, practices, and courses of business which operated
as a fraud upon plaintiff and other members of the Class and the Sub-Class, and
made various untrue statements of material fact and omitted to state material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, to plaintiffs and
other Class and Sub-Class members as set forth above. The purpose and effect of
said scheme was to induce plaintiffs and the members of the Class and Sub-Class
to purchase and/or acquire the Company's common stock at artificially inflated
prices.
134. By reason of the foregoing, defendants knowingly or
recklessly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder in that they (a) employed devices, schemes and artifices to defraud;
(b) made untrue statements of material fact and/or omitted to state material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading; and (c) engaged in
acts, practices, [and] course of business which operated as a fraud and deceit
upon plaintiffs and other members of the Class and the Sub-Class in an effort to
maintain an artificially high market price for the Company's securities.
135. Each defendant is sued as a primary participant in the
wrongful and illegal conduct charged herein. The Individual Defendants are sued
as controlling persons as alleged below.
136. In addition to the duties of full disclosure imposed on
defendants as a result of their making, or participation in the making of,
affirmative statements and reports to the investing public, defendants had a
duty to promptly disseminate truthful information that would be material to
investors in compliance with the integrated disclosure provisions of the SEC as
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embodied in SEC Regulation S-X (17 C.F.R. Section 210.01 et seq.) and S-K (17
C.F.R. Section 22910 et seq.) and other SEC regulations, including accurate and
truthful information with respect to the Company's business, operations,
financial condition and performance so that the market prices of the Company's
publicly traded securities would be based on truthful, complete and accurate
information. As a seller of Medaphis stock during the Class Period, while in
possession of material non-public information, defendant Medaphis had a duty to
disclose such information or to abstain from trading in such stock.
137. Defendants, individually and in concert, directly and
indirectly, by the use of means and instrumentalities of interstate commerce and
the mails, engaged and participated in a continuous course of conduct to conceal
adverse material information about the business, management, financial
condition, performance, operations, and prospects of the Company, as specified
herein. Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information, and engaged in acts,
practices, and a course of conduct as alleged herein in an effort to assure
investors of the Company's value and performance and continued substantial
growth, which included the making of, or the participation in the making of,
untrue statements of material facts and omitting to state material facts
necessary in order to make the statements made about the Company and its
business, operations and future prospects, in light of the circumstances under
which they were made, not misleading, as set forth more particularly herein, and
engaged in transactions, practices and a course of business which operated as a
fraud and deceit upon the purchasers of Medaphis stock during the Class Period.
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138. Each of the Individual Defendants' primary liability and
controlling person liability arises from the following facts, among others: (i)
each of the Individual Defendants was a high-level executive and/or director at
the Company during the Class Period and was a member of the Company's senior
management team; (ii) each of the Individual Defendants, by virtue of his
responsibilities and activities as a senior executive officer and/or director of
the Company, was privy to and participated in the creation, development and
reporting of the Company's internal budgets, plans, projections and/or reports;
(iii) the Individual Defendants enjoyed significant personal contact and
familiarity with each other and were advised of and had access to other members
of the Company's management team, internal reports, and other data and
information about the Company's financial condition and performance at all
relevant times; and (iv) the Individual Defendants were aware of the Company's
dissemination of information to the investing public which they knew or
recklessly disregarded was materially false and misleading.
139. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business, management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock. As
demonstrated by their misrepresentation of the Company's condition and
performance throughout the Class Period, if they did not have actual knowledge
of the misrepresentations and omissions alleged, defendants were reckless in
failing to obtain such knowledge by deliberately refraining from taking those
steps necessary to discover
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whether their statements were false or misleading. The Individual Defendants --
by virtue of their receipt of information reflecting the true facts regarding
the Company, and/or their control over or association with the Company that made
them privy to confidential proprietary information concerning the Company --
participated in and knew of (or recklessly disregarded) the fraudulent scheme
alleged herein. The undisclosed problems alleged in this Complaint were
sustained, material and of a nature that evidences that they were in existence
during the Class Period and were therefore known to or within the purview of all
defendants at all relevant times.
140. As a result of the dissemination of the material
misleading information and failure to disclose material facts, as set forth
above, the market price of Medaphis common stock was artificially inflated
during the Class Period. In ignorance of the fact that the market price of
Medaphis stock was artificially inflated, plaintiffs and other members of the
Class and Sub-Class relied, to their damage, directly on the misstatements or on
the integrity of the market both as to price and as to whether to purchase or
acquire these securities. Plaintiffs and the other members of the Class and
Sub-Class would not have purchased or otherwise acquired Medaphis stock at the
market prices they paid or acquired such securities, or at all, if they had been
aware that the market prices had been artificially and falsely inflated by the
defendants' false and misleading statements and concealments. At the time of the
acquisition of Medaphis common stock by plaintiffs and the other members of the
Class and the Sub-Class, the fair market value of said common stock was
substantially less than the prices at which plaintiffs acquired such stock. As a
direct and proximate result of the defendants' wrongful conduct, plaintiffs and
other members of the Class and the Sub-Class have suffered substantial damages
in connection with their acquisitions of Medaphis stock.
- 62 -
<PAGE> 63
141. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the allegedly
false statements pleaded in this Complaint. To the extent there were any
forward-looking statements, there were no meaningful cautionary statements
identifying important and material factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements.
Alternatively, to the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, the defendants are liable for those
false forward-looking statements because at the time each of those
forward-looking statements was made, the particular speaker knew the
forward-looking statement was false, and the forward-looking statement was
authorized and/or approved by an executive officer of Medaphis who knew that the
statement was false when made.
COUNT II
ON BEHALF OF ALL PLAINTIFFS, THE CLASS AND
THE SUB-CLASS FOR VIOLATIONS
OF SECTION 20(A) OF THE EXCHANGE ACT
AGAINST THE INDIVIDUAL DEFENDANTS
142. Plaintiffs repeat and reallege the allegations set forth
above as if set forth fully herein. This claim is asserted against the
Individual Defendants.
143. At all relevant times, the Individual Defendants acted as
controlling persons of the Company within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of, among other things, the Individual
Defendants' high-level positions, and defendants' participation in and/or
awareness of the Company's operations and business and/or intimate knowledge of
the Company's operations and business, the Individual Defendants had the power
to influence and control and did influence and control, directly or indirectly,
the various
- 63 -
<PAGE> 64
statements and documents complained of herein. The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press
releases, public filings and other statements complained of herein prior to
and/or shortly after these statements were issued and had the ability to prevent
the issuance of the statements or to cause the statements to be corrected.
144. In addition, the Individual Defendants had direct
involvement in the operations of the Company, and, therefore, are presumed to
have had the power to control or influence the regular transactions giving rise
to the securities violations alleged herein and exercised the same.
145. As set forth above, defendant Medaphis violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. By virtue of
their controlling positions, the Individual Defendants also are liable for such
primary violations pursuant to Section 20(a) of the Exchange Act. As a direct
and proximate result of defendants' wrongful conduct, plaintiffs and other
members of the Class and Sub-Class suffered damages in connection with their
acquisitions of the Company's stock during the Class Period.
COUNT III
ON BEHALF OF THE SUB-CLASS FOR
VIOLATIONS OF SECTION 11 OF THE
SECURITIES ACT AGAINST ALL DEFENDANTS
- 64 -
<PAGE> 65
146. Plaintiffs Carley Capital Group and WME Management Group,
L.P. (the "Sub-Class Plaintiffs") incorporate by reference and reallege the
allegations set forth above as if set forth fully herein.
147. This Count is brought for violations of Section 11 of the
Securities Act, 15 U.S.C. Section 77k, on behalf of the Sub-Class as defined
herein against Medaphis and the Individual Defendants.
148. The HDS Registration Statement, which contained the HDS
Prospectus, (hereinafter referred to as the "Registration Statement" and the
"Prospectus"), and the documents incorporated therein by reference, as set forth
in paragraphs 64-65 and 98-100 hereof, were inaccurate and misleading, contained
untrue statements of material facts, omitted to state other facts necessary to
make the statements made not misleading, and concealed and failed adequately to
disclose material facts, all as set forth in paragraphs 69 and 101-102 above.
149. Medaphis is the registrant for the shares sold to the
Sub-Class Plaintiffs and other members of the Sub-Class. Medaphis issued, caused
to be issued and participated in the issuance of materially false and misleading
written statements to the investing public which were contained in the
Registration Statement, which misrepresented or failed to disclose, inter alia,
the facts set forth above.
150. Each of Defendants Brown, Cote and Douglass, either
personally or through an attorney-in-fact, signed the Registration Statement and
was a director and/or senior executive of Medaphis at the time of the HDS Merger
referred to hereinabove.
151. The defendants named herein were responsible for the
contents and dissemination of the Registration Statement and the Prospectus.
None of the defendants named
- 65 -
<PAGE> 66
herein made a reasonable investigation or possessed reasonable grounds for
believing that the statements contained in the Registration Statement and
Prospectus were true and did not omit any material facts and were not materially
misleading, all for the reasons set forth in paragraphs 69, 101-102 and 147
above.
152. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business, management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
153. The Sub-Class Plaintiffs acquired shares of Medaphis
stock issued pursuant to, or traceable to, the Registration Statement.
154. The Sub-Class Plaintiffs and the other members of the
Sub-Class have sustained damages. The value of the Company's shares has declined
substantially subsequent to and due to defendants' violations.
155. At the times they purchased the Company's shares, the
Sub-Class Plaintiffs and other members of the Sub-Class were without knowledge
of the facts concerning the wrongful conduct alleged herein and could not have
reasonably discovered those facts. Less than one year has elapsed from the time
that the Sub-Class Plaintiffs discovered or reasonably could have discovered the
facts upon which this Complaint is based to the time of filing this
- 66 -
<PAGE> 67
Complaint. Less than three years has elapsed from the time that the securities
upon which this claim is brought were bona fide offered to the public to the
time of filing this Complaint.
156. The Sub-Class Plaintiffs are entitled to recover from
defendants damages measured by the difference between their exchange price for
Medaphis securities and the actual value of such securities.
COUNT IV
ON BEHALF OF THE SUB-CLASS
FOR VIOLATIONS OF SECTION 12(A) (2) OF THE
SECURITIES ACT AGAINST ALL DEFENDANTS
157. The Sub-Class Plaintiffs incorporate by reference and
reallege the allegations set forth above as if set forth fully herein.
158. This Claim is brought by the Sub-Class Plaintiffs
pursuant to Section 12(a) (2) of the Securities Act, 15 U.S.C. Section 771(a)
(2), on behalf of the Sub-Class against Medaphis and the Individual Defendants.
159. The statements referred to above at paragraphs 64-65 and
98-100 were each made in a "prospectus" as that term is defined in Section 2(a)
(10) of the Securities Act, contained untrue statements of material facts,
omitted to state other facts necessary to make the statements made not
misleading, and concealed and failed to disclose material facts on the grounds
and for the reasons set forth in paragraphs 69 and 101-102 herein. The actions
of the defendants named in this Count solicited the sale of shares of Medaphis
common stock in
- 67 -
<PAGE> 68
connection with the HDS Merger for their personal financial gain. Those actions
included participating in the preparation of the materially false and misleading
Prospectus and other materials used in the sale of Medaphis common stock.
160. The defendants owed to the purchasers of the Company's
shares, including the Sub-Class Plaintiffs and other members of the Sub-Class,
the duty to make a reasonable and diligent investigation of the statements
contained in the Prospectus and other offering materials to ensure that such
statements were true and that there was no omission to state a material fact
required to be stated in order to make the statements contained therein not
materially misleading.
161. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
162. The Sub-Class Plaintiffs and other members of the
Sub-Class purchased or otherwise acquired the Company's common stock pursuant to
and traceable to the Prospectus. The Sub-Class Plaintiffs did not know, or in
the exercise of reasonable diligence could not have known, of the untruths and
omissions contained in or made in connection with the Prospectus.
163. The Sub-Class Plaintiffs and other members of the
Sub-Class have sustained injury and suffered damages.
- 68 -
<PAGE> 69
164. By reason of the conduct alleged herein, the defendants
named in this Count violated Section 12 (a) (2) of the Securities Act.
Accordingly, the Sub-Class Plaintiffs and the other members of the Sub-Class who
hold the Company's shares have the right to rescind and recover the
consideration paid for the Company's shares and hereby elect to rescind and
tender their shares of the Company to the defendants sued herein. Sub-Class
members who have sold their shares of Medaphis are entitled to rescissory
damages.
165. Less than three years have elapsed from the time that the
securities upon which this Count is brought were sold to the public to the time
of the filing of this action. Less than one year has elapsed from the time when
the Sub-Class Plaintiffs discovered or reasonably could have discovered the
facts upon which this Count is based to the time of the filing of this action.
COUNT V
ON BEHALF OF THE SUB-CLASS FOR VIOLATIONS
OF SECTION 15 OF THE SECURITIES ACT
AGAINST THE INDIVIDUAL DEFENDANTS
166. The Sub-Class Plaintiffs incorporate by reference and
reallege the allegations set forth above as if set forth fully herein.
167. The Individual Defendants acted as controlling persons of
the Company within the meaning of Section 15 of the Securities Act. By reason of
their senior management positions, stock ownership and directorships as alleged
above, these defendants had the power to
- 69 -
<PAGE> 70
influence and exercised the same to cause Medaphis to engage in the acts and
conduct complained of in Count III herein.
168. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
169. By reason of such conduct, the Individual Defendants are
liable pursuant to Section 15 of the Securities Act, 15 U.S.C. Section 77o. As a
direct and proximate result of the conduct of the Individual Defendants alleged
in Count III herein, the Sub-Class Plaintiffs and the other members of the
Sub-Class suffered damages in connection with their acquisitions of the
Company's securities pursuant to the HDS Merger.
WHEREFORE, plaintiffs, on behalf of themselves and on behalf
of the Class and Sub-Class, pray for judgment as follows:
(a) Declaring this action to be a class action pursuant to
Rules 23(a) and 23(b) (3) of the Federal Rules of Civil Procedure on behalf of
the Class and the Sub-Class as defined herein;
(b) Awarding plaintiffs and the members of the Class
and/or Sub-Class rescissory or compensatory damages in an amount which may be
proven at trial, together with interest thereon;
- 70 -
<PAGE> 71
(c) Awarding the Sub-Class Plaintiffs and members of the
Sub-Class rescission and damages in accordance with Section 12 (a) (2) of the
Securities Act on Counts IV and V;
(d) Awarding plaintiffs and the members of the Class and
Sub-Class pre-judgment and post-judgment interest, as well as their reasonable
attorneys' and experts' witness fees and other costs; and
(e) Awarding such other and further relief as this Court
may deem just and proper, including any extraordinary equitable and/or
injunctive relief as permitted by law or equity to attach, impound or otherwise
restrict the defendants' assets to assure plaintiffs have an effective remedy.
DEMAND FOR JURY TRIAL
Plaintiffs, on their own behalf and on behalf of the Class and
Sub-Class, hereby demand a trial by jury on all Counts hereof.
Dated: February 3, 1997 APPEL, CHITWOOD & HARLEY
BY: /s/
--------------------------------
Martin Chitwood
Georgia Bar No. 124950
Christi C. Mobley
Georgia Bar No. 107869
1400 Resurgens Plaza
945 East Paces Ferry Rd.
Atlanta, GA 30326
(404) 266-1650
- 71 -
<PAGE> 72
- and -
BARRACK RODOS AND BACINE
BY: /s/
--------------------------------
Leonard Barrack
Gerald J. Rodos
Sheldon L. Albert
Anthony J. Bolognese
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
(215) 963-0600
- and -
BERGER & MONTAGUE, P.C.
BY: /s/
--------------------------------
Sherrie R. Savett
Genna D. Kidd
1622 Locust Street
Philadelphia, PA 19103
(215) 875-3000
CO-LEAD COUNSEL FOR PLAINTIFFS
CARR, TABB & POPE
BY: /s/
--------------------------------
W. Pitts Carr
Georgia Bar No. 112100
Render C. Freeman
Georgia Bar No. 275910
1355 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30309
(404) 876-7790
LIAISON COUNSEL FOR PLAINTIFFS
- 72 -
<PAGE> 73
ABBEY GARDY & SQUITIERI
Jill Abrams
212 East 39th Street
New York, NY 10016
(212) 889-3700
ALPERT BARKER & CALCUTT
Jonathan Alpert Patrick
Calcutt 100 South Ashley
Drive Suite 2000 Tampa, FL
33602 (813) 223-4131
BERMAN, DEVALERIO & PEASE
Glen DeValerio
One Liberty Square
Boston, Massachusetts 02109
(617) 542-8300
BERNSTEIN, LIEBHARD
& LIFSHITZ
Mel E. Lifshitz
274 Madison Avenue
New York, NY 10016
(212) 779-1414
BERNSTEIN, LITOWITZ, BERGER
& GROSSMAN
Vincent R. Cappucci
Steven B. Singer
Kevin M. McGee
1285 Avenue of the Americas
New York, New York 10019
(212) 554-1400
FINKELSTEIN, THOMPSON
& LOUGHRAN
Burton Finkelstein
Doug Thompson
1055 Jefferson Street, N.W.
Suite 601
Washington, DC 20007
- 73 -
<PAGE> 74
GOODKIND LABATON RUDOFF &
SUCHAROW, L.L.P.
Jonathan M. Plasse
Barbara J. Hart
100 Park Avenue
New York, New York 10017
(212) 907-0700
HOFFMAN & EDELSON
Marc H. Edelson
Jerry Hoffman
Suite 280, Jenkintown Plaza
101 Greenwood Avenue
Jenkintown, PA 19046
(215) 886-4111
JAROSLAWICZ & JAROSLAWICZ
David Jaroslawicz
150 William Street
19th Floor
New York, New York 10038
(212) 227-2780
KAPLAN, KILSHEIMER
& FOX, L.L.P.
Robert N. Kaplan
Richard J. Kilsheimer
Ariana J. Tadler
685 Third Avenue
New York, New York 10017
(212) 554-1444
LAW OFFICE OF MILES TEPPER
Miles M. Tepper
7 Becker Farm Road
Roseland, NJ 07068
(201) 740-1881
MAGER, LIEBENBERG & WHITE
Roberta Liebenberg 10th
Floor, 2 Penn Center 15th &
JFK Boulevard Philadelphia,
PA 19102
- 74 -
<PAGE> 75
(215) 569-6921
MANN & WOOLRIDGE
Theo Davis Mann
28 Jackson Street
Newnan, GA 30263
(770) 253-2222
MILBERG WEISS BERSHAD HYNES
& LERACH LLP
David J. Bershad
Richard H. Weiss
Janine L. Pollack
One Pennsylvania Plaza
New York, New York 10119
(212) 594-5300
POMERANTZ, HAUDEK, BLOCK
& GROSSMAN
Stanley B. Grossman
D. Brian Hufford
100 Park Avenue
New York, New York 10017
(212) 818-0477
RACKEMANN, SAWYER & BREWSTER, P.C.
Alan B. Rubenstein
One Financial Center
Boston, MA 02111
(617) 542-2300
SCHATZ & NOBEL, P.C.
Jeffrey S. Nobel
216 Main Street
Hartford, Ct. 06106
(860) 493-6292
LOCKRIDGE GRINDAL NAUEN &
HOLSTEIN, PLLP
Richard Lockridge
W. Joseph Bruckner
Suite 2200
100 Washington Ave., South
- 75 -
<PAGE> 76
Minneapolis, MN 58401
(612) 339-6900
SCHIFFRIN & CRAIG, LTD.
Andrew L. Barroway
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
SPECTOR & ROSEMAN, P.C.
Robert M. Roseman
Jeffrey L. Kodroff
Mark J. Dorval
2000 Market Street
12th Floor
Philadelphia, PA 19103
(215) 864-2424
WECHSLER HARWOOD HALEBIAN
& FEFFER, LLP
Jeff Haber
805 Third Avenue
New York, NY 10022
(212) 935-7400
WEISS & YOURMAN
Joseph H. Weiss
Mark D. Smilow
319 Fifth Avenue
New York, New York 10016
(212) 682-2010
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, L.L.P.
Fred Taylor Isquith
Neil L. Zola
270 Madison Avenue
New York, New York 10016
(212) 545-4653
COUNSEL FOR PLAINTIFFS
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<PAGE> 77
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- -----------------------------------------X
IN RE 1996 MEDAPHIS CORPORATION : CIVIL ACTION NO.
SECURITIES LITIGATION : 1: 96-CV 2088-FMH
- -----------------------------------------X
CERTIFICATE OF SERVICE
This is to certify that I have this day served a true and correct copy
of the within and foregoing "CONSOLIDATED SECOND AMENDED CLASS ACTION COMPLAINT
FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS" upon counsel for defendants by
facsimile and hand delivery this 3rd day of February, 1997 at the following
address:
M. Robert Thornton, Esq.
King & Spalding
191 Peachtree Street, N.E.
Suite 4200
Atlanta, Georgia 30303
/s/
--------------------------------
Martin D. Chitwood
Georgia Bar No. 124950
Christi C. Mobley
Georgia Bar No. 107869
APPEL, CHITWOOD & HARLEY
1400 Resurgens Plaza
945 East Paces Ferry Road
Atlanta, Georgia 30326
(404) 266-1650
- 77 -
<PAGE> 1
EXHIBIT 99.3
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
STEPHEN D. ALEXANDER (SBN #141099)
DAVID R. BOYKO (SBN #178116)
725 South Figueroa Street, Suite 3890
Los Angeles, CA 90017
(213) 689-5800
Attorneys for Plaintiffs
HEALTH SYSTEMS INTERNATIONAL, INC.
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
HEALTH SYSTEMS ) Case No. BC160414
INTERNATIONAL, INC., a )
Delaware corporation ) COMPLAINT FOR VIOLATION OF
) SECTIONS 11,12(2), and 15 OF
Plaintiff, ) SECURITIES ACT OF 1933,
) CALIFORNIA CORPORATIONS
) CODE SECTIONS 25401
v. ) and 25402, FRAUD, INTENTIONAL AND
) NEGLIGENT MISREPRESENTATION,
MEDAPHIS CORPORATION., a ) AND INTENTIONAL INTERFERENCE
Delaware corporation; RANDOLPH G. ) WITH PROSPECTIVE ECONOMIC
BROWN, an individual; and DOES 1- ) ADVANTAGE
50, inclusive, )
)
Defendants, )
- ----------------------------------------
Plaintiff HEALTH SYSTEMS INTERNATIONAL, INC. (hereinafter "HSI") for its
complaint against MEDAPHIS CORPORATION (hereinafter "Medaphis"), RANDOLPH G.
BROWN (hereinafter "Mr. Brown"), and DOES 1-50 inclusive, alleges as follows:
<PAGE> 2
SUMMARY OF ALLEGATIONS
1. The claims and allegations herein arise from the acquisition of Health
Data Sciences Corporation ("HDS") by Medaphis. Medaphis accomplished this
transaction by offering 0.7912 shares of its own common stock in exchange for
each share of common and preferred stock of HDS. The primary purpose of this
acquisition was purportedly to enhance Medaphis position in the market for
advanced healthcare information systems through HDS' integrated information
management system, ULTICARE(R), and to provide Medaphis with additional
opportunities to cross-sell its systems and services to the HDS customer base.
2. Plaintiff HSI is informed and believes, and on the basis of such
information and belief alleges, that the CEO of Medaphis, Mr. Randolph Brown,
and his aligned insiders instead planned and accomplished the acquisition of HDS
before the close of the second quarter of Medaphis' 1996 fiscal year to
artificially inflate Medaphis' own sagging earnings and thereby sustain the
inflated market value of its own stock. By utilizing the pooling of interests
accounting method for the transaction, Medaphis was able to increase its
reported earnings for the second quarter of its 1996 fiscal year, meet the
composite estimate of market analysts who follow Medaphis stock, and thereby
maintain an artificially high market price for its stock.
3. In furtherance of this scheme, Mr. Brown and his Medaphis allies
required the acquisition to be consummated before reporting their third quarter
results and admitting undisclosed, adverse financial results. To induce HSI, a
major shareholder of HDS, to accept Medaphis' share exchange offer, Medaphis and
Mr. Brown made false and misleading statements that Medaphis' core businesses
were not experiencing any problems, that research
2
<PAGE> 3
development costs, rather than sagging revenue from operations, would
temporarily drag down earnings, and deliberately failed to disclose that
Medaphis would shortly reveal a write-off of up to $40,000,000 in reorganization
costs and would lower its earnings estimate for the following year, which would
more than halve the value the of shares to be received by HDS shareholders.
These false and misleading statements were contained in oral communications with
HSI, as well as in the prospectus provided by Medaphis to all HDS shareholders
in connection with the share exchange offer. Further, despite knowing of HSI's
discussions and intent to form a strategic alliance of its own with HDS, these
defendants wrongfully interfered with that prospective business relationship by
proposing to acquire HDS using Medaphis stock whose market price was
artificially inflated by these false and misleading statements which disguised
Medaphis' poor business performance and sagging fortunes. When Medaphis revealed
this information, a scant two months after HDS shareholders had voted to accept
Medaphis' shares in exchange for their HDS holdings, Medaphis stock plummeted
from a closing price of $39.74 on the last trading day before HDS' shareholders
voted on the acquisition, to a closing price of $14.25 on August 15, 1996 after
revealing its true financial condition, and to a low of $11.375 on September 12,
1996 after the information was fully disseminated to, and taken into account by,
the market. On October 21, Medaphis revealed its actual financial results for
the third quarter of 1996 and announced a loss of $36.4 million. Its stock price
immediately plunged another 38%, reaching a low of $8.37 after the information
had been fully disseminated to the market.
4. The reality of Medaphis, concealed by artful accounting practices,
restatements, write-offs, and other churning created by its acquisition of the
prior and future earnings of new businesses, has been one of stagnation in its
shrinking core businesses and failure to meet the
3
<PAGE> 4
substantial technological challenges of its new businesses. The aftermath of
Medaphis' acquisition of HDS apparently resulted from the failed efforts of the
defendants herein to maintain a facade of earnings growth momentum. As Medaphis
has revealed its reality, layer by layer, the market prices for its shares have
plummeted to reflect those revelations. It is now clear that HSI and other
shareholders of HDS were systematically deceived by the defendants.
5. The actions of Medaphis, Mr. Brown, and other Medaphis insiders and
agents were accomplished by the use of fraud and false and misleading statements
to induce HDS shareholders to accept Medaphis' share exchange offer. HDS
shareholders accepted Medaphis' offer of stock only to find themselves defrauded
of over half the value received in violation of the Securities Act of 1933, the
California Corporations Code, and common law principles of fraud.
