<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<S> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
</TABLE>
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF CLASS AT NOVEMBER 7, 1997
- -------------- -------------------
<S> <C>
Common Stock $0.01 Par Value................................ 73,208,235 Shares
Non-voting Common Stock $0.01 Par Value..................... 0 Shares
</TABLE>
================================================================================
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 and 1996, as
restated............................................... 3
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996, as restated......................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996, as restated......... 5
Notes to Consolidated Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
PART II: OTHER INFORMATION
Legal Proceedings......................................... 25
Exhibits and Reports on Form 8-K.......................... 29
Index to Exhibits......................................... 29
</TABLE>
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- -------------- ------------- --------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Revenue.................................... $124,649 $132,121 $423,162 $455,138
Salaries and wages......................... 95,544 106,473 281,508 293,425
Other operating expenses................... 37,818 39,370 115,841 118,594
Depreciation............................... 7,505 7,201 21,540 19,981
Amortization............................... 4,374 4,809 13,729 15,026
Interest expense, net...................... 7,246 3,284 19,417 8,019
Litigation settlement...................... 52,500 -- 52,500 --
Restructuring and other charges............ 13,837 24,350 16,661 41,181
-------- -------- -------- --------
Total expenses................... 218,824 185,487 521,196 496,226
Loss before income taxes and extraordinary
item..................................... (94,175) (53,366) (98,034) (41,088)
Income tax benefit......................... (14,191) (20,767) (16,176) (10,443)
-------- -------- -------- --------
Loss before extraordinary item............. (79,984) (32,599) (81,858) (30,645)
Extraordinary income on sale of HRI, net of
tax...................................... -- -- 76,391 --
-------- -------- -------- --------
Net loss......................... (79,984) (32,599) (5,467) (30,645)
Pro forma income tax adjustments........... -- 625 -- 979
-------- -------- -------- --------
Pro forma net loss............... $(79,984) $(31,974) $ (5,467) $(29,666)
======== ======== ======== ========
Pro forma net loss per common share:
Pro forma net loss before extraordinary
item.................................. $ (1.10) $ (0.45) $ (1.13) $ (0.42)
Extraordinary income on sale of HRI...... -- -- 1.05 --
-------- -------- -------- --------
Pro forma net loss....................... $ (1.10) $ (0.45) $ (0.08) $ (0.42)
======== ======== ======== ========
Weighted average shares outstanding........ 72,942 71,665 72,542 71,123
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(AS RESTATED)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 6,710 $ 7,631
Restricted cash........................................... 4,884 19,568
Accounts receivable, billed