PARTIES
6. HSI is, and at all relevant times hereinafter mentioned was, a
corporation duly organized and existing under the laws of the State of Delaware,
with a principal place of business in Woodland Hills, California. HSI provides
managed health care services in California and other states through its
principal operating subsidiaries, including Health Net, the second largest
provider of health maintenance organization ("HMO") services in California. HSI
owned stock representing approximately sixteen percent of HDS.
7. Medaphis is, and at all relevant times hereinafter mentioned was, a
corporation duly organized and existing under the laws of the State of Delaware,
with its principal place of business in Atlanta, Georgia. Medaphis provides
business management services and systems to the healthcare industry, including
scheduling, information systems, subrogation and related recovery services,
systems integration, and integrated healthcare delivery systems. Medaphis is
qualified
4
<PAGE> 5
and does business in California. Medaphis stock is publicly traded on the Nasdaq
Stock Market under the symbol "MEDA."
8. HDS was, until the effective date of its acquisition by Medaphis, a
corporation organized and existing under the laws of the State of Delaware with
its principal place of business in San Bernardino, California. HDS is a
developer and supplier of healthcare information systems for integrated patient
care by integrated healthcare enterprises, HMOs, municipal healthcare systems;
and elder care organizations. HDS stock was not publicly traded prior to the
acquisition by Medaphis. HSI owned 1,234,544 shares (or 77%) of HDS Series F
preferred stock, representing over sixteen percent of the total outstanding
equity of HDS.
9. Mr. Brown is an individual who resides in the State of Georgia. During
all times stated herein, Mr. Brown served as Chairman, Chief Executive Officer,
and President of Medaphis. Mr. Brown resigned as Chairman and Chief Executive
Officer of Medaphis on October 3l, 1996.
10. The true names and capacities of the defendants named herein as DOES 1
through 50, inclusive, are unknown to HSI and, therefore, HSI sues them by such
fictitious names. Once HSI has ascertained the true names and capacities of said
defendants, HSI will amend this complaint accordingly.
11. HSI is informed and believes and based thereon alleges that the
defendants designated herein by the fictitious names DOES 1 through 50,
inclusive, are, and at all relevant times hereinafter mentioned were, insiders
of Medaphis, including without limitation, officers, directors, employees,
agents, servants, and representatives, subsidiaries, affiliates, or
co-conspirators of Medaphis, and in that capacity are liable to HSI for the
claims alleged herein.
5
<PAGE> 6
JURISDICTION AND VENUE
12. This court has jurisdiction over this matter, and venue is proper
pursuant to 17 U.S.C. 77v, Cal. Code Civ. Proc. Section Section 395,395.5 and
Los Angeles County Superior Court Rule 2.0 in that: Medaphis does business in
California, including Los Angeles County; Medaphis, as well as DOES 1 through 50
engaged in substantial, systematic, and continuous activities in California in
order to effectuate the acquisition of HDS; and HSI's principal place of
business in Woodland Hills is in the County of Los Angeles. The amount in
controversy among the parties exceeds the jurisdictional minimum of this Court.
GENERAL ALLEGATIONS
A. Medaphis and HDS
13. Medaphis provides business management services and systems to the
healthcare industry, as well as subrogation and recovery services (which assist
in recovery of benefits) to healthcare payors. In addition, Medaphis also
provides information management systems and systems integration services to
various entities in the healthcare industry.
14. HDS develops and supplies healthcare information systems to a wide
range of entities in the healthcare industry, primarily through its integrated
information system known as ULTICARE(R). HDS also has extensive experience in
most areas of patient care automation. HDS is one of the top ten vendors of
patient care systems in the United States, an industry which is forecast to
become a $20 billion dollar industry by the year 2000.
15. HSI was not only an investor in HDS, but also a key business partner.
In 1995, HSI entered into a $4 million dollar, non-exclusive, seven year license
for use of HDS' ULTICARE(R) products covering an unlimited numbers of
non-hospital patients and available to
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all HSI affiliates. HSI and HDS also agreed to jointly develop a call center as
part of an overall patient care system. HSI is to provide clinical and technical
assistance to HDS in developing this center and to contribute $1 million dollars
to its development as well. Both companies would share equally in any earnings
generated from sales to third parties. HSI also pays substantial amounts to HDS
for on-going consulting and system support services. For additional
consideration, the term of this license was later modified and extended to
twenty years.
16. HSI considers the ULTICARE(R) system to be a superior product line and
essential to its own efforts to develop and implement its "Fourth Generation
Medical Management" initiative. That initiative requires an advanced information
management system which can simultaneously house clinical data from all
providers within a large geographic region, serve as the primary contact system
between health plan members and the healthcare system, provide clinical practice
management tools to improve the quality of care and reduce costs for physicians,
and automate clinical protocols to optimize patient workup and treatment.
Successful implementation of this initiative, and therefore continued viability
of the ULTICARE(R) system is critical to HSI's ability to manage costs and to
compete and prosper in the competitive health care services industry. B.
B. Medaphis' Acquisition of HDS
17. In early May, 1996, Medaphis management initiated discussions with HDS
regarding a potential acquisition of the company. Medaphis proposed to structure
the transaction as a share exchange, in which it offered Medaphis common stock
in exchange for the common and preferred stock of HDS shareholders. Medaphis
further proposed that the transaction be structured so that it would receive
pooling of interests accounting treatment.
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18. The HDS Board of Directors met in San Bernardino, California to
consider Medaphis' proposal. Based on the information before the Board, and in
particular Medaphis' representations concerning its business and prospects, the
Directors voted in favor of the acquisition and to recommend that HDS'
shareholders also vote in favor of the transaction. On June 29, 1996, in
Riverside, California, HDS held a special meeting of its stockholders to
consider the proposed transaction. The HDS stockholders, including HSI, voted to
accept Medaphis' offer of a share exchange.
19. HSI relied on the statements and representations Medaphis included in
a prospectus relating to its share exchange offer and to the issuance of new
shares of Medaphis common stock to be exchanged for HDS common and preferred
stock. That prospectus, dated May 31,1996, included and/or incorporated the
following material statements and representations:
(a) In 1994, Medaphis purchased Imonics Corporation, a leader in
business process re-engineering and systems integration services, to help
transition Medaphis from simply the "leading provider of transaction
processing services for doctors and hospitals... [to, by the end of 1996,]
an equally important healthcare information systems company and as one of
the leading advanced client/server systems integrators in the world."
(from the Medaphis 1995 Annual Report, incorporated by reference);
(b) Imonics' expertise in technology systems was explained as a
critical element of Medaphis' technology improvement and future business
prospects because it had been" a leader in business process re-engineering
and systems integration. For years, Imonics has been providing hardware
and software solutions to business operations
which process large volume of paper. Now, Imonics is applying these same
efficiencies within Medaphis
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through systems integration and work flow engineering services."
(from the Medaphis 1995 Annual Report, incorporated by reference);
(c) In February 1996, a wholly owned German subsidiary of Imonics
entered into a joint venture with a subsidiary of Bertelsmann AG, and
shortly thereafter booked $12.5 million dollars in revenue to account for
a multi-year contract with a German telecommunications firm for systems
integration and work flow engineering systems and services (from the
Medaphis 10-Q Report dated March 31, 1996, incorporated by reference);
(d) Medaphis had approved in early 1995 a restructuring plan to
consolidate the data processing functions of its core business, Medaphis
Physician Services Corp., by 1997 and had recorded a $15 million reserve
for costs associated with that plan;
(e) Medaphis' only expected accounting charges in the near-term were
approximately $7,500,000 in the second quarter of 1996 for expenses
associated with share exchange acquisitions consummated during that period
and $4,800,000 for expenses relating to the HDS acquisition when
consummated;
(f) An important component of Medaphis' business strategy was growth
through acquisitions and that it had successfully integrated several
recent acquisitions ("Increasingly, Medaphis is looking to companies that
can expand Medaphis' technology business and help contribute to the
technological advantages Medaphis is now able to offer in healthcare and
other industries. Since 1988, Medaphis has acquired nearly 40 businesses
providing business management systems and services to physicians and
hospitals for total consideration of approximately $900 million." (from
the Medaphis 1995
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Annual Report, incorporated by reference));
(g) Medaphis has been successful in its strategy of offsetting
margin pressure in its core business operations with growth in its
technology operations; and
(h) Medaphis touted itself as possessing the exemplary management
skills necessary to establish, maintain, and expand its leadership in the
healthcare industry ("I believe we have the right people in the right
slots, where their talents, skills, interests and creativity were most
needed, in assignments that should prove extraordinarily fulfilling for
them and rewarding for our stockholders." "In 1995, Medaphis futher
strengthened its market leading position in providing business management
services to physicians..." "As the healthcare industry's leading provider
of business management systems and services, Medaphis is able to help its
clients more efficiently and effectively manage their business offices,"
(from the Medaphis 1995 Annual Report, incorporated by reference)).
20. In addition, HSI relied on the representations and warranties that
Medaphis made in its Merger Agreement with HDS, dated May 23, 1996. The
Agreement was incorporated, as Annex A, into the Medaphis prospectus relating to
its share exchange offer and to the issuance of new shares of Medaphis common
stock to be exchanged for HDS common and preferred stock. The Agreement included
the following material statements and representations:
(a) Since December 3l, 1995, there was not a change in the results of
operations, liabilities, financial condition, or business of Medaphis
that, as a whole, would have a material adverse effect on the company;
(b) Since that same date, there were not any developments, events,
or conditions which had, or were likely to have, a material adverse effect
on Medaphis;
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(C) since that same date, there were neither write downs nor material
liability or obligation or contingency or reserve increases suffered other
than in the ordinary course of business; and
(d) Medaphis made no untrue statement of material fact or omitted to
state a material fact which would be necessary to make its statements not
misleading.
21. Mr. Brown and DOES 1 through 25, because of their positions of control
and authority as officers and/or directors of Medaphis were able to, and did,
control the contents of several quarterly and annual financial reports, SEC
filings, presentations to security analysts following Medaphis, and the
representations made to HSI. Each had the ability to review and correct or
prevent the issuance of the SEC filings alleged herein to be false or
misleading. Because of their membership on the Board of Directors and/or
executive or managerial positions with Medaphis, each of the referenced
defendants had access to the adverse, non-public information about Medaphis'
business, finances, products, markets, and present and future business prospects
via their access to internal corporate documents, conversations with corporate
employees and officers, attendance at Medaphis' management and Board of
Directors meetings and committees thereof, as well as via reports and other
information provided to them in connection with this conduct. As a result, each
of these defendants was responsible for the accuracy of the public reports and
representations detailed herein.
22. In addition to defendants' direct responsibility for the contents of
those representations, defendants also provided similarly deceptive and
unreasonable statements of Medaphis' business and financial condition to the
security analysts following Medaphis so that the resulting optimistic reports on
the Medaphis would maintain and/or boost the market price of its
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stock. Those reports, some of which were reviewed by HSI prior to the
acquisition included the following statements:
(a) "Over the next several quarters, we expect the re-engineering
program in its core Medaphis Physician Services Corporation to begin to
have an impact while the growth in its technology businesses continues
[sic] to accelerate." (May 16, 1996 report by Donaldson, Lufkin & Jenrette
Securities Corporation);
(b) "Near-term, we have confidence in our quarterly estimates as well
as our $1.05 - $1.10 estimate for the full year." (May 16, 1996 report by
Donaldson, Lufkin & Jenrette Securities Corporation);
(C) "Based on our conversation with management yesterday, our comfort
level on near-term earnings prospects have increased. While management did
not endorse a specific estimate, it appears as though there have been some
fundamental positive changes... While there remains consolidation
challenges, we believe that these are the early signs that the 'large
software development project is beginning to pay off..." (June 4, 1996
report by Donaldson, Lufkin & Jenrette Securities Corporation);
(d) "MEDAPHIS HAS ONE OF THE BEST MANAGEMENT TEAMS in the health-care
information sector, in our opinion ... IN EARLY MAY 1996, MEDAPHIS CLOSED
ON THE ACQUISITION OF BSG... We believe that BSG would have gone public
and accepted public funds rather than Medaphis stock if its due diligence
turned up any meaningful concerns about Medaphis' future." (June 4, 1996
report by Dean Witter Reynolds Inc.); and
(e) "First, a 'research report' from the Center for Financial
Research and
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Analysis has been circulating questioning Medaphis' accounting practices,
fundamentals and acquisition strategy. We disagree with virtually all of
the points made... It appears as though BSG, Rapid Systems and Imonics,
are all on or above budget while its core business continues to work
through the reengineering process... [Medaphis] is likely to grow
[earnings per share] in 1997 by about 30 - 40%." (June 27, 1996 report by
Donaldson, Lufkin & Jenrette Securities Corp.)
C. Medaphis' Oral Representations to HSI
23. In May 1996, Mr. Brown, in his capacity as President and CEO of
Medaphis, met with several officers of HSI, among them Dr. Malik Hasan (HSI's
Chairman, President and Chief Executive Officer), to persuade them to accept
Medaphis' offer of its shares in exchange for their HDS holdings. During that
meeting, Mr. Brown made certain representations to HSI, including those set
forth below. HSI is informed and believes, and on that basis alleges, that these
representations were false or misleading when made and that Mr. Brown was aware
of their false or misleading nature. Such representations included:
(a) Medaphis was a very successful company which had shown
substantial growth in earnings, that it would continue to grow, and that
it was planning to grow very substantially in the near future as the
result of its on-going program of acquisitions;
(b) it had recently acquired, and successfully integrated the
operations of, several key healthcare technology companies, including
Imonics, a leader in the systems engineering field which would be critical
to Medaphis' future plans;
(C) the financial markets had respected, and prices for Medaphis
stock had relected, that demonstrated growth capability, as well as
confidence in the Medaphis management
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team;
(d) by combining with HDS, Medaphis' earnings would continue to grow
and stock price would continue to rise; and
(e) as a shareholder in Medaphis, HSI would benefit from this
continued growth.
24. In response to Dr. Hasan's questions regarding Medaphis' haste to
close the transaction, Mr. Brown stated that Medaphis had to close the HDS
transaction before the end of the second quarter because the company had
experienced some cost overruns on a development project which would adversely
affect earnings in that quarter, and he wanted to use HDS' earnings (which had
not yet been declared) as an offset. Further, Mr. Brown assured HSI that revenue
and earnings from operations were on-track, and that Medaphis' core business,
Medaphis Physicians' Service Co., was operating on a sound basis and in a
satisfactory manner, with the exception of the development cost overruns
associated with a new imaging system for its fully automated, paperless payment
program. Mr. Brown assured HSI that the development problems had been solved,
that the program was "on-track," and that Medaphis' earnings in the second
quarter would be affected by the cost overrun which he wanted to offset with
HDS' earnings and therefore the transaction had to be closed prior to the end of
that quarter.
25. During these same meetings, Mr. Brown, and the proxy and prospectus
provided to HSI by Medaphis, failed to disclose the following material facts
which Mr. Brown and Medaphis had an obligation to disclose in order to make
their representations about Medaphis not false or misleading:
(a) Medaphis was experiencing major problems with the systems
integration
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contract in Europe for which it had just booked $12.5 million dollars in
revenue and would have to restructure the operation;
(b) Medaphis' core business, Medaphis Physician's Service Corp., was
no longer profitable, and the restructuring of that business would require
far more time than the company had publicly disclosed and additional
writeoffs considerably in excess of the $25 million already disclosed as a
reserve;
(C) Imonics, previously exclaimed as the shining star of the new,
technology-oriented Medaphis, was racked by poor and inexperienced
management and inability to control costs, and it would have to undergo a
major management restructuring accompanied by material writeoffs;
(d) Medaphis' overall conversion to a more "high tech" company, the
hope for the future which Medaphis' management held out to investors, was
proceeding neither as smoothly nor as successfully as the company had
advertised, and the difficulties of integrating the various recent
acquisitions would seriously cripple any near-term success of this
purported "strategy;"
(e) Medaphis' management was forecasting a horrific third-quarter of
thirty to forty million dollars, or twenty-eight to thirty-three cents
loss per share (in sharp contrast to financial analysts' consensus
estimate of twenty-seven cents per share) due to these reorganization and
restructuring charges; and
(f) Medaphis' core businesses were doing poorly and the company was
able to maintain the illusion of profitability and its then-current stock
price by acquiring other, profitable companies whose earnings would boost
its own.
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26. In reasonable reliance on Defendants' oral statements and the written
representations contained in Medaphis' proxy/prospectus, HSI voted to accept
Medaphis' offer to exchange its preferred shares of HDS for shares of Medaphis.
Pursuant to that exchange offer, HSI exchanged 1,234,544 shares of Series F
Preferred Stock of HDS for 976,771 shares of common stock of Medaphis, valued at
approximately $41 million dollars on the acquisition's effective date of July 1,
1996.
27. When deciding to accept Medaphis' offer of a share exchange, HSI was
unaware that Medaphis' representations were false and misleading and did not
know of the material facts which Mr. Brown and Medaphis had failed to disclose.
As a result, HSI voted to approve the merger and exchange its shares of HDS
Series F Preferred Stock for Medaphis common stock.
D. Medaphis Reveals Its True Business Condition
28. Following the close of the stock market on August 14,1996, Medaphis
publicly announced what HSI alleges on information and belief that it had
privately known:
(a) it expected to incur an approximately $9,000,000 charge in the
next fiscal quarter to restructure the operating relationships and
economics of the European joint venture it had booked $12.5 millions
dollars in revenue for less than six months earlier;
(b) its core business, Medaphis Physician's Service Corp., continued
to experience grave weakness, had encountered delays in the restructuring
process that had begun a year earlier, and would have to incur another
$11,000,000 in restructuring charges over and above the $25,000,000 taken
in 1995;
(c) because of the management weaknesses and inefficiencies in its
once glittering subsidiary Imonics (which was itself carrying out the
re-engineering of Medaphis'
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core business), Medaphis was restructuring that company, including layoffs
and implementation of a new business model and expected to incur an
approximately $15,000,000 charge for reorganizing Imonics; and
(d) Medaphis would no longer maintain its growth and profitability by
acquiring other companies, and therefore significantly revised its 1997
earnings forecast from the analysts' consensus estimate of $1.42 per share
to a range of $0.75 to $0.90 per share.
29. In fact, even these forecasts did not reveal the true state of
Medaphis' business operations and finances. On October 22, 1996, Medaphis
publicly revealed that the third quarter write-offs actually taken were even
larger than forecast on August 14. It had taken a $24.3 million write-off for
Imonics' restructuring (compared to the previously announced $15 million) and
$16.8 million relating primarily to the renegotiation of Imonics' European
contract (compared to the previously announced $9 million). It further revealed
that, due to improprieties at Imonics, it had restated its financial results for
the year and the quarter ended December 31, 1995 to reflect a $5.1 million
reduction in net income and therefore a net loss of $8.5 million for that year
and $1.1 million for that quarter. In addition, it now forecast only $0.60 to
$0.75 earnings per share for 1997. Capping off this debacle of mismanagement,
Mr. Brown resigned as Chairman and Chief Executive Officer of Medaphis on
October 31,1996, shortly after the full dissemination of this information
reduced the market price of Medaphis shares to a meager $8.37.
30. HSI alleges, on information and belief, that this information was
known to Medaphis, Mr. Brown, and DOES 1 through 50 while they were negotiating
the acquisition of HDS, after execution of the Merger Agreement with HDS, and at
the time the Medaphis prospectus became effective and thereafter. Each of these
defendants had a statutory and common-
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law obligation to reveal this information in order to make their prior
representations (as described herein) neither false nor misleading.
31. Through its ownership of a separate class of equity securities, HSI's
consent was required for the transaction. Had HSI known of the true facts
concerning the problems with Medaphis' business operations, as well as the
apparent deficiencies of the management of Medaphis and its subsidiaries, it
would have rejected the offer to exchange its HDS shares for those of Medaphis
by exercising its voting power to block the transaction, and it would not have
signed the affiliate letter agreeing not to sell the Medaphis stock it would
receive from the transaction until after Medaphis had filed financial statements
containing post-merger financial information, and would have sought to acquire
HDS itself. HSI would have so acted, not only as a major investor in HDS whose
holdings were likely to suffer from Medaphis' acquisition, but also as a major
healthcare business with a vital interest in HDS' continued development and
success of its ULTICARE(R) line of products.
FIRST CAUSE OF ACTION
(Violation of Section 11 of the Securities Act of 1933)
(By HSI Against Medaphis and DOES 1-50)
32. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 3l, supra as if fully set forth herein.
33. HSI purchased Medaphis common stock by means of a registration
statement which, when effective, contained untrue statements of fact and
material omissions regarding the poor financial health of its core business
operations, the pending restructuring of its European joint venture, and the
large pending restructuring and reorganization charges. Medaphis, as well as
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DOES 1 through 50 who, by virtue of their position and/or relationship to
Medaphis, had knowledge of such untrue statements of fact and material omissions
and access to adverse, non-public information which should have been disclosed.
34. The conduct described above is prohibited under the Securities Act of
1933, codified at 17 U.S.C. Section 77k.
35. HSI has been damaged by Medaphis' untrue statements of fact and
material omissions in an amount not yet determined, but which is in excess of
$38 million.
SECOND CAUSE OF ACTION
(Violation of the Section 12(2) of the Securities Act of 1933)
(By HSI Against Medaphis and DOES 1-50)
36. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 35, supra, as if fully set forth herein.
37. Medaphis and DOES 1 through 50 offered and sold Medaphis common stock
by means of interstate commerce, including but not limited to, interstate mail
and telephone services, by means of a prospectus as well as oral communications
at the June 1996 HDS shareholders meeting and in a May 1996 meeting with Dr.
Hasan and HSI, which included untrue statements of fact and/or material
omissions regarding the flagging health of Medaphis' core business, of its
pending restructuring charges, and of problems with its European joint venture.
The true material facts were not known to HSI when it voted to accept the
Medaphis common stock in exchange for its HDS holdings, and, had HSI known the
material facts not disclosed to it, HSI would not have voted to accept Medaphis'
offer of a share exchange.
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38. The conduct described above is prohibited under the Securities Act of
1933, codified at 17 U.S.C. Section 771(2).
39. HSI has been damaged by Medaphis' false statements of material facts
and material omissions in an amount not yet determined, but which is in excess
of $38 million.
THIRD CAUSE OF ACTION
(Violation of Section 15 of the Securities Act of 1933)
(By HSI Against Mr. Brown and DOES 1-50)
40. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 39, supra, as if fully set forth herein.
41. The defendants herein acted as controlling persons of Medaphis within
the meaning of Section I5 of the Securities Act of 1933. By reason of their
position as senior officers, directors, and/or agents of Medaphis, these
defendants had the power and authority to cause Medaphis to engage in the
wrongful conduct complained of herein. Some or all of these defendants also
indicated their power and authority over Medaphis by signing the Registration
Statement (Form S-4) complained of herein.
42.1 By reason of such wrongful conduct, defendants are jointly and
severally liable, pursuant to Section 15 of the Securities Act of 1933 (codified
at 17 U.S.C. Section 77o), for Medaphis' violations of Section 11 and 12(2) of
the same Act as described above. As a direct and proximate result of this
wrongful conduct, HSI suffered damages in connection with its purchase of
Medaphis' common stock pursuant to the share exchange with HDS shareholders.
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FOURTH CAUSE OF ACTION
(Violation of Cal. Corp. Code Section 25401)
(By HSI Against Medaphis)
43. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 42, supra, as if fully set forth herein.
44. Medaphis offered and sold its securities in this state by means of
oral and written communications which included untrue statements of material
fact and/or were misleading, under the circumstances in which they were made,
because they omitted a material fact. Medaphis possessed knowledge that it core
operations were suffering financially, that its European joint venture would
have to be restructured, that it would have to take large restructuring and
reorganization charges, and did not disclose these material facts to HSI.
Instead Medaphis omitted these facts from its written and oral representations,
thereby leaving them false and misleading in light of the circumstances in which
they were made.
45. The conduct described above is prohibited under California
Corporations Code Section 25401, and HSI is granted a right of action against
such conduct by Section 25501 of that Code.
46. Had HSI known of the true facts concerning the problems with Medaphis'
business operations, as well as the apparent deficiencies of the management of
Medaphis and its subsidiaries, it would have rejected the offer to exchange its
HDS shares for those of Medaphis by exercising its voting power to block the
transaction, and it would not have signed the affiliate letter
agreeing not to sell the Medaphis stock it would receive from the transaction
until after Medaphis had filed financial statements containing post-merger
financial information, and would have pursued its own
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plans to acquire HDS. HSI has been damaged by its detrimental reliance on
Medaphis' representations and by Medaphis' material omissions in an amount not
yet determined, but which is in excess of $38 million.
FIFTH CAUSE OF ACTION
(Violation of Cal. Corp. Code Section 25402)
(By HSI Against Mr. Brown and DOES 1-50)
47. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 46, supra, as if fully set forth herein.
48. Mr. Brown and DOES 1-50, by virtue of their position and/or
relationship to Medaphis possessed material information about Medaphis' business
operations, plans, and finances which they knew would significantly affect the
market price and which had not, to their knowledge, generally been available to
the public. Mr. Brown and DOES 1-50 offered and sold Medaphis securities in this
state despite knowing such information regarding the restructuring and
reorganization charges that the company would have to reveal, the continued
weakness and unprofitability of Medaphis' core businesses, and the large
disparity between earnings estimates made by outside analysts and what the
company was itself projecting.
49. The conduct described above is prohibited under California
Corporations Code Section 25402, and HSI is granted a right of action against
such conduct by Section 25502 of that Code.
50. Had HSI known of the true facts concerning the problems with Medaphis'
business operations, as well as the apparent deficiencies of the management of
Medaphis and its subsidiaries,
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it would have rejected the offer to exchange its HDS shares for those of
Medaphis by exercising its voting power to block the transaction, and it would
not have signed the affiliate letter agreeing not to sell the Medaphis stock it
would receive from the transaction until after Medaphis had filed financial
statements containing post-merger financial information, and would have pursued
its own plans to acquire HDS. HSI has been damaged by its detrimental reliance
on Medaphis' representations and by Medaphis' material omissions in an amount
not yet determined, but which is in excess of $38 million.
SIXTH CAUSE OF ACTION
(Fraud and Intentional Misrepresentation)
(By HSI Against Medaphis, Mr. Brown, and DOES 1 through 50)
51. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 31, supra as if fully set forth herein.
52. On information and belief, HSI alleges that each of the
representations described above was false or misleading when made by Defendants
(as described above), was known to be false or misleading when made, and was
made with intent to mislead and deceive HSI. The representations were made with
the intent to induce HSI's reliance and to accept the offer to purchase Medaphis
stock in exchange for its shares of HDS Common and Series F preferred stock.
53. Each of the Defendants had a duty to disclose this information on the
grounds that the information was material to the acquisition transaction and
that the Merger Agreement and the prospectus required the disclosure of all
material facts. Defendants' failure to disclose these material facts to HSI,
therefore, constitutes fraud and/or negligent misrepresentation. Had HSI known
of the true facts concerning the problems with Medaphis' business operations, as
well as the apparent
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deficiencies of the management of Medaphis and its subsidiaries, it would have
rejected the offer to exchange its HDS shares for those of Medaphis by
exercising its voting power to block the transaction, and it would not have
signed the affiliate letter agreeing not to sell the Medaphis stock it would
receive from the transaction until after Medaphis had filed financial statements
containing post-merger financial information, and would have pursued its own
plans to acquire HDS.
54. HSI has been damaged by its detrimental reliance on Defendants'
representations and by Defendants' material omissions in an amount not yet
determined, but which is in excess of $38 million.
SEVENTH CAUSE OF ACTION
(Fraud and Negligent Misrepresentation)
(By HSI Against Medaphis, Mr. Brown, and DOES 1 to 50)
55. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 31, supra, as if fully set forth herein.
56. On information and belief, HSI alleges that each of the
representations described above was false or misleading when made by Defendants
(as described above), was made without a reasonable basis for believing it to be
true, and was made with intent to mislead and deceive HSI. The representations
were made with the intent to induce HSI's reliance and to accept the offer to
purchase Medaphis stock in exchange for its shares of HDS Common and Series F
preferred stock.
57. Each of the Defendants had a duty to disclose this information on the
grounds that the information was material to the acquisition transaction and
that the Merger Agreement and the prospectus required the disclosure of all
material facts. Defendants' failure to disclose these material facts to HSI,
therefore, constitutes fraud and/or negligent misrepresentation. Had HSI known
of
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the true facts concerning the problems with Medaphis' business operations, as
well as the apparent deficiencies of the management of Medaphis and its
subsidiaries, it would have rejected the offer to exchange its HDS shares for
those of Medaphis by exercising its voting power to block the transaction, and
it would not have signed the affiliate letter agreeing not to sell the Medaphis
stock it would receive from the transaction until after Medaphis had filed
financial statements containing post-merger financial information, and would
have pursued its own plans to acquire HDS.
58. HSI has been damaged by its detrimental reliance on Defendants'
representations and by Defendants' material omissions in an amount not yet
determined, but which is in excess of $38 million.
EIGHTH CAUSE OF ACTION
(Intentional Interference with Prospective Economic Advantage)
(By HSI Against Medaphis and Mr. Brown)
59. HSI realleges and incorporates by this reference the allegations
contained in paragraphs 1 through 31, supra, as if fully set forth herein.
60. When Medaphis submitted its unsolicited acquisition proposal to HDS,
HSI had already discussed a strategic merger with HDS which was well-received by
its management and directors. HSI disclosed this intent to Medaphis and Mr.
Brown during the meetings referred to herein. Such a merger represented an
economically profitable business opportunity for HSI which would give HSI a
leading position in the expanding field of healthcare information services and
bring in-house the technology which HSI envisioned as a key to its future
success.
61. Medaphis and Mr. Brown wrongfully and intentionally interfered with
this prospective business relationship by proposing to acquire HDS through a
transaction financed by
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Medaphis stock, rather than cash, with a market value in excess of $250 million
which had been artificially inflated by Medaphis' failure to disclose the true
facts concerning its financial health as alleged above. The value of this
consideration, far in excess of what HSI had proposed, was made possible only
through the fraudulent misrepresentations of Medaphis and Mr. Brown as detailed
herein. Had the true value of Medaphis' shares been known, as reflected by the
market price after its August 14 disclosures, the relationship between HSI and
HDS would not have been disrupted, and HSI would have pursued its merger
proposal with HDS.
62. Defendants' wrongful conduct has actually and proximately caused HSI
to suffer damages in an amount not yet determined, but which is no less than $50
million.
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<PAGE> 27
PRAYER FOR RELIEF
WHEREFORE, HSI prays for relief as follows:
On the SECOND AND FOURTH CAUSES OF ACTION:
1. For rescission of its purchase of Medaphis common stock received in
exchange for its common and preferred stock of HDS;
2. That Medaphis be ordered to hold HDS as a separate business entity and
to preserve its existing management, officers, and budget and not to take
further steps to effectuate the merger during the pendency of this suit;
On the FIRST, THIRD, FIFTH, SIXTH, SEVENTH, AND EIGHTH CAUSES OF ACTION:
1. For general damages against Medaphis, Mr. Brown, and DOES 1 through 50
according to proof;
2. For punitive damages against Medaphis, Mr. Brown, and DOES 1 through 50
in the amount of 100,000,000;
On ALL CAUSES OF ACTION:
1. For the costs of suit, attorneys' fees, and pre- and post-judgment
interest incurred herein; and
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<PAGE> 28
2. For all other such relief as the Court may deem just and proper.
Dated: November, 7 1996. FRIED, FRANK, HARRIS, SHRIVER
& JACOBSON
STEPHEN D. ALEXANDER
DAVID R. BOYKO
By:/s/
---------------------------------
Stephen D. Alexander Attorneys
for Plaintiff HEALTH SYSTEMS
INTERNATIONAL, INC.
28
<PAGE> 1
EXHIBIT 99.4
WILENTZ, GOLDMAN & SPITZER
A professional Corporation
Nicholas w. McClear, Esq. (2288)
90 Woodbridge Center Drive
P.O. Box 10
Woodbridge, New Jersey 07095-0958
(908) 636-8000
Attorneys for Plaintiffs, Ernest Hecht and
Stephen D. Strandberg, on behalf of themselves
and all others similarly situated.
SUPERIOR COURT OF NEW JERSEY
LAW DIVISION ESSEX COUNTY
DOCKET NO. L-12691-96
- -------------------------------------x
:
ERNEST HECHT and STEPHEN D. :
STRANDBERG, on behalf of :
themselves and all others :
similarly situated, :
:
Plaintiffs, : Civil Action
:
v. : COMPLAINT - CLASS ACTION
:
STEVEN G. PAPERMASTER; ROBERT :
E. PICKERING, JR.; DAVID S. :
LUNDEEN; NORMAN SMITH; RAYMOND :
J. NOORDA; GREGORY A. GROSH; :
MEDAPHIS CORPORATION, a Delaware :
corporation; and RANDOLPH G. BROWN :
: DEMAND FOR JURY TRIAL
:
Defendants. :
- -------------------------------------x
Individual and representative plaintiffs, Ernest Hecht and Stephen D.
Strandberg, on behalf of themselves and all others similarly situated, complain
against defendants Steven G. Papermaster ("PAPERMASTER"), Robert E. Pickering,
Jr. ("PICKERING"), David S. Lundeen ("LUNDEEN"), Norman Smith ("SMITH"), Raymond
J. Noorda ("NOORDA"), and Gregory A. Grosh ("GROSH") (hereinafter
<PAGE> 2
from time to time collectively called the "BSG DEFENDANTS"); and Medaphis
Corporation ("MEDAPHIS") and Randolph G. Brown ("BROWN") (hereinafter from time
to time collectively called the "MEDAPHIS DEFENDANTS") as follows, upon
information and belief (except for those allegations which pertain to plaintiffs
and their attorneys, which allegations are based upon personal knowledge) based,
inter alia, on the investigation made by plaintiffs' attorneys, which
investigation included, without limitation, a review of various public filings
and articles about BSG Corporation ("BSG") and defendant Medaphis:
NATURE OF THE ACTION
1. This is a class action on behalf of a class comprising all persons
or entities whose options to purchase shares of BSG common stock ("BSG Options")
were converted in connection with the merger between defendant Medaphis and BSG
on or about May 6, 1996 ("Merger") into options to purchase shares of the common
stock ("Shares") of defendant Medaphis ("Medaphis Options") and who suffered
damages as a result thereof.
2. On behalf of themselves and the class, plaintiffs seek, inter alia,
to recover: (A) damages to the class and plaintiffs caused by (I) the BSG
Defendants' violation of their fiduciary duties and the duty to perform due
diligence as directors, officers, and controlling shareholders of BSG in
adequately investigating, negotiating and consummating the Merger Agreement (as
hereinafter defined), the Merger and related transactions with due regard to the
rights of plaintiff and the other members of the class and (ii) the Medaphis
Defendants' fraud; and (B) punitive damages.
BSG CORPORATION
3. Before the Merger, BSG was a privately-held Delaware corporation
with its principal place of business in Austin, Texas.
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<PAGE> 3
4. It was founded by defendant Papermaster in 1987. It described itself as
one of the largest pure client/server and advanced technology systems
integrators serving Fortune 1000 customers. It was engaged in the business of
providing information technology and change management services to organizations
seeking to transform their operations through the strategic use of client/server
and other advanced technologies.
5. BSG had grown substantially since its founding, exceeding a 50% growth
rate every year. In 1993, its revenues were about $26 million. In 1994, its
revenues grew to over $46 million. In 1995, BSG's revenues increased to about
$69.7 million. In 1995, Fortune magazine denominated BSG as one of its "25 Cool
Companies," and Inc. magazine listed it as one of the 1995 Inc. 500 Companies.
6. BSG employed over 650 persons at 11 locations across the United States.
7. Immediately before the Merger, its largest shareholder was NFT
Ventures, Inc. ("NFT"), a Utah corporation. NFT's president and one of its two
directors is defendant Noorda. Its sole shareholder is the Raymond J. Noorda
Family Trust ("Noorda Trust") of which defendant Noorda is one of the two
trustees.
8. Immediately before the Merger, another large shareholder was NP
Ventures LTD ("NP"), a Texas limited partnership. Its general partner was
Powershift Partners, Ltd., whose general partner, in turn, was defendant
Papermaster.
THE UNDERLYING MERGER
THE MERGER AGREEMENT
9. Defendant Medaphis; BSGSUB, Inc., its wholly-owned subsidiary; and BSG
entered into a definitive agreement dated as of March 15, 1996 for the Merger
("Merger Agreement"),
3
<PAGE> 4
whereby, in part, defendant Medaphis agreed to acquire, through the merger of
BSGSUB, Inc., into and with BSG, all of BSG's outstanding capital stock for
about 7.5 million Shares and further to assume BSG Options and stock rights,
representing an additional approximately 2.7 million Shares.
10. The Merger was subject to, inter alia, BSG shareholder approval. The
holders of BSG Options, however, had no right to vote to approve the Merger.
11. BSG's Board of Directors, including the BSG Defendants, approved the
execution, delivery and performance of the Merger Agreement, as well as the
Merger itself and all other contemplated transactions. The Merger Agreement
committed BSG's Board of Directors to recommending to BSG's shareholders
approval of the Merger Agreement and the contemplated transactions.
12. Before approval of the Merger Agreement, the BSG Defendants undertook
a financial investigation of Medaphis.
13. Before approval of the Merger Agreement, the BSG Defendants negotiated
its terms with representatives of defendant Medaphis.
14. In anticipation and before the execution of the Merger Agreement,
defendant Papermaster executed a certain Stockholders Agreement and delivered it
to Medaphis.
15. In anticipation and before the execution of the Merger Agreement,
defendant Papermaster used his ability to direct the affairs of NP to cause NP
to execute the Stockholders Agreement and deliver it to Medaphis.
16. In anticipation and before the execution of the Merger Agreement,
defendant Noorda used his ability to direct the affairs of NFT to cause NFT to
execute the Stockholders Agreement and deliver it to Medaphis.
4
<PAGE> 5
17. The Merger Agreement provided, in part, that:
(A) Defendant Medaphis would assume all of BSG's rights and
obligations with respect to the BSG Options.
(B) In connection with the Merger, the BSG Stock Options Plans
would be amended to provide that the BSG Options will evidence the right to
purchase Shares.
(C) The nature of the options would change from Incentive Stock
Options "ISO's") to Non-Qualified Stock Options.
(D) Each holder of BSG Options would have to complete, execute
and return an Option Assumption Agreement, along with the original BSG option
agreements; otherwise the BSG Options would continue to govern.
(E) Each BSG Option Holder completing and returning the Option
Assumption Agreement would receive a Medaphis Option for the number of Shares
equal to the product of the number of shares covered by the BSG Option
multiplied by a conversion ratio based, generally speaking, on (I) the number of
Shares and the number of BSG shares of common stock being exchanged through the
Merger and (ii) the closing price of the Shares on NASDAQ the trading date
before the date of the Agreement ("Conversion Ratio").
(F) The exercise price of a Medaphis Option would be
calculated by dividing the per share exercise price of a BSG Option by the
Conversion Ratio.
18. In addition to the above provisions, the Merger Agreement contained a
number of provisions that benefitted only all or some of the BSG Defendants.
19. The Merger Agreement further provided, in part, that:
5
<PAGE> 6
(A) Defendant Medaphis would, for five years, nominate to its
Board of Directors a designee of defendants Papermaster and Noorda.
(B) After the Merger, defendant Papermaster would remain
a director of BSG.
(C) After the Merger, defendant Papermaster would remain
BSG's Chairman of the Board and Chief Executive Officer.
(D) After the Merger, defendant Lundeen would remain an
Executive Vice President and Chief Financial Officer of BSG.
(E) After the Merger, defendant Pickering would be an
Executive Vice President of BSG.
(F) After the Merger, Employment Agreements would be executed
with the BSG Defendants (except Noorda).
(G) After the Merger, BSG would be the parent/umbrella
organization for all of Medaphis's process re-engineering and systems
integration companies and capabilities. Therefore, by virtue of their guaranteed
positions and employment, the BSG Defendants would be in charge of these
expanded operations.
20. In addition to these specific provisions, the BSG Defendants had
substantial personal inducement to approve the Merger Agreement, the Merger, and
related transactions. They would reap most of the financial gain from the
consummation of the Merger. The BSG Defendants, directly or indirectly, held and
controlled enough BSG shares to approve the Merger Agreement, the Merger and
related transactions.
21. On the other hand, the Merger Agreement had a substantial adverse
impact on the interests of the holders of BSG Options:
6
<PAGE> 7
(A) Transformation of the options from ISO's to Non-Qualified
Stock Options created negative tax consequences for the holders of BSG Options.
The BSG Options, being ISO's, would have been taxed at lower capital gains rates
and only when the holder sold the shares acquired through exercise of the
options. In contrast, the Medaphis Options, being Non-Qualified Stock Options,
would be taxed as ordinary income and on two occasions: first, when an option
was exercised, and, second, when the shares acquired through exercise of the
options were sold. In effect, the conversion of the nature of the options
reduced their value by about 40%.
(B) As a practical matter, holders of the BSG Options were
compelled to have their BSG Options converted into Medaphis Options. After the
Merger, BSG Options would be worthless.
22. In announcing the execution of the Merger Agreement, BSG and defendant
Papermaster represented to the holders of BSG Options:
[T]his change [from ISO's to Non-Qualified Stock Options] was
a key component in the overall transaction which, among other
benefits ENABLED US TO OBTAIN AN EXTREMELY ATTRACTIVE PRICE
FOR YOUR BSG
SHARES . . . .
(Emphasis supplied).
23. In the same announcement, BSG and defendant Papermaster informed the
holders of BSG Options:
THE SENIOR EXECUTIVES OF BSG AND I PLAN TO CONVERT OUR STOCK
OPTIONS INTO NON-QUALIFIED MEDAPHIS STOCK OPTIONS. I BELIEVE
THAT THIS IS NOT ONLY IN THE BEST INTEREST OF BSG AND OUR
EMPLOYEES, but inherently is in the best interest of Medaphis
and its shareholders.
(Emphasis supplied).
7
<PAGE> 8
THE MERGER
24. On May 6, 1996, the Merger was accomplished through the exchange of
about 7.5 million Shares for all BSG capital stock, along with an additional
approximately 2.3 million Shares for the assumption of BSG Options. BSG, Inc.,
was merged into and with BSG, with BSG surviving the Merger as a wholly-owned
subsidiary of defendant Medaphis.
25. Each share of BSG common was exchanged into about .23 of a Share, the
Conversion Ratio being calculated after all shares of BSG's two classes of
preferred stock had been converted into common stock.
26. Further, in connection with the Merger, defendant Medaphis entered
into a Registration Rights Agreement with NFT and with NP whereby NFT and NP are
entitled to certain demand and incidental registration rights with respect to
its Shares received in the Merger.
27. Defendant Medaphis issued a press release dated May 7, 1996,
announcing the Merger. The press release quoted defendant Brown as follows:
Over the past few years, BSG has focused on building the
infrastructure necessary to not only manage its growth, but
also to manage the over 1,000 client/server-based technical
staff who are now a part of the BSG group as a result of this
Merger. Imonics, Rapid Systems Solutions and BSG create, we
believe, the largest specialty client/server IT services
company in the industry. This merger creates wonderful
business opportunities for BSG and Medaphis and we are
delighted about future prospects.
(Emphasis added).
8
<PAGE> 9
PARTIES
PLAINTIFFS
28. Plaintiff Ernest Hecht is a citizen of the State of New Jersey,
residing in Millburn, New Jersey, who, when the Merger occurred, held BSG
Options covering 22,383 BSG shares. In connection with the Merger, his BSG
Options were converted into Medaphis Options covering 5,148 Shares, and he has
been damaged as a result of defendants' misconduct as described herein. On or
about June 6, 1996, Mr. Hecht exercised some of his Medaphis Options to acquire
1,000 Shares; on or about August 23, 1996, he exercised some of his Medaphis
Options to acquire another 500 Shares. Mr. Hecht now holds Medaphis Options
covering 3,648 Shares.
29. Plaintiff Stephen D. Strandberg is a citizen of the State of New
Jersey, residing in Maplewood, New Jersey, who, when the Merger occurred, held
BSG Options covering 38,713 BSG shares. In connection with the Merger, his BSG
Options were converted into Medaphis Options covering 8,904 Shares, and he as
been damaged as a result of defendants' misconduct as described herein.
DEFENDANTS
THE BSG DEFENDANTS
30. Defendant Papermaster, before the Merger, was BSG's Chairman,
President and Chief Executive Officer. He remained BSG's Chairman and Chief
Executive Officer after the Merger.
31. Defendant Pickering who, at all relevant times before the Merger, was
an Executive Vice President of BSG.
32. Defendant Lundeen, since August 22, 1995, was BSG's Chief Financial
Officer and an Executive Vice President. He retained these positions with BSG
after the Merger.
9
<PAGE> 10
33. Defendant Smith was an Executive Vice President of BSG.
34. Defendant Noorda, since April 18, 1995, was a director of BSG. By
reason of his positions as the president and one of two directors of NFT and one
of the two trustees of the Noorda Trust, he had the power to direct the voting
of NFT's BSG shares, including approval of the Merger. NFT owned about
19,287,848 BSG shares of common stock (after conversion, as required by the
Merger Agreement, of preferred stock into common) immediately before the Merger.
These shares represented about 58.84% of BSG's outstanding capital stock on a
fully diluted basis.
35. Defendant Grosh was an executive of BSG and was appointed as one of
the individuals to investigate Medaphis, the Merger Agreement, the Merger and
related transactions.
THE MEDAPHIS DEFENDANTS
36. Defendant Medaphis is a Delaware corporation with its principal place
of business in the State of Georgia. It is a provider of out-sourced billing,
accounts receivable and business management systems and services to the health
care industry. There are more than 7l million Shares outstanding. Both before
and after the Merger, the Shares were actively traded on the NASDAQ National
Market System ("NASDAQ").
37. Defendant Brown is a citizen of the State of Georgia. At all relevant
times until on or about October 31, 1996, he had been the president, chief
executive officer and a director of defendant Medaphis. He joined Medaphis in
July 1987 as Executive Vice president and Chief Financial Officer and was named
President, Chief Executive Officer and Director in April 1988, and Chairman in
January 1991. Defendant Brown received $1,508,396.00 in total cash compensation
in 1995, including a $1 million dollar signing bonus as part of a five year
employment contract entered into in March 1995. Also in 1995, defendant Brown
received options to purchase 200,000 Shares at an
10
<PAGE> 11
exercise price of $22.8150 per share. As of March 12, 1996, defendant Brown
beneficially owned 500,750 Shares.
38. By reason of his stock ownership, management positions membership on
the Board of Directors of Medaphis, and the ability to make public statements in
the name of Medaphis, defendant Brown controlled defendant Medaphis and had the
power and influence to cause it to engage in the unlawful conduct complained of
herein. Defendant Brown had access to the adverse non-public information about
the operations, results and financial condition of Medaphis, as particularized
herein, via access to internal corporate documents, communications with
corporate officers and employees attendance at management and board of director
meetings and committees thereof, and other means.
CLASS ACTION ALLEGATIONS
39. Pursuant to Rules 23(a) and 23(b) (3) of the Federal Rules of Civil
procedure, plaintiffs bring this action as a class action on behalf of a class
(i) comprising all persons or entities whose BSG Options were converted into
Medaphis Options in connection with the Merger and who suffered damages as a
result thereof, but (ii) excluding the defendants; members of the immediate
family of the individual defendants; any entity in which any defendant has or
had a controlling interest; and the legal affiliates, representatives, heirs,
controlling persons, successors and predecessors-in-interest or assigns of any
such excluded party (the "Class").
40. The members of the Class are so numerous that joinder of all members
is impractical, but the exact number of the members of the Class can only be
determined by discovery.
41. There are questions of law and fact common to the members of the
Class. All members of the Class are owed the same duties by defendants;
therefore, the questions of law and
11
<PAGE> 12
fact as to the liability of each defendant are common to the Class. Among the
common questions to the Class are:
(A) Did the BSG Defendants perform due diligence in their
investigation, negotiation and consummation of the Merger Agreement, Merger, and
related transactions?
(B) Did the BSG Defendants faithfully discharge their
fiduciary duty and duty of care in their investigation, negotiation and
consummation of the Merger Agreement, the Merger and related transactions?
(C) Did the BSG Defendants faithfully discharge their duties
of loyalty, candor, and fair dealing in their investigation, negotiation and
consummation of the Merger Agreement, the Merger and related transactions?
(D) Were the BSG Defendants negligent in their investigation,
negotiation and consummation of the Merger Agreement the Merger and related
transactions?
(E) Did the Medaphis Defendants provide the BSG Defendants
with materially false or misleading information in connection with the Merger
Agreement, the Merger and related transactions?
(F) Did the Medaphis Defendants' publicly disseminated
releases and statements before the Merger contain materially false or misleading
information?
(G) Did the Medaphis defendants act wilfully or recklessly in
omitting and/or misrepresenting material facts?
(H) Were the market prices for the Shares artificially
inflated by the material nondisclosures and/or misrepresentations?
(I) Have the members of the Class sustained damages?
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<PAGE> 13
(J) If so, what is the appropriate measure of damages?
42. The questions affecting individual members of the Class pertain
primarily to the amount of damages, and, therefore, the common questions of law
and fact predominate over any questions affecting individual members in that
defendants have acted on grounds generally applicable to the entire Class.
43. Plaintiffs' claims are typical of the claims of all other members of
the Class because plaintiffs and the other members of the Class sustained
damages arising out of defendants' misconduct.
44. Plaintiffs will fairly and adequately protect the interest of the
Class and have retained counsel who are experienced and competent in class
actions. Plaintiffs have no interest that is contrary to or in conflict with
those of the other members of the Class that they seek to represent.
45. There is no litigation already commenced by any other member of the
Class concerning the issues raised in this Complaint.
46. The size of the claims of some members of the Class may be relatively
small in comparison to the expense and burden of seeking legal redress
individually for the wrongs defendants committed against them, and absent Class
members have no substantial interest in individually controlling the prosecution
of individual actions.
47. Without a class action, defendants will continue to retain the
proceeds of their wrongful conduct.
48. No difficulties are likely to be encountered in the management of this
action as a Class action.
13
<PAGE> 14
49. A class action will cause an orderly and expeditious administration
of claims; will foster economies of time, effort and expense; and will insure
uniformity of decisions.
50. It is desirable to litigate in one forum the claims of the Class.
51. For these reasons, a class action is superior to all other available
methods for the fair and efficient adjudication of this controversy.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
52. At all relevant times, the market for the Shares was an efficient
market for the following reasons, among others:
(A) The Shares were listed and actively traded on NASDAQ, a highly
efficient and automated market.
(B) As a regulated issuer, defendant Medaphis filed periodic public
reports with the SEC. (C) Defendant Medaphis regularly communicated with public
investors via established market communication mechanisms, including through
regular disseminations of press releases on the national circuits of major
newswire services and through other wide-ranging public disclosures, such as
communications with the financial press, Dow Jones and other similar reporting
services.
(D) Defendant Medaphis was followed by securities analysts employed by
brokerage firms who wrote reports which were distributed to the sales force and
certain customers of their respective brokerage firms. Each of these reports was
publicly available and entered the public marketplace.
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<PAGE> 15
53. As a result, the market for the Shares promptly digested current
information regarding Medaphis from all publicly available sources and reflected
such information in the price of the Shares.
FACTUAL ALLEGATIONS
THE BSG DEFENDANTS' FINANCIAL INVESTIGATION AND NEGOTIATIONS
54. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants obtained from the Medaphis Defendants
access to already publicly available information, consisting of: (i) Medaphis's
Annual Report on Form 10-K for the year ending December 31, 1994 (including all
exhibits and items incorporated by reference); (ii) its Quarterly Reports on
Form 10-Q for the 3 quarters ending March 31, June 30 and September 30, 1995
(along with all exhibits and incorporated items); (iii) the proxy statement for
its April 27, 1995 annual shareholders' meeting; and (iv) its Current Reports on
Form 8-K filed with the SEC since September 30, 1995.
55. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants obtained from the Medaphis Defendants
access to: (i) Medaphis's audited consolidated balance sheets as of December 31,
1993 and 1994 and statements of operations, changes in stockholders' equity and
cash flows for the fiscal year then ended, along with the notes thereto; and
(ii) its unaudited consolidated balance sheet as of September 30, 1995.
56. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants, their accountants, counsel and other
authorized representatives had full access to, inter alia, all of Medaphis's
contracts, commitments, books, records and other information, and the right to
obtain
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<PAGE> 16
all financial, technical and operating data, as well as other information
pertaining to Medaphis's business.
57. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
certain material information about the finances and operations of Medaphis,
including, inter alia:
(A) Medaphis' financial condition during, inter alia, the fiscal year
1995, the fourth quarter 1995 and the first quarter 1996.
(B) The operations and revenues of a joint venture in which Imonics
GMBH, a wholly-owned subsidiary of Medaphis, held a 50% interest ("Joint
Venture").
(C) The results at Medaphis' largest operating subsidiary, Medaphis
physician Services Corporation ("MPSC"), were "improv[ing]" and Medaphis'
re-engineering project.
(D) The operations of Rapid Systems Solutions, Inc., a Medaphis
wholly-owned subsidiary ("Rapid"); Imonics; and all other of Medaphis's process
re-engineering and systems integration companies and capabilities and ability to
integrate their operations under BSG after the Merger.
FINANCIAL RESULTS
58. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
and investigated information about Medaphis's finances and results of operations
for the fiscal year 1995, the fourth quarter 1995 and the first quarter 1996.
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<PAGE> 17
59. As eventually set forth in a press release and its Form 10-K filed on
April I, 1996, defendant Medaphis recorded for the year ending December 31,
1995, a net loss of $1.1 million, and for the quarter ending December 31, 1995,
net income of $4.0 million.
60. As eventually set forth in a press release dated April 23, 1996, and
its Form 10-Q filed with the SEC on May 14, 1996, defendant Medaphis recorded
for the first quarter 1996 net income of about $13.2 million.
61. The fourth quarter 1995 results contained $4.0 million in revenue from
an Imonics license agreement.
62. Defendant Medaphis included in its Consolidated Statement of Income
for the first quarter 1996 about $12.5 million relating to its purported share
of net earnings from the Joint Venture.
63. In its April 23, 1996 press release, defendant Medaphis reported that
it was "pleased with the first quarter": revenues had increased by 24.l% over
the same quarter in the prior year, from $110.1 million to $136.6 million, and
that, excluding certain restructuring and merger costs, net income had increased
by 55% to $13.2 million and earnings per share had increased by 35% to $0.23 per
share.
64. The first quarter Form 10-Q, which provided to the public additional
details concerning its financial results, stated:
Revenue. Revenue increased 24.1% to $136.6 million in the
first quarter of 1996 as compared with $110.1 million in the
first quarter of 1995. Revenue growth results from: (i)
acquisitions; (ii) increases in the number of business
management services to clients; and (iii) increases in sales
to information management and systems integration clients. The
Company has consummated 14 business combinations during the
period from January 1, 1995, through March 31, 1996.
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Revenue of the Company's services division was $106.1 million
and $98.1 million, respectively, for the quarters ended March
31, 1996 and 1995. A substantial portion of the revenue in the
Company's services division is recurring, representing
approximately 70% of consolidated revenue. Revenue of the
Company's technology systems division was $30.9 million and
$12.3 million, respectively, for the quarters ended March 31,
1996 and 1995. The Company's overall internal revenue growth
during the quarter ended March 31, 1996 was approximately
19.5%
THE JOINT VENTURE'S OPERATIONS AND REVENUES
65. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
information about the Joint Venture's operations and finances.
66. In February, 1996, immediately before the execution of the Merger
Agreement, Medaphis, through Imonics, had entered into the Joint Venture. The
Joint Venture was formed to pursue custom software development and systems
integration projects for customer service systems in Europe.
67. The Joint Venture reportedly signed a large software licensing and
software engineering contract with a German telecommunications entity to provide
systems integration and work flow engineering systems and services over a
multi-year period.
68. Subsequently, defendant Medaphis provided similar, but less detailed
information about the Joint Venture to the public. In Defendant Medaphis' April
23, 1996 announcement of first quarter 1996 results, defendant Brown noted:
The performance of our client/server IT services business was
excellent and included formation of a joint-venture with a
subsidiary of Bertelsmann A.G. in Germany. The joint venture signed
a large contract with a telecommunications company during the
quarter.
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(Emphasis supplied)
69. The first quarter 10-Q also reported the formation of the Joint
Venture and disclosed inclusion of $12.5 million net earnings from the Joint
Venture.
70. In April 1996, officials of defendant Medaphis attended a
Robinson-Humphrey Co. conference at which they touted the successes at Imonics,
declaring that it was "going like gangbusters".
71. The market responded favorably to the information about the Joint
Venture. In an April 30, 1996 company report on Medaphis by Smith Barney, for
example, the Joint Venture was specifically cited as an example of one of the
areas in which Medaphis had "displayed strong growth."
MPSC AND THE RE-ENGINEERING PROJECT
72. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
and investigated information about the operations and results at MPSC and the
Re-engineering Project.
73. Purportedly to improve its operations and operating results,
productivity and cost efficiency, in late 1994 Defendant Medaphis undertook a
comprehensive re-engineering initiative (the "Re-Engineering Project") of its
physician accounts receivable and practice management operations at MPSC. The
Re-Engineering project involves, among other things, the consolidation of the
processing operations in over 300 offices into fewer than 10 large regional
processing centers. The Project also involves implementation of advanced
client/server computing in its processing operations and at local sales and
services offices. Before the Merger, application development, work flow
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<PAGE> 20
engineering and implementation of these advanced technologies was performed by
Imonics, a subsidiary of defendant Medaphis acquired in 1994.
74. As eventually represented in its Form 10-K for the 1995 fiscal year,
Defendant Medaphis represented to the BSG Defendants that the Re-Engineering
Project "is expected to be substantially completed during 1997."
INTEGRATION OF OTHER SUBSIDIARIES AND OPERATIONS
75. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
information about and investigated the operations of Medaphis' process
re-engineering and systems integration companies and capabilities and the
capability and costs of integrating under BSG.
76. Exhibit 5.15 to the Merger Agreement, provided, in pertinent part,
that:
BSG will be the parent/umbrella organization for all of Medaphis's
process re-engineering and systems integration companies and
capabilities (collectively, the "Relevant Businesses") . Imonics,
BSG Alliance/IT and other Relevant Business will become subsidiaries
or divisions of BSG and will form part of the "BSG (Business
Systems) Group."
77. On March 15, 1995, the date of the Merger Agreement, the Medaphis
Defendants issued a press release announcing the Merger Agreement that stated:
The merger with BSG is a major milestone in increasing our
technology capabilities. Working with Imonics and Rapid Systems
Solutions, BSG will lead our systems integration efforts and we
believe will accelerate transformation of the way transaction
processing is performed in the healthcare industry.
Over the past few years, BSG has focused on building the
infrastructure necessary to not only manage its growth, but also to
20
<PAGE> 21
manage the over 1,900 client/server-based technical staff who are
now a part of Medaphis. We are excited about our newly acquired
capabilities in client/server consulting and systems integration.
Imonics and Rapid Systems Solutions combined with BSG have created,
we believe, the largest pure client/server technology services
company in the country.
(Emphasis supplied).
THE MATERIAL INACCURACIES IN THE MEDAPHIS DEFENDANTS' INFORMATION
78. The Medaphis Defendants had misused accounting policy to
inappropriately record about $4 million in revenues from Imonics in the fourth
quarter of 1995, thereby inflating the financials of Medaphis and the price of
the Shares.
79. The Medaphis Defendants had misused accounting policy to
inappropriately record over $12 million in revenues from its Joint Venture in
the first quarter of 1996, thereby inflating the financials of Medaphis and the
price of the Shares.
80. As The Wall Street Journal reported on August 16, 1996:
Robert Olstein, the manager of the Olstein Financial Alert fund, a
mutual fund based in Purchase, N.Y., said he had recently sold the
stock short because of concerns about the company's accounting,
including rises in capitalized software costs and in what are called
"unbilled revenues". Such revenues reflect work done on contracts
for which customers have not yet been charged. Apparently it was the
profits resulting from some of those revenues that were wiped out in
the write-off that provoked yesterday's plunge.
(Emphasis supplied).
81. According to Medaphis' Form 8-K, which it filed on July 9, 1996 to
report on its acquisition of HDS, its revenue recognition policy is as follows:
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
21
<PAGE> 22
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.
(Emphasis added)
82. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should have verified the validity of the Imonics licensing
agreement and the Joint Venture's contract; the ability of Imonics to complete
them satisfactorily; and the propriety of Medaphis's accounting practices and
inclusion of revenues from the license agreement and the Joint Venture contract
in its financial results.
83. Moreover, the Medaphis Defendants failed to disclose the extent of the
problems being experienced by the Company's MPSC subsidiary and the
Re-Engineering Project, and there was no reasonable basis for the defendants'
information that MPSC was improving and that the Reengineering Project was
positioning the Company for important improvements in operating results.
84. MPSC had not been able, in fact, to consolidate offices, improve
business procedures or develop technology as fast as planned.
85. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should likewise have discovered the extent of the problems
being experienced by the Company's MPSC subsidiary and the Re-engineering
Project, and further have verified the validity of the basis
22
<PAGE> 23
for the defendants' information that MPSC was improving and that the
Re-engineering Project was positioning the Company for important improvements in
operating results.
86. The Medaphis Defendants also acted knowingly or recklessly by touting
the capability and costs of BSG merger to Medaphis without also disclosing the
substantial financial adverse impact that would result from the need to
integrate Rapid's Imonic's operations with BSG.
87. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should have verified the capability and costs of
integrating Medaphis's process re-engineering and systems integration companies
and capabilities under BSG.
MEDAPHIS' TRUE FINANCIAL CONDITION EXPOSED
88. Only three months after the Merger, Medaphis' true financial condition
and operating difficulties began to be exposed in two bombshell announcements.
89. The first bombshell was on August 14, 1996. After the close of
trading, defendant Medaphis issued a press release disclosing its severe
problems with Imonics and with MPSC and the Re-engineering Project. Defendant
Medaphis announced that it expected to report a large loss, in the range of
$0.28 to $0.33 per share, in the third quarter of 1996, which would include
charges in the range of $35 to $40 million.
90. A substantial portion of Medaphis' difficulties were reported to have
arisen from the need to reorganize Imonics and its problems with the Joint
Venture's contract, so positively reported by defendant Medaphis previously.
Explaining the situation, defendant Medaphis reported:
Management has commenced the process of reorganizing the
Imonics systems integration business. This
reorganization resulted from a review by BSG of
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<PAGE> 24
Imonics' overall operations and an assessment of recent
difficulties encountered by Imonics with a large systems
integration agreement entered into by its European joint
venture.
The reorganization of Imonics will include efforts to
more closely align Imonics' business practices with
those of BSG. The BSG model is structured to manage
client/server information technology projects with
experienced project management. It is currently
anticipated that Imonics' European joint venture will
continue with its system integration project on terms
and conditions mutually satisfactory to the parties, but
that the agreement relating to the project will be
restructured.
91. Defendant Medaphis further disclosed that about $9 million of
charges would be made in the third quarter to write off revenues from the Joint
IVenture, caused by the restructuring of the systems integration agreement
entered into by the Joint Venture. Another $15 million in charges related to the
reorganization of Imonics.
92. In addition, defendant Medaphis revealed that MPSC was continuing to
experience poor results, due in part to delays in the Re-Engineering Project. It
further disclosed that, as a result of these problems, Medaphis would take a
restructuring charge of approximately $11 million.
24
<PAGE> 25
93. The second bombshell came on October 22, 1996, when defendant
Medaphis further revealed the extent of its problems with Imonics and the joint
venture and admitted that its prior financial statements were materially
inaccurate. It announced that its net loss per share for the third quarter was
actually greater than anticipated on August 14: $0.51, compared to a predicted
$0.28 to $0.33.
94. Again, a substantial portion of the loss was attributable to its
severe problems with Imonics, again resulting in large charges:
(A) There was a charge against revenues of $16.8 million, relating
primarily to Imonics' reorganization, including reorganization of the Joint
Venture's contract.
(B) About $8.5 million was included in salaries and wages relating to
employees and contractors who were no longer providing services to Imonics.
(C) In addition, a $24.3 million restricting charge was recorded,
consisting of about $10,7 million relating to a write-down of Imonics' assets;
$3.7 million of severance costs, primarily for former Imonics employees; $3.2
million in exist costs for lease terminations; and $6.7 million of legal and
other costs.
95. Defendant Medaphis further admitted the need to restate its financial
results for the year and the three months ended December 31, 1995. It was
reported that the restatement related to the 1995 Imonics license agreement.
License fee revenue payable under this agreement had been recognized during the
fourth quarter of 1995. Medaphis anticipated that net income for the quarter and
year ended December 3l, 1995 of $5.1 million, resulting in a net loss for 1995
of $8.5 million, compared with the previously reported net loss of $3.4 million;
and a net loss for the quarter of $1.1 million, instead of the previously
reported net income of $4.0 million.
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<PAGE> 26
96. Medaphis further reported that during the third quarter 1996, it
terminated 430 employees, including Imonics' entire former senior management
team. The firing of Imonics' senior management team had first been announced on
August 26, 1996.
THE SHARES CRASH
97. The market has reacted sharply and dramatically to the two waves of
revelations.
98. On the day following the August 14 disclosures, the price of the
Shares plummeted 60%. The Shares closed at $14-1/4, after dropping by $21-3/8.
Some 43 million Shares changed hands during the day, making it the most active
U.S. issue and representing the sixth-highest single trading day in NASDAQ
history, excluding penny stocks.
99. Similarly, after the second disclosure on October 22, 1996, the
Shares, which had fluctuated in the $12 to $18 range, plunged almost another 38%
and has traded as low as $8.25. On November 6, 1996, the Shares closed at $8.56
and 1/4.
100. These facts, as alleged herein, provide a strong inference that:
(A) The BSG Defendants failed to perform due diligence and exercise
reasonable care in the investigation, negotiation and consummation of the Merger
Agreement, Merger and related transactions. Had they performed due diligence and
exercised the requisite care, they would have discovered the inappropriate
accounting policies, operational difficulties, and adverse financial information
ultimately admitted by the Medaphis Defendants.
(B) The BSG Defendants approved the Merger Agreement and the
Merger because of substantial personal inducements given to them, and thus
violated their duties of loyalty and candor.
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<PAGE> 27
(C) The BSG Defendants used the extensive financial and operational
information obtained about Medaphis during the investigation and negotiation of
the Merger Agreement, Merger and related transactions to engage in post-Merger
speculation in the Shares, in breach of their duties of loyalty and candor.
(D) The Medaphis Defendants made materially false and misleading
statements to the BSG Defendants and the investing public knowing that said
statements issued or disseminated in the name of the Company were materially
false and misleading; knew or recklessly disregarded that such statements would
be issued or disseminated to the BSG Defendants and the investing public; and
knowingly and substantially participated or acquiesced in the issuance or
dissemination of such statements.
COUNT I
AGAINST ALL THE BSG DEFENDANTS FOR FAILURE
TO PERFORM DUE DILIGENCE
101. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
102. Each BSG Defendant owed a fiduciary duty to the plaintiffs and the
other members of the Class because of his or her position as a director, officer
and/or controlling shareholder of BSG to perform due diligence in their
investigation of Medaphis and their investigation and negotiation of the Merger
Agreement, the Merger and related transactions.
103. The BSG Defendants failed to perform due diligence in their
investigation of Medaphis and their investigation and negotiation of the Merger
Agreement, the Merger and related transactions.
104. Had the BSG Defendants performed due diligence, they would have
uncovered the Medaphis Defendants' misrepresentations and the truth about
Medaphis' financial condition.
27
<PAGE> 28
105. Had the BSG Defendants performed due diligence, they would not have
approved the Merger Agreement, the Merger and related transactions on the terms
and conditions agreed to and/or would have negotiated better terms for the
conversion of BSG Options into Medaphis Options.
106. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duty and duty to perform due diligence
owed to plaintiffs and all other members of the Class.
107. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT II
AGAINST ALL THE BSG DEFENDANTS FOR BREACH OF
FIDUCIARY DUTY AND DUTY OF CARE
108. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
109. Each BSG Defendant owed a fiduciary duty and duty of care to the
plaintiffs and the other members of the Class because of his or her position as
a director, officer and/or controlling shareholder of BSG to adequately
investigate Medaphis and investigate and negotiate the Merger Agreement, the
Merger and related transactions.
110. The BSG Defendants failed to exercise the degree of care owed to the
Class to adequately investigate Medaphis and investigate and negotiate the
Merger Agreement, the Merger and related transactions.
111. Had the BSG Defendants exercised the degree of care owed to the
Class, they would have uncovered the Medaphis Defendants' misrepresentations and
the truth about Medaphis' financial condition.
28
<PAGE> 29
112. Had the BSG Defendants exercised the required degree of care, they
would not have approved the Merger Agreement, the Merger and related
transactions on the terms and conditions agreed to and/or would have negotiated
better terms for the conversion of BSG Options into Medaphis Options.
113. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties to plaintiffs and all other
members of the Class.
114. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT III
AGAINST ALL THE BSG DEFENDANTS FOR BREACH OF
DUTIES OF CANDOR, LOYALTY AND FAIR DEALING
115. Plaintiffs adopt by reference paragraphs I through 100 hereof.
116. Each BSG Defendant owed fiduciary duties of candor, loyalty and fair
dealing to the plaintiffs and the other members of the Class because of his or
her position as a director, officer and/or controlling shareholder of BSG to
adequately investigate Medaphis and investigate and negotiate the Merger
Agreement, the Merger and related transactions.
117. The BSG Defendants approved the Merger Agreement, the Merger and
related transactions because their terms were favorable to the BSG Defendants.
118. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties of candor, loyalty and fair
dealing to plaintiffs and all other members of the Class.
29
<PAGE> 30
119. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT IV
AGAINST ALL THE BSG DEFENDANTS FOR NEGLIGENCE
120. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
121. The BSG Defendants negligently investigated Medaphis and investigated
and negotiated the Merger Agreement, the Merger and related transactions.
122. Had the BSG Defendants exercised the degree of care owed to the
Class, they would have uncovered the Medaphis Defendants' misrepresentations and
the truth about Medaphis' financial condition.
123. Had the BSG Defendants exercised the required degree of care, they
would not have approved the Merger Agreement, the Merger and related
transactions on the terms and conditions agreed to and/or would have negotiated
better terms for the conversion of BSG Options into Medaphis Options.
124. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties to plaintiffs and all other
members of the Class.
125. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
30
<PAGE> 31
COUNT V
AGAINST ALL THE MEDAPHIS DEFENDANTS FOR FRAUD AND DECEIT
126. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
127. For several years, under the leadership of defendant Brown, defendant
Medaphis had grown substantially through a strategy of aggressive growth
primarily by acquisitions such as the Merger. Since 1988, defendant Medaphis
acquired over 40 companies, including more than 20 acquired in the past two
years. The growth was financed through a rising price in its Shares. Because
defendant Medaphis paid for most of its acquisitions through exchange of stock,
as it did for BSG, the higher the price of the Shares, the fewer Shares it had
to pay to make acquisitions.
128. The Medaphis Defendants knew that in order for Medaphis to be able to
continue to grow through acquisitions, most often using the Shares as currency,
it was imperative that the Shares trade at high prices. The Medaphis Defendants
further realized that they must present their overall business in an
extraordinary favorable light to maintain and increase the price of the Shares.
129. Specifically with regard to the Merger, the Medaphis Defendants had a
substantial incentive to keep the price of the Shares artificially high in order
to give up fewer shares in the Merger as well as increase the exercise price of
the Medaphis Options, thus lowering their value.
130. Further, defendant Brown had a substantial personal incentive to
inflate the price of the Shares in order, among other things, to: (i) protect
and enhance his executive position and the consequent substantial compensation
and prestige; and (ii) enhance the value of his substantial personal holdings of
Medaphis securities and options to acquire such securities.
131. The Medaphis Defendants, individually and in concert, engaged in a
plan, scheme and course of conduct, pursuant to which they knowingly and/or
recklessly engaged in acts, transactions,
31
<PAGE> 32
practices, and courses of business which operated as a fraud and deceit, and
made various untrue statement of material fact and omitted to state material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, as described herein.
The purpose and effect of the scheme was to artificially inflate the price of
the Shares.
132. The Medaphis Defendants, directly and indirectly, engaged and
participated in, and aided and abetted a common plan, scheme and continuing
course of conduct to conceal or fail to disclose material information about the
business, management, earnings, and finances of Medaphis as described herein.
The Medaphis Defendants employed devices, schemes and artifices to defraud and
engaged in acts, practices and a course of conduct as herein alleged in an
effort to fraudulently reduce the amount of and exercise price of Medaphis
Options, which included the making of untrue statements of material facts,
omitting to state material facts necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading,
and engaging in transactions, practices and courses of business which operated
as a fraud or deceit.
133. The false and misleading statements and omissions therefrom, were
done with the intent to deceive or defraud or to aid and abet the deception and
defraud, or were made with such recklessness or indifference to truth as to
constitute intent to deceive and fraud.
134. The acts, practices and common course of conduct by said defendants
operated as a fraud and deceit upon (a) the market in the Shares; and (b)
plaintiffs and the other members of the Class.
135. The Medaphis Defendants had a duty to promptly disseminate accurate
and truthful information with respect to Medaphis' operations, results and
financial condition, or to cause and
32
<PAGE> 33
direct that such information be disseminated, and to promptly correct any
previously disseminated information that was misleading.
136. As a result of the Medaphis Defendants' fraud and deceit, the market
price of the Shares was artificially inflated at the time of both the Merger
Agreement and the Merger, causing injury to plaintiffs and other members of the
class.
WHEREFORE, individual and representative plaintiffs, Ernest Hecht and
Stephen D. Strandberg, on behalf of themselves and the other members of the
Class, respectfully request that this Court:
(A) Determine that this lawsuit may be maintained as a class action
pursuant to Rules 23(a) and 23(b) (3) of the Federal Rules of Civil Procedure on
behalf of the Class defined herein;
(B) Award compensatory damages against the defendants, jointly and
severally, in favor of the plaintiffs and the other members of the Class in an
amount to be determined by the Court as fair and just for the misconduct of
defendants;
(C) Award the plaintiffs and the other members of the Class punitive
damages;
(D) Awarding such further relief as this Court may deem just and
equitable, including any equitable or injunctive relief as permitted by the law
or equity to attach, to impound or otherwise restrict the defendants' assets to
assure plaintiffs have an effective remedy;
(E) Awarding plaintiffs and the other members of the Class
pre-judgment and post-judgment interest, as well as their reasonable attorneys'
fees and expert witnesses' fee' other costs.
33
<PAGE> 34
WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By:/s/
-------------------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED: November 8, 1996
OF COUNSEL:
FREUNDLICH & REISEN
159 Millburn Avenue
Millburn, New Jersey 07041
(201) 376-1090
LAWRENCE E. FELDMAN, ESQ.
Lawrence E. Feldman & Associates
Manor Professional Building
7837 Old York Road
Elkins Park, PA 19028
(215) 635-4704
34
<PAGE> 35
DEMAND FOR TRIAL FOR JURY
Individual and representative plaintiffs, Ernest Hecht and Stephen D.
Strandberg, individually and on behalf of all others similarly situated, demand
trial by jury on all issues.
WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By: /s/
-----------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED:
35
<PAGE> 36
DESIGNATION OF TRIAL COUNSEL
Trial counsel on behalf of Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others similarly situated shall be Nicholas W.
McClear, Esq.
WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By: /s/
----------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED: November 8, 1996
36
<PAGE> 37
CERTIFICATION PURSUANT TO RULE 4:5-1
We hereby certify that the matter in controversy is not, to our knowledge,
the subject of any other pending action or arbitration proceeding, and that no
other action or arbitration proceeding is contemplated by the plaintiffs at this
time. We are not aware of any other parties who should be joined in this action
at this time.
By: /S/
----------------------------
NICHOLAS W. McCLEAR
DATED: November 8, 1996
37
<PAGE> 1
EXHIBIT 99.5
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- ------------------------------------------
)
THOMAS W. BROWN, ADMINISTRATOR, ) NO. 1 96-CV 2904
THOMAS W. BROWN PROFIT SHARING )
PLAN, Derivatively on Behalf of ) FIRST AMENDED VERIFIED
MEDAPHIS CORPORATION, ) DERIVATIVE COMPLAINT
)
Plaintiff, ) PLAINTIFF DEMANDS A
vs. )
RANDOLPH G. BROWN, ROBERT C. BELLAS, ) TRIAL BY JURY
JR., DAVID R. HOLBROOKE, RICHARD H. )
STOWE, JOHN A. DOWNER, DAVID E. )
McDOWELL, DENNIS A. PRYOR, STEVEN G. )
PAPERMASTER, MICHAEL L. DOUGLAS, )
MICHAEL R. COTE and JAMES S. )
DOUGLASS, )
)
Defendants, )
and )
)
MEDAPHIS CORPORATION, )
)
Nominal Defendant. )
- ------------------------------------------)
Plaintiff, through his attorneys, for his First Amended Derivative
Complaint ("Complaint") alleges, as of November 1, 1996, the date of the
original filing of Plaintiff's derivative complaint, upon information and
belief, except as to the allegations contained in paragraph 2, which are alleged
upon personal knowledge, as follows:
<PAGE> 2
INTRODUCTION
1. This is a shareholders' derivative action brought on behalf of
Medaphis Corporation (hereinafter "Medaphis" or "the Company"), a Delaware
corporation whose headquarters and principal place of business are in Atlanta,
Georgia. Medaphis' shares are publicly traded on the NASDAQ market, with at
least hundreds of record shareholders and many thousands of beneficial
shareholders. In this action, plaintiff, on behalf of Medaphis, alleges that
defendants have damaged Medaphis by deliberately, in bad faith or recklessly (I)
engaging in violations of federal securities laws, (ii) implementing a sham
system of internal controls completely inadequate to ensure timely and proper
accounting and reserves to account for receivables, (iii) engaging in fraud and
securities fraud, and (iv) by damaging the Company's reputation. As alleged
herein, defendants' actions and omissions were deliberate, undertaken in bad
faith, fraudulent, and constituted breaches of their fiduciary duties of loyalty
and due care. The acts and omissions alleged herein occurred during the period
from February 29, 1996 through October 22, 1996 (the "Relevant Period").
Defendants were motivated by the desire to wrongfully obtain the resources
Medaphis needed to succeed in its existing commitments, which it could not meet,
at a nominal cost, and thereby secure their continued lucrative employments as
officers and directors of Medaphis and its subsidiaries. Defendants knew that if
Medaphis' true financial and operational condition became known, Medaphis would
be unable to continue to grow using its stock as currency for acquisitions, to
gain expertise and manpower to perform under existing Medaphis contracts which
Medaphis lacked the resources to perform, as set forth below. Defendants knew
that if the truth about Medaphis became public, Medaphis would be forced to
restructure and eliminate or divest itself of subsidiaries of which certain
defendants are
-2-
<PAGE> 3
officers and founders, and otherwise renegotiate the Company's major contracts
and credit resources, to the personal detriment of defendants.
THE PARTIES
2. Plaintiff Thomas W. Brown, Administrator, Thomas W. Brown
Profit Sharing Plan, resides in Carnegie, Pennsylvania. Plaintiff purchased
1,260 shares of Medaphis common stock on June 21, 1995 and has been a
shareholder of the Company continuously since that date.
3. Nominal Defendant Medaphis is a provider of outsourced
billing, accounts receivable and business management systems and services to the
health care industry. As of August 12, 1996, there were more than 71 million
shares of Medaphis common stock outstanding. During the Relevant Period, the
Company's common stock was actively traded on the NASDAQ National Market System.
4. Defendant Randolph G. Brown ("Brown") was at all times
relevant the President, Chief Executive Officer and a Director of Medaphis. He
joined the Company in July 1987 as Executive Vice President and Chief Financial
Officer and was named President, Chief Executive Officer and Director in April
1988, and Chairman in January 1991. Defendant Brown received $1,508,396 in total
cash compensation in 1995, which included a $1 million signing bonus received as
part of a five-year employment agreement he entered into in March 1995. Also in
1995, defendant Brown received options to purchase 200,000 shares of Medaphis
common stock at an exercise price of $22.8150 per share. As of March 12, 1996,
defendant Brown beneficially owned a total of 500,750 shares of the Company's
common stock. Brown executed the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission
-3-
<PAGE> 4
("SEC") on April 1, 1996. Brown was still a director of the Company on November
1, 1996, when this derivative action was first filed.
5. Defendant Robert C. Bellas, Jr. ("Bellas") has been a director
of Medaphis since 1987, and is a member of the Audit and Compensation Committees
of the Board of Directors. Bellas serves as Chairman of the Compensation
Committee. Bellas signed the Company's Annual Report on Form 10-K filed with the
SEC on April 1, 1996. As of April 3, 1996, Bellas beneficially owned 8,115
shares of the Company's common stock, including shares issuable upon the
exercise of stock options. Bellas signed Medaphis' registration statement on
Form S-3 filed with the SEC on July 12, 1996.
6. Defendant David R. Holbrooke ("Holbrooke") has been a
director of Medaphis since 1994, and is a member of the Audit Committee of the
Board of Directors. Holbrooke signed the Company' s Annual Report on Form 10-K
filed with the SEC on April 1, 1996. As of April 3, 1996, Holbrooke beneficially
owned 33,900 shares of the Company's common stock, including shares issuable
upon the exercise of stock options. Holbrooke signed Medaphis' registration
statement on Form S-3 filed with the SEC on July 12, 1996.
7. Defendant Richard H. Stowe ("Stowe") was a director of
Medaphis from 1988 until approximately May 16, 1996, and was a member of the
Audit and Compensation Committees of the Board of Directors. Stowe chaired the
Company's Audit Committee. Stowe signed the Company's Annual Report on Form 10-K
filed with the SEC on April 1, 1996. As of April 3, 1996, Stowe beneficially
owned 13,762 shares of the Company's common stock, including shares issuable
upon the exercise of stock options.
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8. Defendant John A. Downer ("Downer") was a director of Medaphis
from 1989 until approximately May 16, 1996. Downer signed the Company's Annual
Report on Form 10-K filed with the SEC on April 1, 1996.
9. Defendant David E. McDowell ("McDowell") has since
approximately May 16, 1996, served as a director of Medaphis. Since
approximately October 31, 1996, McDowell has served as Chairman and Chief
Executive Officer of Medaphis, assuming these positions following Brown's
resignation of these positions. McDowell signed Medaphis' registration statement
on Form S-3 filed with the SEC on July 12, 1996.
10. Defendant Dennis A. Pryor ("Pryor") has since 1992 served as
a director of Medaphis. Pryor served as Chairman of Medaphis subsidiary CompMed,
acquired by merger in 1992. Pryor signed Medaphis' registration statement on
Form S-3 filed with the SEC on July 12, 1996.
11. Defendant Steven G. Papermaster ("Papermaster") has, since
approximately May 16, 1996, served as a director of Medaphis. Papermaster is
Chairman and CEO of Medaphis subsidiary BSG Corp., acquired by merger on May 6,
1996. Papermaster signed Medaphis' registration statement on Form S-3 filed with
the SEC on July 12, 1996.
12. Defendant Michael L. Douglas ("Douglas") from approximately
June 26, 1996 to approximately February 5, 1997, served as a director, Vice
Chairman and Chief Operating Officer of Medaphis. Although represented by
Medaphis to be a director at the time, Douglas did not sign the registration
statement on Form S-3 filed with the SEC on July 12, 1996.
13. Defendant Michael R. Cote ("Cote") is and was, at all relevant
times, Senior Vice President-Finance and Chief Financial Officer of the Company.
Press releases issued by
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defendants during the Relevant Period consistently identified Cote as the
contact person at the Company for purposes of communications with the investment
community. Cote signed all periodic reports and registration statements filed
with the SEC during the Relevant Period.
14. Defendant James S. Douglass ("Douglass") is and was, at all
relevant times, Vice President, Corporate Controller, and Chief Accounting
Officer of the Company.
15. Brown, Bellas, Holbrooke, Stowe, Downer, McDowell, Pryor,
Papermaster and Douglas, are collectively hereinafter sometimes referred to as
the "Director Defendants".
16. Brown, Bellas, Holbrooke, Stowe, Downer, McDowell, Pryor,
Papermaster, Douglas, Cote and Douglass are collectively hereinafter sometimes
referred to as the "Individual Defendants".
JURISDICTION AND VENUE
17. This court has subject matter jurisdiction over this action
pursuant to 28 U.S.C. ss.ss. 1332(a) (1) and 1367(a). Venue is proper pursuant
to 28 U.S.C. ss. 1391(a)(2) because a substantial part of the events or
omissions giving rise to the claims set forth herein occurred in this judicial
district.
SUBSTANTIVE ALLEGATIONS
MEDAPHIS' BUSINESS OPERATIONS AND METEORIC
GROWTH THROUGH ACQUISITIONS
18. Medaphis has consistently described itself as a leading
provider of business management systems and services to the healthcare industry.
The Company's original and core business consists of billing, collection, and
other outsourced financial services designed to assist its physician clients
with the business management functions associated with providing medical
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services. Medaphis also provides subrogation and related recovery services
primarily to healthcare payers, scheduling and information management systems to
hospitals and emerging integrated healthcare delivery systems, and systems
integration and work flow engineering systems and services.
19. Medaphis reportedly provides business management systems and
services to over 19,000 physicians and over 2,000 hospitals across the United
States, subrogation and services to healthcare plans covering in excess of 23
million people nationwide, and systems integration and work flow engineering
systems and services in the United States and abroad. The Company's operations
are organized into two principal operating units: Medaphis Services Corporation,
which includes all doctor and hospital transaction processing companies,
including MPSC; and Medaphis Systems Corporation, which includes all of
Medaphis' technology companies, including its systems integration businesses
(such as Imonics) and its healthcare information businesses (such as Atwork) .
20. Over the past several years, a key component of Medaphis'
stated business strategy involved growth through acquisitions of other
businesses, using its stock as currency. Indeed, Medaphis built its reputation
in the investment community by representing itself as a fast-growing company
with an aggressive acquisition program and a successful history of integrating
those acquisitions smoothly into its overall business operations. Such
representations - which, as will be shown herein, were demonstrably false and
misleading - convinced the investment community that the Company's strategy was
successful and poised Medaphis for future earnings growth. For example:
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Analysts liked the flawless way Medaphis assimilated these firms [it
acquired], which formed the core of the company's 40-plus acquisitions
over eight years. As revenue grew fivefold, Medaphis gained Wall Street
stardom. The Atlanta Journal and Constitution, September 8, 1996.
21. The Company's rising stock price financed Medaphis' growth
strategy. Because Medaphis paid for most of its acquisitions with stock, the
higher the price of the stock, the fewer shares the Company had to issue to
acquire target businesses.
22. Prior to and during the Relevant Period, defendants left no
doubt that Imonics -- a company acquired by Medaphis in late 1994 -- was one of
the keys to the Company's success, and enabled the Company to continue its
strategy of growth through acquisitions. Medaphis consistently represented that
the Imonics acquisition allowed it to diversify its operations from primarily
billing and accounts receivable management and enabled the Company to offer
integration services to various health care providers and other businesses.
Imonics was also put in charge of re-engineering the physician billing business
of Medaphis, which falls under MPSC, the Company's largest operating unit, which
reportedly accounts for approximately 60% of the Company's total services
revenues.
23. With the acquisition of Imonics, Medaphis began a
much-publicized project to re- engineer the paper and labor intensive business
of MPSC in order to significantly reduce personnel-related costs, upgrade the
Company's systems to the level of other service industries, and provide for
economies of scale. Defendants have referred to this project as the
"Re-Engineering Project".
24. The Re-Engineering Project was designed to allow for the
consolidation of the processing operations of MPSC that had previously been
conducted in over 300 local physician
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backoffice operations into fewer than 10 large regional data processing centers.
The Re-Engineering Project involved designing and installing software through
Imonics to automate the Company's billing process and reduce the quantity of
paper processed.
FALSE AND MISLEADING STATEMENTS DURING THE
RELEVANT PERIOD
1. DEFENDANTS' MOTIVATION AND METHODOLOGIES
25. The defendants were aware that in order for Medaphis to
preserve its status as a Wall Street "star," it would have to continue
aggressively acquiring high-profit technology companies to generate revenues
sufficient to maintain its growth and cover the high costs of its Re-Engineering
Project. Moreover, to continue its acquisition strategy, Medaphis would have to
use it stock as currency. To this end, beginning at the end of 1995, defendants
set out to increase the price of Medaphis stock and thereby ensure that the
Company's acquisition pipeline remained robust by issuing a series of materially
false and misleading public statements. Specifically, defendants knew that, but
for Medaphis continuing its acquisition strategy, Medaphis would be unable to
meet its obligations under existing contracts, and would be forced to eliminate,
divest or otherwise restructure its operations to the detriment of defendants'
positions with Medaphis and the Medaphis subsidiaries of which defendants were
founders and employees.
26. The materially false and misleading public statements issued
by defendants related in large part to reported financial results and financial
statements that did not comply with Generally Accepted Accounting Principles
("GAAP"). GAAP encompasses the rules, conventions and practices recognized and
employed by the accounting profession for the preparation financial statements.
Statements of Financial Accounting Standards are promulgated by the profession's
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Financial Accounting Standards Board, and are considered the highest authority
of GAAP. SEC Regulation S-X (17 C.F.R. ss.210.4-01(a)(1)) provides that
financial statements filed with the SEC which are not prepared in compliance
with GAAP are presumed to be misleading and inaccurate.
27. Defendants' false and misleading statements also related to
narrative misrepresentations concerning: Medaphis' business operations and the
Re-Engineering Project; Medaphis' earnings growth; the operating performance,
condition and prospects of Imonics; and Medaphis' acquisition and integration of
several companies into the operations of Imonics.
28. Defendants issued these statements directly, through press
releases, SEC filings, and annual and quarterly reports to shareholders.
Defendants also provided guidance to securities analysts and used them as
conduits to provide false and misleading information to the investment
community.
29. In writing their reports, several of which are referred to
herein at paragraphs 32, 33, 34, 63, 67, and 86-88 securities analysts relied in
substantial part upon information provided to them privately by the Company.
Indeed, it was the Company' s practice to have key members of its management
team, including defendants Brown and Cote, communicate with securities analysts
on a regular basis to discuss the Company's business, operations, performance
and prospects. Defendants knew that by disseminating information to the
investment community, investors would rely and act upon such information and
that such information would have in effect on the market price of the Company's
Stock.
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2. FEBRUARY 6, 1996 PRESS RELEASE ANNOUNCING FOURTH QUARTER
AND YEAR-END 1995 RESULTS AND RELATED ANALYSTS REPORTS
30. On February 6, 1996, defendants issued a press release
announcing the Company's results for the fourth quarter and year ended December
31, 1995. The Company reported fourth quarter earnings of $11.4 million or $0.22
per share before one-time merger and other charges. These results, which were in
line with analysts' estimates, represented a more than 50% increase over
reported earnings of $0.14 per share in the fourth quarter of 1994. For the full
year of 1995, Medaphis reported operating earnings of $41.9 million or $0.82 per
share before charges, representing an increase of approximately 80% over
reported operating earnings for the full year of 1994. The Company also reported
in the February 6, 1996 release that operating revenues grew 29% in the fourth
quarter, to $122.5 million, also in line with analysts' projections. Revenue for
the year ended December 31, 1995 was reportedly $467.8 million, up 47% from
$319.1 million in the same period in 1994.
31. In this press release, defendant Brown noted that the
Re-Engineering Project was progressing well and had achieved "significant
milestones", and that the Company's technology division (which includes Imonics
and Atwork) "continued to grow rapidly and show positive operating results
outperforming our expectations in the second half of 1995" and was "effectively
offsetting the margin pressure and results" being experienced by MPSC.
32. Securities analysts following Medaphis, while taking note of
the margin pressures at MPSC, recommended the purchase of Medaphis stock based
on defendants' representations and other information provided by the Company.
For example, on February 7, 1996, one day
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after the quarterly and annual operating results were issued, Donaldson, Lufkin
& Jenrette issued a research report which stated:
Medaphis reported Q4 and year end 1995 results from continuing
operations of $0.22 and $0.82, respectively.... Based on the results...
it is becoming clear that the higher-growth technology businesses (such
as Imonics, Atwork and Consort) are more than offsetting the margin
pressures at MPSC. As MEDA essentially hit our EPS projections, we
remain comfortable with our $1.07 EPS estimate for this year and a
range of $1.40 - 1.50 for 1997.
33. In a similar vein, a research report issued by Hambrecht &
Quist on February 7, 1996, again prepared on the basis of information provided
by the Company and/or its senior management stated:
Management indicates that, in addition to the technology units, several
of the recent acquisitions are experiencing growth that is well-above
the corporate average. Overall, the company 's internal growth has
largely been moderated by a lack of growth in the MPSC unit. Looking
forward, this unit should see better growth as the re-engineering
effort winds down. MPSC's growth, when combined with the other units,
should accelerate Medaphis' internal growth rate.... The company
continues to progress on the re-engineering front.... To reiterate,
while Medaphis' re-engineering is modestly depressing margins in the
near-term, we believe the long term efficiencies gained will more than
offset any pricing pressure in the core billing and receivables market
and fuel significant EBITDA margin expansion in 1997.
34. Likewise, a report issued by the firm of Morgan Stanley on
February 6, 1996, on the basis of information provided by the Company and/or its
senior management, stated in relevant part:
MEDA's overall fundamentals continue to be buoyed by its strong
technology divisions. We estimate that the companies Atwork, Imonics,
and recently acquired Consort divisions will be the driving force to
margins. We estimate that these divisions are on the order of 1-2 times
more profitable than MEDA's core A/R, billing business. As evidence of
MEDA's conviction here, it has significantly added to staff at the
Imonics subsidiary, increasing headcount from 80 to 300 in 1995.
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The February 6, 1996 press release announcing operating results for the fourth
quarter and full year, 1995, and the information provided by defendants to the
market through the analysts' reports referred to in paragraphs 30-34 were
materially false and misleading in at least the following respects:
(a) The financial results incorporated and discussed
therein were false and had been achieved only through the use of improper
accounting practices in violation of GAAP. As was ultimately disclosed at the
close of the Relevant Period, the operating results reported for this period
were improperly and materially overstated by at least $5 million as a result of
the reporting of revenues and profits under software license agreements entered
into by Imonics, which is permissible under GAAP only where customers are
unconditionally obligated to perform under the agreements. In fact, unknown to
the general public, in order to create the illusion that more customers had
signed such license agreements than was actually the case, the Company had
aggressively enlisted one or more major customers but then provided them with
secret side letters, enabling the customer(s) to avoid paying all of the fees
payable under the agreements. This was improper under GAAP, in the following
respects:
Accounting Research Bulletin ("ARB") 43, Chapter 1, Section A: Profit
is deemed to be realized when a sale in the ordinary course of business
is effected, unless the circumstances are such that the collection of
the sale price is not reasonably assured. (Emphasis added.)
Financial Accounting Standards Board ("FASB") Statement of Concepts
("CON"), paragraph 83 (a): Revenues and gains are generally not
recognized until realized or realizable. Revenues and gains are
realized when products (goods or services), merchandise, or other
assets are exchanged for cash or claims to cash. Revenues and gains are
realizable when related assets received or held are readily convertible
to known amounts of cash or claims to cash. (Emphasis added).
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FASB Statement of Standards No. 5, paragraph 27: Contingencies that
might result in gains usually are not reflected in the accounts since
to do so might be to recognize revenue prior to its realization.
FASB Statement of Standards No. 48 ("FAS48"), paragraph 6: If an
enterprise sells its product but gives the buyer the right to return
the product, revenue from the sales transaction shall be recognized at
time of sale only if all of the following conditions are met: (1) The
seller's price to the buyer is substantially fixed or determinable at
the date of sale; (2) The buyer has paid the seller, or the buyer is
obligated to pay the seller and the obligation is not contingent on
resale of the product; (3) The buyer's obligation to the seller would
not be changed in the event of theft or physical destruction or damage
of the product; (4) The buyer acquiring the product for resale has
economic substance apart from that provided by the seller; (5) The
seller does not have significant obligations for future performance to
directly bring about resale of the product by the buyer; and the amount
of future returns can be reasonably estimated.
Where resolution of a significant contingency is part of a license agreement,
then "a sale in the ordinary course of business" has not been "effected." (ARB
43). Additionally, if the contingency is not resolved, then "related assets
received or held are [not] readily convertible to known amounts of cash or
claims to cash." (FASB CON 5). Further, if the non-satisfaction of the
contingency results in the "return" of the product or the absence of any
obligation of the buyer to pay for the license fee, then the buyer is not
"obligated to pay the seller" and revenue may not permissibly be recognized
under the license agreement. (FAS48). As detailed in paragraphs 107- 108, the
falsification of reported revenue in the fourth quarter of 1995 ultimately
required the Company, at the end of the Relevant Period, to restate the results
to reduce reported net income by $5.1 million, resulting in a net loss of $1.1
million rather than the previously reported net income of $4 million for the
quarter, and a net loss of $8.5 million for 1995, over double the previously
reported net loss of $3.4 million for the year.
(b) In addition, the representations that the technology
division (consisting primarily of Imonics and Atwork) was "effectively
offsetting" the margin pressures and results at
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MPSC were materially false and misleading when made in that the technology
division was not able to offset revenue, growth and margin pressures affecting
MPSC because: (i) Imonics was experiencing severe operational problems
including, among other things, excessive staffing, inadequate cost controls, and
poor operating performance so severe that they negated Imonics' ability to
perform as represented; and (ii) Atwork's sales pipeline had been in decline
since September of 1995 and there were significant operating flaws, or "bugs,"
in certain of the Atwork division's software products introduced at year end
1995.
3. PUBLIC STATEMENTS RELATING TO THE RAPID SYSTEMS AND
BSG MERGERS
35. Having disseminated its materially false and misleading press
release of February 6, 1996, which included false financial results showing
increasing net income rather than true losses the Company was actually
suffering, Medaphis implemented its scheme to use its stock (the price of which
was artificially inflated as a result of defendants' misstatements) as currency
for additional acquisitions.
36. Thus, on February 29, 1996, defendants caused Medaphis to file
with the SEC a Form S-4 Registration Statement (the "February 1996 Registration
Statement"), which was signed by defendants Brown, Bellas, Holbrooke, Pryor,
Stowe, Downer, Cote and Douglass. Defendants filed the February, 1996
Registration Statement in order to issue 2 million shares of Medaphis common
stock which the Company reported "may be offered by Medaphis from time to time
in connection with acquisitions of other businesses or properties."
37. On March 13, 1996, the defendants issued a press release
announcing that Medaphis had signed a definitive agreement to acquire all of the
outstanding capital stock of
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Rapid Systems Solutions, Inc. ("Rapid Systems") (a closely-held, Columbia,
Maryland based computer systems integration company) in exchange for 1,135,000
shares of Medaphis common stock, worth approximately $43 million (the "Rapid
Systems Merger"). Defendant Brown stated that Rapid Systems was acquired
specifically because it complemented "the work Imonics is doing on the Medaphis
re-engineering project."
38. Two days later, on March 15, 1996, defendants issued a press
release announcing yet another acquisition, this time reporting that Medaphis
had executed a definitive agreement to acquire all of the outstanding capital
stock of BSG Corporation ("BSG") for approximately $350 million in stock,
including 7.5 million shares of Medaphis common stock, and assumption by
Medaphis of BSG stock options and stock rights representing an additional 2.66
million shares of Medaphis common stock (the "BSG Merger"). This transaction
represented the largest acquisition yet for Medaphis. According to the March 15
announcement, the Company's "existing systems integration and information
technology (IT) services companies - including Imonics Corporation and Rapid
Systems Solutions, Inc. - will come under the BSG umbrella, thereby creating the
industry's largest IT services company focused purely on client/server
technology and applications.
39. Significantly, defendant Brown, in emphasizing the
importance of the BSG Merger, assured investors that BSG had the necessary
infrastructure to manage successfully the integration of both Imonics and Rapid
Systems to create successfully the largest client/server technology services
company in the country:
The merger with BSG is a major milestone in increasing our technology
capabilities. Working with Imonics and Rapid Systems Solutions, BSG
will lead our systems
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integration efforts and we believe will accelerate transformation of
the way transaction processing in performed in the healthcare industry.
We are excited about our newly acquired capabilities in client/server
consulting and systems integration. Imonics and Rapid Systems Solutions
combined with BSG have created, we believe, the largest pure
client/server technology services company in the country. (Emphasis
added.)
40. A March 18, 1996 Wall Street Journal article reported in
connection with the planned BSG Merger that:
[t]he company said it decided to make a bigger push into systems
integration following the successful 1994 acquisition of Imonics, which
has seen its profit double since the purchase and its employees
increase, according to Michael Cote, Medaphis' chief financial officer.
41. As a result of the foregoing positive announcements, on
March 20, 1996, Medaphis shares hit a 52-week high of $53.25, a 40% increase
over the stock's March 12, 1996 close of $37.50.
42. The statements concerning the synergies and efficiencies of
the Rapid Systems and BSG Mergers, and the Company's integration of the
operations of Rapid Systems and BSG into its overall business identified in
paragraphs 36-40 above were materially false and misleading. Among other
reasons, because of the severe operational problems at Imonics summarized at
paragraphs 34(b) and 47 hereof, there was no reasonable basis for the
representations concerning the synergies offered by the merger of Imonics and
Rapid Systems with BSG's operations. Defendant Cote's representations concerning
the supposed profitability of Imonics were false and misleading for the same
reason, as well as for the added reason that, as set forth in greater detail at
paragraph 34(a) above, Medaphis' publicly reported profits were materially false
and misleading as a result of improper revenue recognition practices relating
specifically to improprieties at Imonics.
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43. On April 3, 1996, in connection with the BSG Merger, Medaphis
filed with the SEC a Registration Statement on Form S-4 (The "BSG Registration
Statement") and a Proxy Statement/Prospectus (the "BSG Prospectus"). The BSG
Registration Statement was signed by defendants Brown, Bellas, Holbrooke, Pryor,
Stowe, Downer, Cote and Douglass.
44. The BSG Prospectus, which was included as part of the BSG
Registration Statement filed with the SEC, incorporated by reference Medaphis'
Annual Report on Form 10-K for the fiscal year ended December 31, 1995,
including the audited financial statements incorporated by reference therein,
(discussed at paragraphs 47-57 herein), and incorporated the false and
misleading statements of the Company's year-end and fourth quarter 1995 results
as reported in the February 6, 1996 press release referred to at paragraph 30
above. These documents represent that the financial results presented therein
"include all adjustments . . . that are necessary for a fair presentation of the
financial position and results of operations for such periods."
45. In addition, the BSG Prospectus repeated defendants'
misleading statements regarding the successful consolidation of Imonics, BSG and
Rapid Systems, stating that the merger "will position Medaphis as the leading
client/server systems integration and workflow engineering company in the United
States." The BSG Prospectus also falsely stated that:
Finally, management believes that BSG, Rapid Systems and Imonics
complement each other and that the combination of these three
organizations within Medaphis should produce synergies.... Imonics
possesses extremely talented object oriented programming expertise, an
existing library of object codes and proprietary pricing methodologies.
Management of Medaphis believes that each of the foregoing attributes
of BSG, Rapid Systems and Imonics are complimentary [sic] in nature and
together position Medaphis to take advantage of systems integration and
workflow engineering projects within and outside the healthcare
industry.
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46. The BSG Prospectus also provided the following highly positive
description of the Re-Engineering Project:
In order to increase efficiency and position Medaphis to take advantage
of the opportunities being created by ongoing changes in the healthcare
industry, Medaphis has commenced a re-engineering project which will
involve, among other things, the consolidation of the billing and
accounts receivable processing function of its billing and accounts
receivable management business, which is currently operated out of
approximately 300 local business offices around the country, into
approximately 10 remote processing centers. In addition to the
consolidation of processing operations, the re-engineering project will
involve the establishment of advanced client/server computing at the
local sales and service offices and at remote processing centers. This
computing infrastructure will be designed to significantly reduce paper
handling and greatly increase the speed of record recovery while
permitting communication over a wide-area network and across geographic
markets and linking together all of Medaphis' operating divisions . . .
47. The BSG Prospectus continued:
Medaphis believes the re-engineering project will provide its customers
and employees with the full information processing and communications
power of an advanced distributed computing system. The re-engineering
project is designed to enable Medaphis to continue to grow and achieve
economies of scale in several areas, including training, client
service, patient and payer relations, transaction processing operations
and electronic data interchange capabilities. The project is expected
to be substantially completed during 1997. Although the re-engineering
project will involve consolidation of the processing functions of its
billing and accounts receivable management services, Medaphis intends
to continue to maintain and place increased emphasis on the sales and
customer service functions of this business on a local basis. (Emphasis
added)
(a) The representations contained in the BSG Registration
Statement and Prospectus, which incorporated Medaphis' operating results for the
fourth quarter and full year 1995 by reference, as well as the May 7, 1996 press
release, were materially false and misleading in the manner and for the reasons
specified in paragraph 34(a) above.
(b) In addition, defendants' representations regarding
the progress, positive results, and expected completion date of the Re-
Engineering Project were materially false and
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misleading and lacked a reasonable basis when made, in that they misrepresented
and/or failed to disclose that: (I) progress of the Re-Engineering Project was
being impeded by, among other things, the serious management, operational, and
other problems being experienced by Imonics, set forth above, and the Company's
inability to successfully integrate and coordinate the acquisitions of BSG and
Rapid Systems; (ii) the software designed to automate the billing process at
MPSC was not appropriate for large volume processing, thus requiring further
software development and causing a deferral of the office consolidation element
of the Re-Engineering Project; and (iii) in light of these problems, the
Re-Engineering Project was not likely to be completed until late 1997, if not
1998, contrary to defendants' representations.
(c) Further, defendants' statements regarding the
synergies to be derived from the BSG and Rapid Systems mergers, and the ability
of Medaphis and Imonics to successfully integrate and coordinate these
acquisitions, were materially false and misleading in that they misrepresented
and/or failed to disclose: (I) the adverse facts regarding Imonics, identified
above at paragraph 34(b); and (ii) that the integration of Imonics' operations
with BSG and Rapid Systems was not proceeding well in view of Imonics distressed
condition, and could not be accomplished without a complete reorganization of
Imonics.
(d) Moreover, defendants' representation that the Company
would "continue to maintain and place increased emphasis on the sales and
customer service functions" of the Company s MPSC division was false and
misleading. As defendants knew or recklessly disregarded: the Company's focus on
the Re-Engineering Project at MPSC was done at the expense of customer service
and customer retention, which was leading to significant revenue declines and
reductions in profitability for Medaphis.
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(e) In addition, the increasing staff levels at Imonics,
cited by analysts as a positive growth factor based on defendants'
representations, were, in reality, excessive, as evidenced by the October 22,
1996 disclosure that the Company had terminated 430 employees, including the
entire Imonics senior management team.
4. REPRESENTATIONS CONTAINED IN THE 1995 10-K AND
ANNUAL REPORT
48. On or about April 1, 1996, Medaphis filed with the SEC its
Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K"). The
1995 10-K was signed by defendants Brown, Bellas, Holbrooke, Pryor, Stowe,
Downer, Cote and Douglass.
49. The 1995 10-K incorporated, at page 19, the same reported
financial results for the fourth quarter and full year of 1995 as were announced
on February 6, 1996 as set forth in paragraph 30 herein. The 1995 10-K also
incorporated by reference the financial presentations set forth in the Company's
1995 Annual Report, which is discussed in greater detail in paragraphs 53- 59
hereof. The 1995 10-K further stated, in relevant part, that such financial
presentations therein "include all adjustments that are necessary for a fair
presentation of the financial position and results of operations for such
periods."
50. The 1995 10-K boasted of the "core competencies in the systems
integration and work flow engineering fields," and went on to state that
although MPSC was experiencing some "revenue and margins pressures", these
pressures were being "offset" by growth in Medaphis' information management and
systems integration services business (for which Imonics was responsible), and
that the Re-Engineering Project was easing such pressures.
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51. The 1995 l0-K also contained a description of the Re-
Engineering Project virtually identical to that set forth in the BSG Prospectus
quoted at paragraphs 44-46 above.
52. With respect to the Company's revenue recognition policy, the
1995 10-K stated:
REVENUE RECOGNITION. . . .
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 on the
percentage of completion method of accounting. (Emphasis added).
53. At or about the time that it filed the 1995 l0-K, the Company
also issued its 1995 Annual Report. Like the 1995 10-K, the 1995 Annual Report
incorporated the same reported financial results for the fourth quarter and full
year of 1995 as were announced on February 6, 1996. The 1995 Annual Report
represented that the financial statements set forth therein:
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 cash flows for each of the three
years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
54. In the 1995 Annual Report, the defendants again touted the
benefits and "positive results" of the Re-Engineering Project, and set forth a
description thereof virtually identical to that set forth in the BSG Prospectus
(see paragraphs 44-46 herein), and in the 1995 10-K (see paragraphs 48-52
herein). The 1995 Annual Report also represented that:
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The positive results of this progressive effort are already in
evidence. Today, Medaphis is a leading provider of information
management systems and systems integration and work flow engineering
systems and services to the healthcare industry and other industries.
55. The 1995 Annual Report also emphasized the positive
contributions that Imonics had made to the Company's business, stating that,
because of Imonics, the Company had gained an "immense competitive advantage"
and had "re-engineered its future." Defendants assured investors that Imonics
would allow the Company to recognize efficiencies that "will dramatically change
the way business done." The following excerpt appeared in the 1995 Annual
Report:
IMONICS: A LEADER IN BUSINESS PROCESS RE-
ENGINEERING AND SYSTEMS INTEGRATION.
With the 1994 acquisition of Imonics, Medaphis re-engineered its
future. A leader in business process re-engineering and systems
integration, Imonics will enable Medaphis to create internal
efficiencies while being able to offer the same cost -effective
solutions to others throughout the healthcare industry, and in other
industries. For Medaphis, or for any other customer service or business
operation that processes large volumes of paper, fax and phone calls,
Imonics' software solutions provide an immense competitive advantage.
The first signs of these increased efficiencies are already in evidence
in our Pittsburgh office. And as they are applied to an even greater
extent in the coming months, our belief is that they will dramatically
change the way business is done throughout our transaction processing
operations and, hopefully, our entire industry. (Emphasis added.)
56. The Annual Report also stated that the progress of the Re-
Engineering project "has been nothing short of remarkable," and that "[t]he
impact on customer service is immeasurable."
57. The 1995 Annual Report also praised the Company's 1995
acquisition of Atwork, which was described as "the leading provider of
information systems that schedule the activities of patients and employees in
healthcare." The 1995 Annual Report offered a highly upbeat assessment of
Atwork:
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Atwork solves complex scheduling problems in healthcare management, and
they have historically enjoyed a high level of client satisfaction.
Atwork markets four leading products to healthcare providers. The
first, ANSOS, automates nurse staffing and scheduling, and, as the
market leader, is the most widely used system of its kind. The second,
ORSOS used for operating room scheduling and inventory management, is
the market leader as well. The third product, One-Call, is used for
enterprise-wide patient scheduling. And finally, One-Staff is used to
schedule and manage all employees throughout the healthcare enterprise.
58. The letter to stockholders, included in the 1995 Annual Report
and signed by defendant Brown, stated, among other things, that:
Medaphis has embarked on an aggressive technology initiative to
increase its own internal efficiencies, as well as those of its
clients.
The positive results of this progressive effort are already in
evidence. Today, Medaphis is a leading provider of information
management systems and systems integration and work flow engineering
systems and services to the healthcare industry and other industries.
***
In the course of solving our own technology problems, we have
discovered a major business opportunity -the lack of next generation
distributed processing platforms and user-oriented applications to
solve business and information processing needs of industry in general,
particularly healthcare.
59. The representations contained in the 1995 10-K and Annual
Report and the documents incorporated therein by reference, incorporating
Medaphis' operating results for the fourth quarter and full year of 1995, and
Medaphis' revenue recognition policies, were materially false and misleading in
the manner and for the reasons set forth in paragraph 34(a) above. The
representations concerning the finances and operations of Imonics, the progress
of the Re-Engineering Project at MPSC, and the ability of Medaphis and Imonics
to successfully integrate and coordinate the acquisitions of BSG and Atwork were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics and Atwork specified at
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paragraphs 34(b) and 68 above. The false and misleading representations in the
1995 10-K were incorporated by reference into the July 12, 1995 Registration
Statement on Form S-3 signed by Defendants Brown, Cote, Douglass, Bellas,
McDowell, Holbrooke, Pryor and Papermaster.
5. REPRESENTATIONS CONCERNING THE BERTELSMANN JOINT VENTURE
AND MEDAPHIS' RESULTS FOR THE FIRST QUARTER OF 1996 ENDED
MARCH 30, 1996
60. In February 1996, Medaphis, through Imonics, entered into a
Joint Venture with a subsidiary of Bertelsmann AG, a German corporation.
According to the Company, the Joint Venture was formed to pursue custom software
development and systems integration projects for customer service systems in
Europe, primarily in Germany, over a multi-year period, with each partner
holding a 50% interest in the Joint Venture. The Joint partnership agreement was
signed on March 13, 1996, eighteen days before the close of the Company's fiscal
1996 first quarter.
61. On or about March 31, 1996, the last day of the first quarter
of fiscal 1996, the Joint Venture concluded an agreement with a German
telecommunications entity to provide systems integration and work flow
engineering systems and services (the "Systems Integration Contact").
Immediately upon entering into the Systems Integration Contract on March 31,
1996, the Company recognized $12.5 million of Joint venture net earnings,
thereby dramatically improving reported revenues and net earnings for the first
quarter of 1996.
62. On April 23, 1996, Medaphis issued a press release to announce
its first quarter results, which included the premature and decidedly optimistic
report of $12.5 million in net earnings recognized in connection with the
Systems Integration Contract into which the Company had rushed at the close of
first quarter. The Company reported that revenues had increased by 24.l% over
results for the first quarter of 1995, from $110.1 million to $136.6 million,
and that
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reported net income had increased from a reported loss of over $8.2 million for
the quarter ended March 31, 1995, to a reported profit of $13.2 million for the
first quarter of 1996. Commenting on these reported results, defendant Brown
noted that Medaphis was "pleased with the first quarter," adding:
The "performance of our client/server IT services business was
excellent and included formation of a joint-venture with a subsidiary
of Bertelsmann A.G. in Germany. The joint venture signed a large
contract with a telecommunications company during the quarter.
63. The market recognized the Joint Venture and the new Systems
Integration Contract as an important step for Medaphis, adding significantly to
the Company's value to an investor. In an April 30, 1996 Smith Barney report,
for example, which was prepared based on information provided by defendants, the
Joint Venture was specifically cited as an example of one of the areas in which
Medaphis had "displayed strong growth":
Imonics announced a joint venture with Bertelsmann, AG to provide
systems integration services overseas. Bertelsmann's BMG Music Club has
been a client of Imonics for several years. In the same announcement,
the JV disclosed a major, multi-year contract with a foreign
telecommunications company. Although Imonics is performing most of the
work on [Medaphis'] re-engineering, its headcount has grown to over 400
to also staff the growth in its outside business.
64. On May 14, 1996, defendants caused Medaphis to file its first
quarter Form 10-Q with the SEC (the "First Quarter 10-Q"), which was signed by
defendants Cote and Douglass, in which it incorporated and provided additional
details concerning first quarter 1996 financial results for the quarter
previously announced on April 23, 1996 (see paragraph 62 herein).
65. The First Quarter 10-Q represented that the financial
information contained therein was "prepared in accordance with the Company's
customary accounting policies and practices."
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66. In addition, the First Quarter 10-Q expressly incorporated the
representations contained in the 1995 10-K, including the representation that
"[r]evenues from systems integration contracts are recorded on the percentage of
completion method of accounting," and also contained management's representation
that the financial statements included therein reflect "all adjustments . . .
necessary for a fair presentation of the results of operations of the interim
period."
67. At or about the time defendants Publicly announced Medaphis'
first quarter 1996 operating results and filed the First Quarter l0-Q, several
bullish reports were issued by securities analysts based on information provided
by the Company:
(a) "Over the next several quarters, we expect the re-engineering
program in its core Medaphis Physician Services Corporation to begin to
have an impact while the growth in its technology businesses continues
[sic] to accelerate." (May 16, 1996 report by Donaldson, Lufkin &
Jenrette Securities Corporation);
(b) "Near-term, we have confidence in our quarterly estimates as well
as our $1.05 - $1.10 estimate for the full year." (May 16, 1996 report
by Donaldson, Lufkin & Jenrette Securities Corporation); and
(c) "Based on our conversation with management yesterday, our comfort
level on near-term earnings prospects have increased. While management
did not endorse a specific estimate, it appears as though there have
been some fundamental positive changes. While there remains
consolidation challenges, we believe that these are the early signs
that the large software development project is beginning to pay off.
(June 4, 1996 report by Donaldson, Lufkin & Jenrette Securities
Corporation).
68. The representations contained in Medaphis' announcements
concerning the Bertelsmann Joint Venture and the Company s financial results for
the quarter ended March 31, 1996, as set forth in paragraphs 60-68 herein, were
materially false and misleading in that the financial results set forth therein
were falsified and had been achieved only through the use of improper accounting
practices which violated GAAP.
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69. The reported net income for this period of $13.2 million was
improperly and materially overstated by virtue of the recognition of $12.5
million in profits from the Systems Integration Contract immediately upon the
execution of the contract in violation of relevant accounting principles,
including GAAP. Defendants knew or recklessly disregarded, at the time the
contract was entered into, that; (I) Imonics was experiencing serious problems,
including over-staffing poor management, inadequate cost controls and poor
operational performance (as detailed in paragraphs 34(b) and 47 hereof); and
(ii) that, as is also detailed at paragraphs 34(b) and 47 hereof, Imonics was
unable to perform its obligations under the Systems Integration Contract and the
Joint Venture. Under such circumstances, the recognition of $12.5 million in
Joint Venture net earnings was improper. ARB 43 provides that "profit is deemed
to be realized when a sale in the ordinary course of business is effected,
unless the circumstances are such that the collection of the sale price is not
reasonably assured." Additionally, the Company could not in good faith consider
the Systems Integration Contract to result in "actual or expected cash flow ...
that ha[s] accrued or will eventuate as a result of the entity's ongoing mayor
Or central operations," if, at the time the contract was entered into,
defendants were aware that there was no basis for the belief that Imonics could
fulfill its obligations under the Contract as proscribed by paragraph 78 of FASB
CON 6.
70. Recognition of the revenues from the contract under such
circumstances was improper under FASB CON 5, paragraph 83, which provides:
Revenues are not recognized until earned. An entity's revenue earning
activity involves delivering or producing goods, rendering services, or
activities that constitute its major or central operations, and
revenues are considered to have been earned when the entity has
substantially accomplished what it must do to be entitled to the
benefits represented by the revenues.
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Accordingly, in recognizing $12.5 million in Joint Venture net earnings in March
of 1996, the Company violated these provisions of GAAP.
71. Second, defendants improperly recognized $12.5 million in
Joint Venture net earnings in the first quarter because if these revenues could
have been properly recognized at all, they should have been recognized ratably
over the period the services were performed under the Systems Integration
Contract in accordance with the percentage-of-completion method of accounting.
As noted above, FASB CON 5, paragraph 83, provides that "revenues are not
earned," and therefore should not be recognized, until an "entity has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues." (Emphasis added).
72. In addition, the First Quarter 10-Q, having incorporated by
reference the 1995 10-K (and derivatively the 1995 Annual Report), was
materially false and misleading for the same reasons, specified in paragraph 82
herein, as the 1995 10-K and Annual Report were false and misleading. The First
Quarter 10-Q expressly incorporated the additional representation contained in
the 1995 10-K that "[r]evenue from systems integration contracts are recorded on
the percentage-of-completion method of accounting." (Emphasis added). Thus, in
recognizing first quarter revenues from the Systems Integration Contract,
defendants violated the Company s own disclosed revenue recognition policy,
rendering this specific statement false.
6. ADDITIONAL PUBLIC STATEMENTS RELATING TO IMONICS AND
THE HDS MERGER
73. In April 1996, Medaphis officials attended a Robinson-Humphrey
Co. conference at which they touted the successes at Imonics, declaring that it
was "going like gangbusters."
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74. Seeking to continue its practice of acquiring companies
utilizing overvalued Medaphis stock, on or about May 24, 1996, Medaphis
announced its intention to acquire Health Data Sciences Corporation ("HDS") in
exchange for 6,125,000 Medaphis common shares and assumption or issuance by
Medaphis of stock options representing an additional 556,000 shares. Based on
May 24, 1996 closing price of Medaphis stock of $40.938, the HDS Merger was
valued at approximately $273.5 million.
75. HDS was a developer and supplier of health care information
systems to institutions, payers, health care networks, and providers. HDS' main
product offering was a line generally known as ULTICARE(R), an integrated
information system which allows doctors and hospitals in large health care
systems to enter, and access immediately thereafter, clinical information on
patients. The ULTICARE system can also schedule medical procedures, such as
surgery.
76. According to an article published in the Atlanta Journal and
Constitution on May 25, 1996, defendant Brown stated that, with the planned
acquisition of HDS, "I think we now have the pieces we need... This is where
we've been aiming with our business."
77. A definitive Merger Agreement was executed by Medaphis and HDS
on May 23, 1996 (the "HDS Merger"). Under the terms of the HDS Merger,
stockholders of HDS were entitled to receive .7912 of a share of Medaphis common
stock for each share of HDS common stock and HDS preferred stock. In connection
therewith, the defendants were specifically motivated to keep the price of
Medaphis stock artificially high in order to complete the acquisition of HDS.
This was because the Merger Agreement expressly provided that HDS could
unilaterally terminate the deal if the average closing price of Medaphis stock
dropped below $37 per share for
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a period of time. Thus, defendants knew that it was imperative that the Company
continue to tout its many "successes" while concealing the true facts about
Medaphis' business.
78. On May 31, 1996, in connection with the HDS Merger, Medaphis
filed an Amendment No. 1 to its Form S-4 Registration Statement with the SEC
(the "HDS Registration Statement"). The Registration Statement included a Proxy
Statement/Prospectus, also dated May 31, 1996, which was issued in connection
with a special meeting of HDS stockholders to be held on June 29, 1996 (the "HDS
Prospectus"). The HDS Registration Statement was signed by defendants Brown,
Bellas, Holbrooke, Pryor, McDowell, Papermaster, Cote and Douglass.
79. The HDS Prospectus included, inter alia, a detailed
description of the background of the HDS Merger, the reasons for the HDS Merger,
and the terms of the Merger. The HDS Prospectus also included an upbeat
description of Medaphis' Re-Engineering Project which was substantially similar
to the statements contained in the BSG Prospectus, the 1995 10-K and the 1995
Annual Report. The defendants again represented in the HDS Prospectus that
"[t]he [Re-Engineering] project is expected to be substantially completed during
1997."
80. As they had in the BSG Prospectus, the defendants also
continued to tout the benefits of the BSG and Rapid Systems mergers in the HDS
Prospectus, stating that:
Management believes that the acquisition of BSG, when combined with
Rapid Systems and Medaphis' existing systems integration and workflow
engineering operations, will position Medaphis as the leading
client/server systems integration and workflow engineering companies in
the United States.
81. The HDS Registration Statement and Prospectus expressly
incorporated by reference Medaphis' 1995 Annual Report, filed on April 1, 1996,
and its First Quarter l0-Q, filed on May 15, 1996, relevant excerpts of which
are set forth at length herein above. As such, the
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HDS Registration Statement and Prospectus was materially false and misleading
for the same reasons the 1995 Annual Report and First Quarter 10-K were
misleading, as specified above.
82. The additional representations in the HDS Prospectus, set
forth in paragraphs 79- 80, concerning the finances and operations of Imonics,
the progress of the Re-Engineering Project at MPSC, and the ability of Medaphis
and Imonics to successfully integrate the Company's various acquisitions were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics specified at paragraphs 34(b) and 47 hereof.
83. Had the full truth about Medaphis been disclosed at the time,
the Company never would have been able to complete the HDS Merger. Based on
recent trading prices of Medaphis stock (as low as $8.50 per share), the
acquisition of HDS, which cost the Company just over 6 million shares, would
have cost nearly five times that amount, or 28 million shares. Based recent
trading prices, defendants' fraudulent conduct enabled the Company to purchase
HDS -- a company valued at $230 - $260 million in the HDS Merger for stock now
worth just $53 million, costing HDS shareholders hundreds of millions of dollars
in losses. Consequently, Defendants have exposed the Company to at least $177
million securities fraud liability in connection with this transaction alone.
7. PUBLIC STATEMENTS RELATING TO SECOND QUARTER 1996 RESULTS
84. On July 23, 1996, defendants issued a press release announcing
Medaphis' financial results for the second quarter of 1996, ending on June 30,
1996. The Company reported that revenue for the three months ended June 30, 1996
was $175.2 million, up 24% from the $141.3 million in the year-earlier period,
and that, excluding merger and other one-time costs, net income was $18.7
million, up 159%, with earnings per share of $0.25, up 150%. For the six months
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ended June 30, 1996, Medaphis reported a 23% increase in revenues over the six
months ended June 30, 1995, from $274.4 million to $338.8 million, and an
increase in net income and earnings per share, from a loss of $4.6 million or
$.08 per share in 1995 to net income of $16.4 million or $.22 per share in 1996.
85. Defendant Brown continued to assure the investment community
that Medaphis' technology companies were "generat[ing] strong results," and he
explained that much of these "strong results" were attributable to the recent
acquisitions of HDS, Rapid Systems and BSG:
We are pleased with the second quarter and underlying results of our
technology and services businesses. The technology companies continue
to generate strong results, especially our latest additions: Health
Data Sciences Corporation ("HDS"), BEG Corporation and Rapid Systems
Solutions, Inc. I am thrilled with the recent addition of HDS to our
technology capabilities and am excited about the opportunities that it
affords us to offer patient-centered information technology in the
healthcare industry. Medaphis Physician Services Corporation continued
to adversely affect results of the Services Division in the second
quarter; however its operating results improved slightly over the first
Quarter of 1996. We continue to assess and evaluate the technology and
processes necessary to ensure our long-term success and remain
cautiously optimistic that the re- engineering project and related
management initiatives are positioning the Company for important
improvements in operating results. (Emphasis added).
86. The defendants' representations concerning the second quarter
of 1996 had their intended effect on the investment community. On July 24, 1996,
Bear Stearns issued a research report based on information provided by the
Company which stated, in relevant part, that:
Importantly, management is confident that the top line and cost
pressures in the physician billing business (which we estimate to be
25% - 30% of total revenue) may have bottomed. These pressures are
expected to continue to moderate over the third and fourth quarters of
1996 allowing for a stabilization of this business segment. During
1997, we expect to see the benefits of the re-engineering which we
believe will pave the way for earnings acceleration."
87. In a similar vein, a Cowen & Co. report dated July 23, 1996,
based on information provided by the Company, stated:
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Technology Strategy A Winner - Virtually all of the revenue growth was
derived from terrific performances in the technology companies (+82% at
$70MM). Strongest performers include Consort Technologies (radiology
information systems), Atwork (medical software), BEG, RSSI and Imonics
(client/server systems integration)."
88. Similarly, on July 24, 1996, Donaldson Lufkin & Jenrette
issued a research report based on information provided by the Company which
stated:
EPS for the next two quarters should be $0.28 and $0.30, respectively.
Management indicated comfort with street estimates for the third and
fourth Quarter of this year. This is in sharp contrast to previous
statements about the last few quarters when management consistently
hedged about its near-term operating results.
89. The representations contained in the July 23, 1996 press
release, which incorporated and reflected Medaphis' operating results for the
first quarter of 1996 (see paragraph 84 herein), were materially false and
misleading for the reasons set forth in paragraph 68-69 herein. The
representations concerning the finances and operations of Imonics, the progress
of the Re-Engineering Project at MPSC, and the ability of Medaphis and Imonics
to successfully integrate the Company's various acquisitions were materially
false and misleading for failing to disclose the adverse material facts
concerning Imonics specified at paragraphs 34(b) and 47 hereof. Moreover,
defendants' forecasts of $0.28 and $0.30 per share for the third and fourth
quarters of 1996, respectively, were contradicted by the adverse facts set forth
above in 34(b) and 47 and were issued by defendants, through analysts' reports
endorsed and adopted by the Company, without any reasonable basis.
THE TRUTH BEGINS TO EMERGE
1. THE AUGUST 14, 1996 DISCLOSURES
90. On August 14, 1996, after the close of trading, Medaphis
finally began to disclose the severe problems which it had been experiencing
with Imonics, as well as the difficulties being
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encountered with MPSC, Atwork, the BSG Merger and the Re-Engineering Project
during the Class Period. On that day, it issued a press release announcing that
it expected to report a loss in the range of $0.28 to $0.33 per share in the
third quarter of 1996, which would include substantial charges in the range of
$35 to $40 million. It also announced that it expected earnings per share in the
range of only $0.75 to $0.90 for fiscal 1997, compared with analysts'
expectations of earnings per share of $0.27 for the third quarter and $1.42 for
fiscal 1997. The press release stated:
The Company's near-term earnings will be impacted by continued weakness
in Medaphis Physician Services Corp.'s business and the reorganization
of Imonics. Medaphis' near-term outlook also has been affected by
slower than expected sales of some of the Company's enterprise-wide
scheduling products. The third quarter earnings estimate includes
charges in the range of $35 to $40 million relating primarily to the
reorganization of Imonics and the re-engineering and consolidation
program at MPSC.
91. A substantial portion of the Company's difficulties, and the
resulting third quarter charges, were reported to have arisen from the need to
reorganize its Imonics subsidiary and the Company's problems with the Systems
Integration Contract, so positively reported by Medaphis during the Relevant
Period. Explaining the situation, Medaphis reported:
Management has commenced the process of reorganizing the Imonics
systems integration business. This reorganization resulted from a
review by BSG of Imonics' overall operations and an assessment of
recent difficulties encountered by Imonics with a large systems
integration agreement entered into by its European joint venture.
The reorganization of Imonics will include efforts to more closely align
Imonics' business practices with those of BSG. The BSG model is structured to
manage client/server information technology projects with experienced project
management. It is currently anticipated that Imonics' European joint venture
will continue with its system integration project on terms and conditions
mutually satisfactory to the parties, but that the agreement relating to the
project will be restructured.
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92. Medaphis further disclosed that approximately $9 million of
charges would be made in the third quarter to account for the restructuring of
the Systems Integration Contract entered into by the Joint Venture with another
$15 million in charges relating to the reorganization of Imonics.
93. The Company revealed that, contrary to its July 23, 1996
representations, its MPSC unit was continuing to experience poor results, due in
part to delays in the Re-Engineering Project. The Company disclosed that as a
result of these problems, it would take a restructuring charge of approximately
$11 million, and "up to $5 million of other costs." The Company stated:
The Company expects to incur charges in the third quarter in the range
of $35 to $40 million. These charges are expected to consist of
approximately $9 million relating to the restructuring of a large
systems integration agreement entered into by Imonics' European joint
venture, approximately $15 million relating to reorganization of
Imonics, approximately $11 million relating to additional restructuring
costs associated with MPSC's re-engineering and consolidation program
and up to $5 million of other costs.
94. Defendant Brown was quoted as stating:
We are extremely disappointed with these developments. The problems
that we have identified at MPSC and Imonics are being addressed by a
new operating management team which possesses the process and
technology expertise and experience we need to execute our plan.
95. Moreover, in sharp contrast to defendants' previous statements
that Medaphis would continue to grow through acquisitions -- the key to its
success -- the Company announced that it had abandoned its acquisition strategy:
"We're focused on re-engineering MPSC's business for future growth, and not on
expanding the business through acquisitions in the near term," defendant
Douglass stated.
96. As reported in Bloomberg News on August 15, 1996, Bertelsmann
officials had called Medaphis in late July to, complain about the computer
integration project which Imonics
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was working on with the Joint Venture. In particular, Bertelsmann offered two
choices to Medaphis: quit or renegotiate the contract. According to Cowen &
Co. analyst Charles Trafton, the news of problems with Imonics came as "a
complete shocker" and "Imonics was not delivering."
97. On the same day it announced its anticipated losses for the
third quarter, Medaphis filed its Form 10-Q for the fiscal 1996 second quarter
(the "Second Quarter 10-Q"). In it, the Company disclosed for the first time
that the Joint Venture had begun discussions with its European Partner,
Bertelsmann, and the related customer on July 25, 1996 regarding difficulties
that had been encountered with certain aspects of the Systems Integration
Contract. As a result of these difficulties, which were not disclosed until
August 14, 1996, Medaphis reported that it had been forced to negotiate "the
restructuring of the operating relationships and economics underlying the
Contract," adding:
Although a restructured arrangement among the parties is subject to the
negotiation and execution of definitive agreements, the Company
anticipates that the contract will be amended and a restructured
arrangement will be executed that will position the Joint Venture to
move forward with the project and to pursue other opportunities and
projects on terms and conditions that are mutually beneficial to the
parties. The Company anticipates recording a loss related to the
restructured arrangement or approximately $9 million during the third
quarter of 1996.
98. With respect to the Imonics' restructuring, the Company
disclosed in the Second Quarter 10-Q that, contrary to previous statements to
the effect that the Company had the necessary infrastructure to create
tremendous business opportunities, the Company would need to take a charge of
$15 million to reorganize Imonics because of over-staffing, inadequate internal
cost controls and poor operating performance. The Second Quarter 10-Q stated:
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Many changes have and will continue to occur at Imonics Corporation
("Imonics") including: headcount reductions, increased focus on project
management, increased cost controls and implementation of the BSG
business model. In addition to the expected $9 million loss related to
the restructured arrangement noted above, the Company anticipates
recording losses in the third quarter of 1996 related primarily to the
reorganization of Imonics of approximately $15 million.
99. The market reacted sharply and dramatically to Medaphis'
August 14 announcement, with its share price plunging the following day,
decreasing the value of the Company by $1.6 billion. The stock price closed at
$14-1/4 per share, after dropping by $21-3/8, or approximately 60 percent. More
than 42 million shares of Medaphis stock changed hands during the day, making it
the most active U.S. issue on NASDAQ that day and representing the sixth-highest
single trading day in NASDAQ history, excluding penny stocks.
2. THE OCTOBER 22, 1996 DISCLOSURES
100. Despite the startling disclosures of August 14, 1996, and the
resulting drop in the price of Medaphis stock, defendants had not yet disclosed
the full extent of the Company' s problems known to, or recklessly disregarded
by, defendants at the time. Instead, defendants continued to mislead investors
about the current and future business prospects of Medaphis and represented that
all of the Company's problems had been identified and adequately reserved
against.
101. For example, after a meeting with Medaphis senior management
on August 21, 1996, an analyst with Bear, Stearns Co. ("Bear Stearns") reported
that:
[a]fter uncovering the problems at Imonics and MPSC, management
undertook a rigorous examination of all business units in order to
assess [the] possibility [of additional charges and a further reduction
in earnings expectations] and concluded that all of the potential
problems have been reserved against. (Emphasis added).
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102. Based largely on this positive meeting with Medaphis
management, Bear Stearns forecast third quarter earnings per share of $0.02
excluding charges of $35 - $40 million, and continued to give Medaphis stock an
"Attractive" rating. Other analysts issued similar cautiously optimistic reports
following the August 21, 1996 meeting, and, based on guidance from Medaphis
management, projected earnings per share of approximately $0.02 for the third
quarter, excluding charges, or a loss of about $0.27 per share including
charges.
103. On October 22, 1996, Medaphis shocked the market for the
second time in as many months, issuing a press release announcing third quarter
results that were far worse than analysts' diminished expectations and the
Company's previous projections. The Company also reduced its earnings
projections for 1997 even further, announced even larger charges associated with
the reorganization of Imonics, and revealed that due to improper revenue
recognition practices in the Imonics division, the Company would have to restate
its financial results for the fourth Quarter and year ended December 31, 1995.
104. In contrast to its August 16, 1996 forecast of losses in the
range of $.28 - $.33 per share, including charges; Medaphis reported a loss of
$.5l per share, or $36.4 million for the 1996 third quarter. These results
compared to a net loss per share of $0.05 in the year-ago quarter. The Company
reported that revenue fell 10% in the third quarter, to $126.7 million, from
$140.8 million the prior year.
105. The Company disclosed that rather than taking charges of
between $35 - $40 million, Medaphis reported total charges of approximately $50
million in the third quarter, relating primarily to the reorganization of
Imonics the write-off of revenues from the Systems Integration Contract. The
October 22, 1996 press release stated:
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The results for the three months ended September 30, 1996 include a
charge against revenue of $16.8 million relating primarily to the
reorganization of Imonics, including the renegotiation of a large
systems integration contract entered into by Imonics' European joint
venture in March 1996. In addition, approximately $8.5 million was
included in salaries and wages relating to employees and contractors,
who are no longer providing services to the Company, costs to complete
certain Imonics contracts and certain other nonrecurring items. In
addition, a $24.3 million restructuring charge was recorded during the
quarter relating to the reorganization of Imonics. The charge consists
of approximately $10.7 million relating to the write down of Imonics'
assets, $3.7 million of severance costs primarily for former Imonics
employees, $3.2 million in exit costs for lease terminations and $6.7
million of legal and other costs.
106. While Medaphis had stated in August that it expected 1997
earnings per share to fall between $0.75 and $0.90, defendant Brown lowered that
range to just $0.60 to $0.75 in connection with the October 22, 1996 press
release. At the same time, however, defendant Brown hinted that 1997 earnings
were likely to come in even lower still, stating: "I believe there are risks
inherent in the business which could cause us to fall short of that goal."
107. In yet another stunning disclosure, the Company announced in
the press release that it would restate 1995 results to reflect an actual loss
for the year ended December 31, 1995 $8.5 million, compared with a previously
reported loss of $3.4 million. For the 1995 fourth quarter, the Company said it
expected to post a loss of $1.1 million, compared with a previously reported
profit of $4 million.
108. Medaphis stated that the 1995 restatements were the result of
improper revenue recognition practices in the Company's Imonics division,
including the improper recognition of $5.1 million in earnings in the fourth
quarter of 1995. According to the Company, the Imonics unit had booked revenue
on a license agreement it had executed in December 1995 despite the existence of
"unauthorized correspondence" which improperly "created a contingency" under the
license agreement. The revenue recognized on this contract, "together with
previously deemed
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immaterial amounts," reduced net income for the quarter and year ended December
31, 1995 by $5.1 million. As disclosed in the press release:
The Company also announced that it intends to restate its financial
results for the year and three months ended December 31, 1995. This
restatement relates primarily to a license agreement entered into by
Imonics in December 1995 and unauthorized correspondence discovered in
connection with the Imonics reorganization which created a contingency
upon license fees payable under the agreement. The license fee revenue
payable under the agreement and recognized by the Company during the
fourth quarter of 1995, together with previously deemed immaterial
amounts, are expected to result in an aggregate reduction to net income
for the quarter and year ended December 31, 1995 of $5.1 million. After
appropriate adjustments for such items, it is currently anticipated
that the Company's restated results for year ended December 31, 1995
will be a net loss of $8.5 million as compared with previously reported
net loss of $3.4 million. In addition, it is anticipated that restated
results for the quarter ended December 31, 1995 will reflect a net loss
of $1.1 million, as compared with previously reported net income of
$4.0 million.
109. Continuing the stream of devastating disclosures that day,
Medaphis reported in the press release that during the third quarter it had laid
off 430 employees, including the entire senior management team at Imonics. This
was in stark contrast to defendants' prior statements portraying the growth in
the number of Imonics employees as a positive factor. The Company also announced
attempting to renegotiate its credit line from $250 million to $300 million.
110. In a lengthy statement accompanying the October 22, 1996 press
release, defendant Brown admitted that BSG had been "preoccupied with the
restructuring of Imonics, that the Company's strategic acquisition program had
"ended," and that "[w]e have no ongoing plans to make acquisitions at this
time."
111. The adverse disclosures of October 22, 1996 drove the
Company's stock down $6.375 or 38%, to close at just $10.375 per share, a
52-week low for the stock. The drop in the market capitalization of the Company
was approximately $450 million. The trading volume of Medaphis stock on October
22, 1996 was more than 13 million shares, making it the most actively
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traded stock in the United States that day. During the Relevant Period, Medaphis
shares, artificially inflated by defendants' wrongful conduct, had closed as
high as $52 1/2 per share (on March conduct, had closed as high as $52 1/2 per
share (on March 20, 1996).
112. On October 31, 1996, Medaphis announced that it had named
David E. McDowell the Company's new Chairman and Chief Executive, replacing
defendant Brown. According to the Company, defendant Brown had resigned for
"personal" reasons. However, Brown had not resigned his board of directors
position when Plaintiff's initial complaint herein was filed November 1, 1996.
DEFENDANTS' CONDUCT HAS DAMAGED MEDAPHIS
113. Each of the defendants, by reason of their management
positions, membership on Medaphis' Board of Directors or membership on the Audit
Committee, were, during the time they held such positions, "controlling persons"
of Medaphis within the meaning of ss. 20 of the Securities and Exchange Act of
1934. Said defendants had the power and influence, and exercised the same, to
cause Medaphis to engage in the illegal practices complained of herein.
114. Said defendants participated in the decisions to release the
false and misleading press releases and SEC filings complained of herein, and/or
were aware of, or recklessly disregarded, the misstatements contained therein
and omissions therefrom and were aware of their materially misleading nature.
Because of their Board Membership, Audit Committee membership and/or executive
and managerial positions with Medaphis, each of the defendants had access to the
adverse non-public information about Medaphis' financial performance and
condition, as particularized herein. Each of the defendants knew that those
adverse facts rendered misleading the positive statements made by and about
Medaphis in the press releases and SEC filings.
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115. Said defendants, because of their positions of control and
authority as officers and/or directors of the Company and/or as members of the
Audit Committee, were able to and did control the contents of the SEC filings
and press releases pertaining to the Company. Each of said defendants was
provided with copies of Medaphis' public statements and SEC filings alleged
herein to be misleading prior to or shortly after their issuance and had the
ability and opportunity to prevent their issuance or cause them to be promptly
corrected.
116. Each of the defendants engaged in a course of conduct which
was designed to and did (I) deceive the investing public regarding Medaphis'
financial reporting and business prospects; (ii) artificially inflate the market
price of Medaphis' securities; (iii) enable Medaphis to make acquisitions paid
for with Medaphis stock based on the inflated value of that stock; (iv) cause
members of the public to purchase or otherwise acquire Medaphis securities at
inflated prices, including, without limitation, shareholders of HDS, BSG and
other companies acquired for Medaphis stock; and (v) make the stock and options
of some of the defendants more valuable. Defendants undertook this scheme to
prolong the appearance of good fortune at Medaphis in a desperate gamble to gain
the resources and expertise necessary to attempt to meet Medaphis' contractual
commitments, and to avoid the otherwise inevitable consequences including
eliminating, divesting or reorganizing Medaphis and certain of its subsidiaries
in which defendants held managerial positions and which certain defendants had
founded. In furtherance of this course of conduct, defendants took the actions
as set forth herein.
117. Defendants engaged in a conspiracy and common course of
conduct, commencing at least by February 29, 1996, the purpose and effect of
which was, inter alia, to cause Medaphis to deceptively present the Company's
financial reporting, financial performance and business
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prospects. Defendants did this so that they could inflate the price of the
Company's stock in order to: (I) protect and enhance their executive positions
and the substantial compensation and prestige they obtained thereby; (ii)
enhance the value of their Medaphis stock holdings and their options to buy
Medaphis stock; and (iii) conceal their previous fraudulent conduct.
118. As set forth above, Defendants accomplished their conspiracy
and common course of conduct through the issuance of the interrelated and
interdependent deceptive and misleading press releases to the public, as well as
by filing the false and misleading SEC filings, all of which misrepresented
Medaphis' financial condition, financial performance and business prospects,
thereby creating a deceptive and misleading impression of continued growth and
future profitability.
119. Each of the defendants aided and abetted and rendered
substantial assistance in the wrongs complained of herein. In taking the actions
to substantially assist the commission of the fraud complained of, each
defendant acted with knowledge of the primary wrongdoing, substantially assisted
the accomplishment of that fraud, and was aware of his overall contribution to
and furtherance of the fraud.
120. Defendants either knew or recklessly disregarded the fact that
the illegal acts and practices and misleading statements and omissions described
herein would adversely affect the integrity of the market for Medaphis
securities and would artificially inflate the prices of those securities.
Defendants, by acting as herein described, knowingly and/or recklessly exposed
Medaphis to liability under the federal securities laws for violations thereof.
121. As a result of the dissemination of the false and misleading
statements described herein, the market price of Medaphis stock was artificially
inflated. That has resulted in the
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Company being subjected to at least 18 class action lawsuits brought on behalf
of purchasers of Medaphis securities during the time the Company was
disseminating the above quoted false information ("the Class Actions").
122. Medaphis has been damaged by its exposure to multi-million
dollar damages claims by the members of the classes in the Class Actions, as
well as to the substantial legal expenses to be incurred in connection with the
Class Actions. In addition, the Company's reputation in the securities markets
has been severely damaged, thereby hampering the Company's ability to secure
future business partners and financing.
123. In particular, Medaphis announced on October 22, 1996, that
it was curtailing a program of expansion which had enabled the Company to
acquire 46 targets in eight years.
124. Medaphis' reputation, and specifically its ability to retain
its significant joint venture partners on favorable terms was damaged: On August
14, 1996, Medaphis announced that it would be forced to renegotiate its major
Joint Venture agreement in Europe.
DERIVATIVE ACTION ALLEGATIONS
125. Plaintiff brings this action, pursuant to Rule 23.1, Federal
Rules of Civil Procedure, on behalf of Medaphis to enforce claims of Medaphis
against defendants which may properly be asserted by Medaphis and which Medaphis
has failed to enforce.
126. The wrongs complained of herein began following plaintiff's
purchase of stock of Medaphis in June, 1995, and were not consummated until
October 22, 1996. Hence, plaintiff has standing to bring this derivative action
on behalf of Medaphis to recover damages for all of the conduct described in
this complaint.
DEMAND IS EXCUSED FOR FUTILITY
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127. Demand on Medaphis to bring this action has not been made and
is not necessary because such demand would be futile. Medaphis is controlled by
its Board of Directors, and, as described herein, each of the Directors, were
involved in and approved the transactions and misstatements complained of
herein, knew or should have known that Medaphis did not have an adequate system
of internal controls in place to account for "accounts receivable, unbilled",
and/or were responsible for the unlawful and improper conduct of Medaphis which
has damaged the company, and hence are named as defendants herein. The Director
Defendants were not in a position to exercise independent business judgment with
respect to the claims alleged herein due to their individual and collective
approval of, participation in and responsibility for this unlawful and wrongful
conduct. Hence, the Director Defendants were not disinterested and could not
have exercised independent business judgment on the issue of whether Medaphis
should prosecute this action. Under the factual circumstances described herein,
the directors of Medaphis were more interested in protecting themselves than
they were in protecting one company by prosecuting this action. Therefore demand
on Medaphis and its Board of Directors was futile and is excused. In particular:
(a) Demand on defendants Brown, Pryor, and Papermaster
would have been futile, and is therefore excused, because they were actively
involved in the day-to-day management of Medaphis and its major subsidiaries,
including BSG which directly managed Imonics, and were directly responsible for
the acts and omissions, including the false statements and omissions, complained
of herein. Brown in particular made many of the false statements alleged herein;
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(b) Demand on defendants Holbrooke, Bellas and McDowell
would have been futile, and is therefore excused, because Holbrooke, Bellas and
McDowell served on the Audit Committee of the Board of Directors, and were
charged with "meeting with the Company's auditors at least annually to review
the Company's financial statements and internal accounting controls. The Audit
Committee is also responsible for submitting recommendations to the Board
regarding the Company's internal accounting controls. Medaphis 1996 Proxy
Statement at 3.
(i) Medaphis is required to have an Audit
Committee by the NASDAQ National Market System listing of Medaphis' securities.
National Association of Securities Dealers, Inc. Bylaws, Schedule D, Part III,
P. 6, ss. (d) provides that "[e]ach Nasdaq National Market issuer shall
establish and maintain an Audit Committee, a majority of the members of which
shall be independent directors."
(ii) Among other things, as members of the Audit
Committee, McDowell, Holbrooke and Bellas had the duty to:
- - Recommend the firm to be employed as the corporation's external auditor
and review the proposed discharge of such firm.
- - Review the external auditor's compensation, the proposed terms of its
engagement and its independence.
- - Review the appointment and replacement of the senior internal auditing
executive.
- - Serve as the channel of communication between the external auditor and
the board and between the senior internal auditing executive and the
board.
- - Review the results of each external audit of the corporation, the
report of the audit, any related management letter, management's
responses to recommendations made by the
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external audit in connection with the audit and reports of the internal
auditing department, that are material to the corporation as a whole
and management's responses to those reports.
- - Review the corporation's annual financial statements; any
certification, report, opinion or review rendered by the external
auditor in connection with those financial statements; and any
significant disputes between management and the external auditor that
arose in connection with the preparation of those financial statements.
- - Consider, in consultation with the external auditor and the senior
internal auditing executive, the adequacy of the corporation's internal
controls.
- - Consider major changes and other major questions of choice respecting
the appropriate auditing and accounting principles and practices to be
used in preparation of the corporation's financial statements when
presented by the external auditor, principal senior executive or
otherwise.
(iii) The Audit Committee should properly have
been the keystone of Medaphis' corporate finance governance. Instead, Holbrooke,
Bellas and McDowell perpetrated a sham, and utterly failed to ensure that
Medaphis' Audit Committee was an informed, vigilant and effective overseer of
the Company's financial reporting process and its internal control system.
(iv) Despite claiming to have met four times
during the 1996 fiscal year, Holbrooke, Bellas and McDowell through utter and
complete abdication of their duties to Medaphis, failed to implement and
maintain an adequate system of internal controls to account for receivables.
Holbrooke, Bellas and McDowell either knew or should have known that Medaphis
lacked an adequate system of internal controls. Their service on the Audit
Committee was a
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sham, in that they took no action whatsoever to assure that such a system of
internal controls was in place. The absence of such controls directly
contributed to the false financial statements and violations of GAAP alleged
herein, and was the proximate cause of Medaphis' disastrous restatement and
consequent exposure to massive liability for violation of the federal securities
laws;
(c) Medaphis was controlled by its Board of Directors,
and, as described herein, all the members of the Board of Directors of Medaphis
were involved in and approved the false or misleading SEC filings complained of
herein. Furthermore, Defendant Brown is responsible in damages for the unlawful
and improper conduct of Medaphis which has damaged the Company. None of the
Director Defendants serving on November 1, 1996, was in position to exercise
independent business judgment with respect to the claims alleged herein due to
their individual and collective approval of, participation in and responsibility
for Medaphis' unlawful and wrongful conduct, which has damaged and will continue
to damage Medaphis severely. Hence, the Director Defendants serving on November
1, 1996, were and are not disinterested and could not have exercised independent
business judgment on the issue of whether Medaphis should prosecute this action.
Under the factual circumstances described herein, the Director Defendants
serving on November 1, 1996, were more interested in protecting themselves than
they were in protecting the Company by prosecuting this action. Therefore,
demand on Medaphis and its Board of Directors would have been futile and is
excused;
(d) Further, demand would have been futile and, in turn,
legally excused, because the Director Defendants serving on November 1, 1996,
had and have irreconcilable conflicts of interest because of their
responsibility for and control of the related class action
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securities litigation arising out of their acts of wrongdoing alleged herein,
which are themselves also a basis for liability herein. Although the class
action complaint herein, which alleges that Medaphis and other defendants
violated federal securities laws, only explicitly names Defendant Brown, the
statute of limitations has not, and will not run until August for the remaining
directors not yet named in the class action. These directors signed the false or
misleading SEC filings herein complained of and each is exposed to liability for
violation of the securities laws. Such a conflict renders each of the Medaphis
directors incapable of disinterestedly deciding to prosecute this action. Each
of said directors signed the SEC false or misleading SEC filings listed after
their name:
Brown: February 29, 1996 Registration Statement on Form S-4
(registration of stock to acquire Rapid Systems); April 3, 1996, Registration
Statement on Form S-4 (the BSG Prospectus); April 1, 1996, Annual Report on Form
l0-K For The Year Ended December 31, 1995; July 12, 1995 Registration Statement
on Form S-3;
Bellas: February 29, 1996 Registration Statement on Form S-4
(registration of stock to acquire Rapid Systems); April 3, 1996, Registration
Statement on Form S-4 (the BSG Prospectus); April 1, 1996, Annual Report on Form
10-K For The Year Ended December 31, 1995; July 12, 1995 Registration Statement
on Form S-3;
Holbrooke: February 29, 1996 Registration Statement on Form
S-4 (registration of stock to acquire Rapid Systems); April 3, 1996,
Registration Statement on Form S-4 (the BSG Prospectus); April 1, 1996, Annual
Report on Form 10-K For The Year Ended December 31, 1995; July 12, 1995
Registration Statement on Form S-3;
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Pryor: February 29, 1996 Registration Statement on Form S-4
(registration of stock to acquire Rapid Systems); April 3, 1996, Registration
Statement on Form S-4 (the BSG Prospectus); April 1, 1996, Annual Report on Form
l0-K For The Year Ended December 31, 1995; July 12, 1995 Registration Statement
on Form S-3;
McDowell: July 12, 1995 Registration Statement on Form S-3;
Papermaster: July 12, 1995 Registration Statement on Form
S-3; Douglas: None.
(e) Medaphis has agreed to indemnify its directors and
officers against liability for acts and omissions occurring in the performance
of their duties as directors and maintains insurance policies to cover the costs
of such indemnification. Under the terms of those insurance policies, however,
claims against directors which are brought by the Company or other directors are
excluded from coverage. Therefore, Medaphis' Board of Directors, or any
committee thereof, was effectively disabled from complying with any demand that
would cause the Company to bring suit against the Defendants because to do so
would result in the loss of insurance coverage;
(f) In order to bring this action for bad faith breaches
of fiduciary duty, the members of Medaphis' Board of Directors would have had to
sue themselves and/or their fellow directors and allies in the top ranks of the
corporation. They, therefore, would not initiate litigation nor be able to
prosecute any such action.
128. Each and every member of the Board of Directors was incapable
of exercising independent business judgment in connection with a shareholder
demand in this case. Brown was still on the board November 1, 1996, when this
action was first filed. He is an insider and primary actor in the underlying
securities fraud, having made many of the untrue statements to the press.
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He signed all of the periodic reports and registration statements complained of
herein. Bellas, Holbrooke and McDowell, in addition to deliberately making a
sham of the Audit Committee also signed some or all of the registration
statements complained of herein and are primarily liable under the federal
securities laws. Papermaster and Pryor, in addition to signing some or all of
the registration statements herein, also were insiders in direct control of
major Medaphis subsidiaries, with intimate working knowledge of the day to day
affairs of Medaphis. Papermaster, in particular, was charged with supervising
and ameliorating Imonics. Medaphis acquired BSG, of which Papermaster was CEO,
to integrate the operations of Imonics and Rapid Systems. BSG allegedly
possessed large processing volume software expertise which Imonics in fact
lacked, and which it needed to meet its commitments under the Bertelsmann
contracts, and on the MPSC Re- Engineering Project. In essence, Papermaster was
hired to straighten out the mess at Imonics. He knew from his first day on the
job that Imonics lacked the capacity to perform under the Bertelsmann contract
and on the MPSC Re-Engineering Project. Finally, Douglas, the 'mystery
director', was never elected by the shareholders, who came and went before any
shareholder ever had the opportunity to vote for him, constituted the
unauthorized seventh member of the board in violation of the Company's By-Laws.
Douglas failed to execute the Company's registration statements, despite being
required to do so by SEC regulations. Each member of this group lacked the
independence required to evaluate a shareholder demand, for all the reasons set
forth above.
129. No demand has been made on the shareholders of Medaphis to
cause Medaphis to bring this action against defendants on behalf of the Company
because such an effort would be futile. The shareholders of Medaphis do not have
the power to collectively act on behalf of the
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company. All any shareholder or group of shareholders can do is, as plaintiff
does here, bring a derivative action, on behalf of Medaphis, pursuant to Rule
23.1 of the Federal Rules of Civil Procedure.
130. Plaintiff will fairly and adequately protect the interests of
Medaphis and its shareholders in enforcing the rights of Medaphis against the
Defendants. Plaintiff's attorneys are experienced in this type of litigation and
will prosecute this action diligently on behalf of Medaphis to enforce the
rights of the company against the Defendants. Plaintiff has no interest adverse
to Medaphis.
COUNT I
BAD FAITH BREACH OF FIDUCIARY DUTY AGAINST ALL DEFENDANTS
131. Plaintiff incorporates by reference the allegations set forth
in paragraphs 1 through 130 above.
132. Each of the Defendants, as directors and/or officers of
Medaphis, owed fiduciary duties to the company.
133. By engaging in conduct described above, and by their actions
or omissions causing or permitting Medaphis to engage in unlawful conduct
described above, each of Defendants deliberately and in bad faith breached his
fiduciary duties to the company. Defendants' violation of their fiduciary duties
to Medaphis was willful and knowing and made in bad faith.
134. Medaphis has been damaged by Defendants' breach of their
fiduciary duties.
COUNT II
VIOLATION OF LAW
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135. Plaintiff incorporates by reference the allegations set forth
in Paragraphs 1 through 130 above.
136. Defendants deliberately violated the federal securities laws
and have damaged Medaphis thereby.
137. Each of the defendants owes a fiduciary duty of care to
Medaphis.
138. Each of the defendants has breached his fiduciary duty of care
to Medaphis by violating the federal securities laws, as set forth above.
COUNT III
GROSS NEGLIGENCE AGAINST ALL DEFENDANTS
139. Plaintiff incorporates by reference the allegations set forth
in Paragraphs 1 through 130 above.
140. Each of the Defendants, as directors and/or officers of
Medaphis, owed to Medaphis a duty to act with reasonable care.
141. Each of the Defendants, by their conduct and omissions
described herein, breached his duty to act with reasonable care.
142. The breach by Defendants of their duty to act with reasonable
care was grossly negligent and reckless.
143. Medaphis has been damaged by the gross negligence and reckless
disregard by defendants of their duties.
COUNT IV
BREACH OF CONTRACT AGAINST THE ALL DEFENDANTS
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144. Plaintiff repeats, realleges and incorporates the allegations
set forth in Paragraphs 1 to 130 above.
145. In consideration of the substantial compensation and
professional enhancement and prestige which each of the Defendants received, as
directors and/or officers of Medaphis, each of those defendants contracted with
Medaphis to act in the best interests of Medaphis and to cause Medaphis to
operate lawfully and properly. Specifically, Brown, Pryor, McDowell,
Papermaster, Douglas, Cote and Douglass all had written employment contracts
with Medaphis, which they breached by their actions, as set forth herein. Each
of the Director Defendants also had an express agreement to serve as a director
of the corporation in exchange for compensation, which each Director Defendant
breached by their actions herein.
146. By their actions and omissions set forth herein, those
defendants breached their contractual obligations and commitments to Medaphis by
not acting in the best interests of Medaphis and by causing or permitting
Medaphis to act in unlawful and improper ways.
147. Medaphis has been damaged by Defendants' breaches of their
contracts with Medaphis.
PRAYERS FOR RELIEF
WHEREFORE, Plaintiff, on behalf of Medaphis, demands judgment against
defendants, and each of them jointly and severally, as follows:
A. Determining that this suit is a proper derivative action and
certifying plaintiff as appropriate representative of Medaphis for said action
pursuant to Rule 23.1 of the Federal Rules of Civil Procedure;
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B. Declaring that each of the defendants breached his fiduciary
duty to Medaphis in bad faith, and breached his contract with Medaphis as
alleged herein;
C. Declaring that each of the Director Defendants breached his
duty of care to Medaphis and that this conduct constituted gross negligence;
D. Determining and awarding Medaphis the damages sustained by it
as a result of the violations set forth in each count of this complaint from
each of the defendants named in each count, jointly and severally, with interest
thereon;
F. Awarding plaintiff the costs and disbursements of this action,
including reasonable fees and costs to plaintiff's attorneys, accountants, and
experts;
G. Granting such other further relief as the Court may deem just
and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
(Signatures appear on the following page.)
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<PAGE> 57
Dated: February ll, 1997 Respectfully submitted,
/s/
-----------------------------------
ROBERT C. SCHUBERT, ESQ.
/s/
-----------------------------------
JUDEN JUSTICE REED, ESQ.
SCHUBERT & REED LLP
Two Embarcadero Center,
Suite 1050
San Francisco, CA 94111
Telephone: 415-788-4220
Telecopier: 415-788-0161
/s/
-----------------------------------
ALFRED G. YATES, JR., ESQ.
ALFRED G. YATES, JR. &
ASSOCIATES
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, Pennsylvania 15219
Telephone: 412-391-5164
Telecopier: 412-471-1033
BIRD, BALLARD & STILL
/s/
-----------------------------------
WILLIAM Q. BIRD, ESQ.
14 Seventeenth Street,
Suite 5
Atlanta, GA 30309
Telephone: 404-873-4696
Telecopier: 404-872-3745
ATTORNEYS FOR DERIVATIVE PLAINTIFF
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<PAGE> 58
VERIFICATION
I, Thomas W. Brown, hereby declare:
1. I am the administrator for the Thomas W. Brown Profit Sharing
Plan, plaintiff in the captioned matter.
2. I have read the foregoing First Amended Verified Derivative
Complaint and know its contents. I am informed and believe and on that ground
allege that the matters stated therein are true and correct
Executed this ____ day of February, 1997 in Pittsburgh, Pennsylvania. I
declare under penalty of perjury that the foregoing is true and
correct.
/s/
-----------------------------------
Thomas W. Brown
<PAGE> 59
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- ------------------------------------------
)
THOMAS W. BROWN, ADMINISTRATOR, ) NO. 1 96-CV 2904
THOMAS W. BROWN PROFIT SHARING )
PLAN, Derivatively on Behalf of )
MEDAPHIS CORPORATION, )
)
Plaintiff, )
vs. )
RANDOLPH G. BROWN, ROBERT C. BELLAS, )
JR., DAVID R. HOLBROOKE, RICHARD H. )
STOWE, JOHN A. DOWNER, DAVID E. )
McDOWELL, DENNIS A. PRYOR, STEVEN G. )
PAPERMASTER, MICHAEL L. DOUGLAS, )
MICHAEL R. COTE and JAMES S. )
DOUGLASS, )
)
Defendants, )
and )
)
MEDAPHIS CORPORATION, )
)
Nominal Defendant. )
- ------------------------------------------)
CERTIFICATE OF SERVICE
THIS IS TO CERTIFY that I have this day served a copy of the within and
foregoing First Amended Verified Derivative Complaint upon all parties in this
action by depositing same in the United States mail, in a properly addressed
envelope with adequate postage thereon, to the following:
<PAGE> 60
M. Robert Thornton, Esq.
Robert A. Ambler, Jr., Esq.
Leisa L. Bernardin, Esq.
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Henry P. Wasserstein, Esq.
Skadden, Arps, Slate, Meagher & Floam
919 Third Avenue
New York, NY 10022
J. Marbury Rainer, Esq.
Parker, Hudson, Rainer & Dobbs
1500 Marquis Two Tower
285 Peachtree Center Ave.
Atlanta, GA 30303
Jack J. Dalton, Esq.
John M. Bowler, Esq.
Troutman Sanders
NationsBank Plaza, Suite 5200
600 Peachtree Street, NE
Atlanta, GA 30308-2216
This _______ day of February, 1997.
/s/
-------------------------------------
William Q. Bird
Georgia State Bar No. 057900
BIRD, BALLARD & STILL
14 Seventeenth Street, Suite 5
Post Office Box 7009
Atlanta, Georgia 30357
404/873-4696
-2-
<PAGE> 1
EXHIBIT 99.6
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Medaphis Corporation ("Medaphis" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Medaphis undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the following:
FUTURE OPERATING RESULTS. While Medaphis has in the past expanded its
operations through acquisitions and internal growth, the 1997 business plan of
the Company does not provide for further acquisitions and, in any event, any
such acquisitions would require the unanimous consent of the Company's existing
lenders. While the Company has and continues to implement management initiatives
designed to enhance and improve its business and operations, there can be no
assurance that Medaphis will be able to achieve or sustain profitability or
revenue growth on an annual or quarterly basis in the future, that fluctuations
in quarter-to-quarter or year-to-year operating results will not occur or that
any such quarter-to-quarter or year-to-year fluctuations will not be material.
Future operating results of Medaphis will be dependent upon, among other things,
(i) successful integration of certain recently acquired businesses, (ii)
successfully exiting non-core businesses, (iii) improvement in operations of the
Company's physician billing business, (iv) successful implementation of various
management initiatives designed to reduce costs and increase efficiencies within
the Company's core business and (v) successful growth in sales of the Company's
business management services and information products.
The Company has recently consummated a number of significant acquisitions,
many of which the Company is in the process of integrating into its operations.
In addition, the Company recently announced its intention to focus on its core
business of delivering business management services and information products to
healthcare providers and to divest non-strategic businesses, including
Healthcare Recoveries, Inc. ("HRI"). The Company also recently announced that it
was assessing alternatives for BSG Corporation ("BSG"), including, but not
limited to, seeking a buyer, a spin-off transaction or other capital-raising
alternatives. There can be no assurance that the Company will be able to
successfully integrate any of the recently acquired companies, that Medaphis
will be able to continue to operate recently acquired companies in a profitable
manner or that any of the recently acquired companies will not have a material
adverse effect upon Medaphis'
<PAGE> 2
results of operations, particularly while such acquisitions are being integrated
into the Company. Similarly, there can be no assurance that the Company will be
able to successfully exit non-core businesses in a timely fashion or at all,
that the Company will be able to divest HRI on favorable terms, that the Company
will be able to find a buyer or develop suitable alternatives for BSG or that
any such divestiture and/or assessment will not have a material adverse effect
upon the results of operations of the Company. Additionally, there can be no
assurance that any such divestiture or assessment will not have an adverse
effect upon the results of operations of HRI or BSG or the reputation and
standing of each of these businesses in their respective markets or their
ability to attract and retain key employees.
During the six months ended December 31, 1996, the Company undertook to
reorganize its Imonics operating unit, integrate the Imonics operations into BSG
and to discontinue the custom software development business previously pursued
by the Imonics unit. This process involved, among other things, recording large
restructuring and other charges during the relevant period, significant
downsizing of Imonics' employee workforce, renegotiation of Imonics' significant
client contracts and other restructuring, reorganization and exit activities.
There can be no assurance that such restructuring and reorganization activities
will not have an adverse effect upon the reputation and standing of Medaphis,
BSG and/or Rapid Systems Solutions, Inc. in the information management and
client/server information technology marketplaces or that such matters will not
have an adverse effect upon the results of operations of Medaphis in future
periods or adversely effect BSG's ability to attract and retain key employees.
The Company's expansion strategy in the past has involved both acquisitions
and internal growth. The Company recently announced that it intends to focus on
its core business of delivering business management services and information
products to healthcare providers and to divest non-strategic businesses.
Moreover, the Company does not currently anticipate pursuing any significant
acquisitions. There can be no assurance that such shift in focus will not have
an adverse effect upon the Company's revenue and operations.
The Company is experiencing margin pressure in the billing and accounts
receivable management services operations of Medaphis Physician Services
Corporation, a wholly owned subsidiary of the Company ("MPSC"). MPSC has not
significantly contributed to the Company's overall results of operations for the
past eighteen months. Management does not expect this trend to improve
significantly until further progress is made with, among other things, ongoing
initiatives designed to reduce redundant costs, improve efficiencies and enhance
operational effectiveness in MPSC's operations. One of the major components of
the Company's 1997 operating plan is to reduce costs and increase efficiencies
in the core business. During 1996 and going forward, the Company has and will
continue to implement various initiatives within the Company's Services Division
(which includes MPSC) designed to reduce costs and improve operational
efficiency. These initiatives have included, among other things, downsizing of
management ranks and improvements in operational processes through the
implementation of best practices. Although the preliminary indications from such
management initiatives have been positive, there can be no assurance that the
Company will be able to successfully implement such initiatives throughout
MPSC's operations, that such management initiatives ultimately will be
successful, that MPSC's margins will improve or that MPSC will contribute
meaningfully to the Company's overall results of operations in future periods.
The Company's future operations are dependent upon, among other things,
continued growth in sales of its healthcare information technology ("HIT")
products, including, but not limited to, sales of its clinical information
management system in both domestic and international markets. The markets for
these products are characterized by rapidly changing technology, evolving
industry standards and frequent new products and product enhancements. The
Company's success in its HIT business will depend upon its continued ability (i)
to enhance its existing products, (ii) to effect conversions of existing
products into foreign languages, (iii) to introduce new products on a timely and
cost effective basis to meet evolving customer requirements, (iv) to achieve
market acceptance for new product offerings and (v) to respond to emerging
industry standards and other technological changes. During the six months ended
December 31, 1996, the Company experienced slower than expected sales of certain
of its enterprise-wide and departmental scheduling products. There can be no
assurance that sales of such scheduling products will improve, that Medaphis
will be able to effectively enhance existing products, create new products or
respond to technological changes or new industry
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<PAGE> 3
standards. Moreover, there can be no assurance that competitors of Medaphis will
not develop competitive products, or that any such competitive products will not
have an adverse effect upon Medaphis' operating results.
The Company recently announced its operating plan for 1997. As noted above,
the operating plan involves refocusing the Company on its core business of
providing business management services and information products to healthcare
providers. The major components of the plan include (i) exiting non-core
businesses, (ii) achieving improved predictability of business results through
enhanced management accountability and controls, (iii) reducing costs and
increasing efficiencies in the core business, (iv) achieving excellence in
customer service, and (v) implementing cross-selling initiatives. Although
management believes that the 1997 operating plan reflects the key action items
which will contribute to Medaphis' efforts to improve and enhance the operations
of the Company, there can be no assurance that the operating plan will result in
meaningful improvements to the Company's operating results in future periods or
that the plan will ultimately be successful.
ABANDONED REENGINEERING PROGRAM; EXISTING SYSTEMS AND TECHNOLOGY. The
Company recently announced that it had abandoned its reengineering program. This
decision was reached at the conclusion of a comprehensive assessment of the
program begun during 1996. The conclusions of the assessment were that it was
not cost effective to continue the development and deployment of the software
and technology upon which the reengineering program was based and that the
reengineering software and technology had no alternative useful application in
the Company's operations. In lieu of further developing and deploying the
reengineering software and technology, the Company intends to further refine,
enhance and develop certain of the Company's existing software and billing
systems and to migrate over time the Company's billing and accounts receivable
management services operations to the Company's most proven software systems and
technology, so as to reduce the number of systems and technology that must be
maintained and supported. Moreover, management intends to continue to implement
"best practices" and other established process improvements in its operations
going forward. There can be no assurance that the Company will be able to
successfully refine, enhance and develop its software and billing systems going
forward, that the costs associated with maintaining, enhancing and developing
such software and systems will not increase significantly in future periods,
that the Company will be able to successfully migrate the Company's billing and
accounts receivable management services operations to the Company's most proven
software systems and technology or that the Company's existing software and
technology will not become obsolete as a result of ongoing technological
developments in the marketplace.
CASH FLOW FROM OPERATIONS; SENIOR CREDIT FACILITY. During the year ended
December 31, 1996, the Company used approximately $8 million in cash for
operating activities. At December 31, 1996, approximately $242.7 million in
borrowings were outstanding under the Company's Senior Credit Facility. The
Senior Credit Facility was amended and restated on February 4, 1997 (the
"Amended Facility") to, among other things, increase the loan commitments from
$250 million to $285 million and extend the maturity through June 30, 1998. The
Amended Facility is secured by substantially all of the Company's assets and is
guaranteed by substantially all of the Company's subsidiaries. The loan
commitments under the Amended Facility will reduce to $200 million on July 31,
1997 (unless extended to September 30, 1997) and $150 million on January 31,
1998. Certain of the other material terms of the Amended Facility include
adjustment of the interest rates, fees and charges and other compensation to be
paid to the lenders by the Company, including the vesting of certain warrant
arrangements for 1% of the common stock of the Company on each of January 1,
1998 and April 1, 1998; modification of the financial reporting requirement to
the lenders; restrictions on new acquisitions and certain litigation settlement
payments; and establishment of a maximum permitted capital expenditures covenant
for the fiscal quarter ending March 31, 1997 and additional financial covenants
for fiscal quarters ending on and after June 30, 1997. This summary of certain
terms of the Amended Facility and the warrants are subject to the terms of the
agreements which have been incorporated by reference as exhibits to this Annual
Report on Form 10-K.
While management presently anticipates that the liquidity provided in the
Amended Facility (together with anticipated results from operations based on the
1997 business plan) will be sufficient to fund the
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<PAGE> 4
Company's anticipated operating and capital expenditure requirements during
1997, there can be no assurance that there will not be material deviations in
actual operations from the 1997 business plan which would make it necessary for
the Company to seek either further modifications to the Amended Facility or
other sources of liquidity. Similarly, while the Company presently anticipates
that the timing and proceeds from the previously announced non-core business
divestiture program will be sufficient to meet the Company's principal
amortization and other obligations under the Amended Facility, there can be no
assurance that the timing or amount of the proceeds to be generated from
business divestitures for debt service purposes will not require further
modifications of the Amended Facility, some of which modifications would require
the consent of all of the lenders thereto. Finally, while the Amended Facility
incorporates an extension of maturity through June 30, 1998, the Company will be
required to renegotiate the Amended Facility prior to maturity and complete its
non-core business divestiture program in order to provide adequate liquidity for
the Company's 1998 business plan. There can be no assurance that the Company's
lenders will agree to further modifications of the Amended Facility or that the
Company will complete the non-core business divestiture program as required. The
Company may also be required to consider other alternative financing
arrangements and/or equity transactions, which could prove costly and/or involve
further dilution to the Company's stockholders. There can be no assurance that
any such alternative financing arrangements and/or equity transactions will be
available to the Company on acceptable terms or at all.
PENDING FEDERAL INVESTIGATION; PUTATIVE CLASS ACTION LAWSUITS. The United
States Attorney's Office for the Central District of California is conducting an
investigation (the "Federal Investigation") of Medaphis' billing and collection
practices in its offices located in Calabasas and Cypress, California (the
"Designated Offices"). Medaphis first became aware of the Federal Investigation
when it received search warrants and grand jury subpoenas on June 13, 1995.
Although the precise scope of the Federal Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
Medaphis' billing and collection practices in the Designated Offices. Numerous
federal and state civil and criminal laws govern medical billing and collection
activities. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs. Although the Designated Offices represent less than 2% of Medaphis'
annual revenue, there can be no assurance that the Federal Investigation will be
resolved promptly, that additional subpoenas or search warrants will not be
received by Medaphis or that the Federal Investigation will not have a material
adverse effect upon the Company. The Company recorded charges of $12 million in
the third quarter of 1995 and $2 million in the fourth quarter of 1996, 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 which were filed following the Company's announcement of the
Federal Investigation. The charges are intended to cover only the anticipated
expenses of the Federal Investigation and the related lawsuits and do not
include any provision for fines, penalties, damages, assessments, judgments or
sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of common stock in April 1995 were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits allege violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of common stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint. 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, as
amended, 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 plaintiffs and the defendants have reached
an agreement in principle to settle this action on a class-wide basis for $4.75
million, subject to court approval and other customary conditions (the "1995
Class Action Settlement"). The 1995 Class Action Settlement
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<PAGE> 5
would also include the related putative class action lawsuit currently pending
in the Superior Court of Cobb County, Georgia, described more fully below. The
Company expects to receive approximately $3.7 million from insurance to fund a
portion of the 1995 Class Action Settlement and accrued approximately $1.2
million in the quarter ending December 31, 1996 to fund the anticipated balance
of the 1995 Class Action Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis common stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning the Company's Gottlieb's Financial Services, Inc. ("GFS") subsidiary.
No subpoenas or other process have been issued to the Company or to GFS in
connection with the investigation. There can be no assurance that this matter
will be resolved promptly, that subpoenas will not be received by Medaphis or
that the investigation will not have a material adverse effect upon Medaphis.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis common stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis common stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). On
December 30, 1996, the defendants filed a motion to dismiss most of the 1996
Consolidated Complaint. On February 3, 1997, the plaintiffs filed a Consolidated
Second Amended Complaint. On February 14, 1997, the defendants moved to dismiss
the Consolidated Second Amended Complaint in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. Plaintiff seeks rescissory, compensatory and punitive
damages, rescission, injunctive relief and costs. On January 10, 1997, the
defendants filed a demurrer to the complaint. The
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demurrer was denied on February 5, 1997. On March 18, 1997, the court denied the
plaintiff's motion for a preliminary injunction. As a result of the Company's
restatement of its fiscal 1995 financial statements, the Company may not be able
to sustain a defense to strict liability on certain claims under the 1933 Act,
but the Company believes that it has substantial defenses to the alleged damages
relating to the 1933 Act Claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG common stock were converted to Medaphis
stock options in connection with Medaphis' acquisition of BSG. The plaintiffs
allege failure to perform diligence, breaches of fiduciary duties of candor,
loyalty and fair dealing and negligence against the BSG defendants (Papermaster,
Pickering, Lundeen, Smith, Noorda and Grosh) and fraud and deceit against the
Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received written demands from various stockholders,
including stockholders of recently acquired companies. To date, these
stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") has notified the Company that it is conducting a non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that additional lawsuits
will not be filed against the Company, that the lawsuits, the written demands
and the pending governmental investigations will not have a disruptive effect
upon the operations of the business, that the written demands, the defense of
the lawsuits and the pending investigations will not consume the time and
attention of the senior management of the Company, that the resolution of the
lawsuits, the written demands and the pending governmental investigations will
not have a material adverse effect upon the Company.
HEALTHCARE FRAUD INITIATIVES; HEALTHCARE REFORM MEASURES
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations of the
Medicare program. This heightened examination has resulted in a number of high
profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (the
"Health Insurance Act"), which includes an expansion of certain fraud and abuse
provisions, such as expanding the application of Medicare and Medicaid fraud
penalties to other federal healthcare programs, and creating additional criminal
offenses relating to "healthcare benefit programs," which are defined to include
both public and private payor programs. The Health Insurance Act also provides
for forfeitures and asset freezing orders in connection with such healthcare
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offenses. Civil monetary penalties and program exclusion authority available to
the OIG also have been expanded. The Health Insurance Act contains provisions
for instituting greater coordination of federal, state and local enforcement
agency resources and actions through the OIG. There also have been several
recent healthcare reform proposals which have included an expansion of the
anti-kickback laws to include referrals of any patients regardless of payor
source.
In addition to the provisions of the Health Insurance Act, submission of
claims for services or procedures that are not provided as claimed may lead to
civil monetary penalties, criminal fines, imprisonment and/or exclusion from
participation in Medicare, Medicaid and other federally funded healthcare
programs. Specifically, the Federal False Claims Act allows a private person to
bring suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and for such person to share in any amounts paid to
the government in damages and civil penalties. Successful plaintiffs can receive
up to 25-30% of the total recovery from the defendant. Such qui tam actions or
"whistleblower lawsuits' have increased significantly in recent years and have
increased the risk that a company engaged in the healthcare industry such as
Medaphis and many of its customers may become the subject of a federal or state
investigation or may ultimately be required to defend a false claims action, may
be subjected to government investigation and possible criminal fines, may be
sued by private payors, and may be excluded from Medicare, Medicaid and/or other
federally funded healthcare programs as a result of such an action. The
government on its own may also institute a Civil False Claims Act case, either
in conjunction with a criminal prosecution or as a stand alone civil case.
Whether instituted by a qui tam plaintiff or by the government, the government
can recover triple its damages together with civil penalties of $5,000-$10,000
per false claim. Under applicable case law, a party successfully sued under the
False Claims Act may be jointly and severally liable for the damages and
penalties. Some state laws also provide for false claims actions, including
actions initiated by a qui tam plaintiff. There can be no assurance that
Medaphis will not be the subject of false claims or qui tam proceedings relating
to its billing and collection activities or that Medaphis will not be the
subject of further government scrutiny or investigations relating to its billing
and accounts receivable management services operations. See "Pending Federal
Investigation; Putative Class Action Lawsuits." Any such proceeding or
investigation could have a material adverse effect upon the Company.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program (Medicare), have projected that the
Medicare "trust fund" is likely to become insolvent by the year 2002 if the
current growth rate of approximately 10% per annum in Medicare expenditures
continue. Similarly, federal and state expenditures under the Medicaid program
are projected to increase significantly during the same seven-year period. In
response to these projected expenditure increases, and as part of an effort to
balance the federal budget, both the Congress and the Clinton Administration
have made proposals to reduce the rate of increase in projected Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of both
programs. In late 1995, Congress passed legislation that would substantially
reduce projected expenditure increases substantially and would make significant
changes in the Medicare and the Medicaid programs. The Clinton Administration
has proposed alternate measures to reduce, to a lesser extent, projected
increases in Medicare and Medicaid expenditures. Neither proposal became law
prior to Congress' 1996 adjournment. Medaphis anticipates that both the Clinton
Administration and the Republican majorities in Congress will introduce
legislation in 1997 designed to reduce projected increases in Medicare and
Medicaid expenditures and to make other changes in the Medicare and Medicaid
programs. Medaphis anticipates that such proposed legislation would, if adopted,
change aspects of the present methods of paying physicians under such programs
and provide incentives for Medicare and Medicaid beneficiaries to enroll in
health maintenance organizations and other managed care plans. Medaphis cannot
predict the effect of any such legislation, if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is
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adopted and implemented. These market reforms include certain employer
initiatives such as creating purchasing cooperatives and contracting for
healthcare services for employees through managed care companies (including
health maintenance organizations), and certain provider initiatives such as
risk-sharing among healthcare providers and managed care companies through
capitated contracts and integration among hospitals and physicians into
comprehensive delivery systems. Consolidation of management and billing services
by integrated delivery systems may result in a decrease in demand for Medaphis'
billing and collection services for particular physician practices, but this
decrease may be offset by an increase in demand for Medaphis' consulting and
comprehensive business management services (including billing and collection
services) for the new provider systems.
CLIENT/SERVER INFORMATION TECHNOLOGY PROJECTS. Medaphis' client/server
information technology business involves, among other things, projects designed
to reengineer significant client operations through the strategic use of
imaging, client/server and other advanced technologies. Failure to meet
expectations with respect to a major project could damage the Company's
reputation and standing in the client/server information technology marketplace,
affect its ability to attract new client/server information technology business,
result in the payment of damages to the client and jeopardize the Company's
ability to collect for services already performed on the project.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the Federal Investigation, the Company's liquidity and financial
resources, divestiture of businesses, the ongoing governmental investigation,
putative class action lawsuits, other lawsuits or demands, healthcare reform
measures and quarter-to-quarter and year-to-year variations in financial results
could cause the market price of Medaphis common stock to fluctuate
substantially. Any adverse announcement with respect to such matters or any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and material adverse effect on the trading price of
Medaphis common stock in any given period. As a result, the market for Medaphis
common stock may experience material adverse price and volume fluctuations and
an investment in the Company's common stock is not suitable for any investor who
is unwilling to assume the risk associated with any such price and volume
fluctuations.
COMPETITION. Medaphis faces intense competition in each of the areas in
which it does business. In providing business management systems and services to
physicians and hospitals, Medaphis competes with certain national information
management systems and transaction processing organizations, certain regional
companies which provide such systems or services and certain physician groups
and hospitals which provide their own business management services. In providing
subrogation and recovery services, Medaphis competes primarily with the internal
recovery operations of potential customers and with certain regional subrogation
recovery vendors. In terms of providing client/server information technology
services, Medaphis competes with national, regional and local companies
specializing in information technology and systems integration consulting
services, national and regional application development companies and the
software development and systems integration units of national computer
equipment manufacturers, large information systems facilities management and
outsourcing organizations, national "Big Six" accounting firms and the
information systems groups of large general management consulting firms. Certain
of Medaphis' competitors have longer operating histories and greater financial,
technical and marketing resources than Medaphis. There can be no assurance that
competition from current or potential competitors will not have a material
adverse effect upon Medaphis.
This Safe Harbor Statement supersedes the Safe Harbor Statement filed as
Exhibit 99.5 to the Company's Current Report on Form 8-K filed on February 18,
1997.
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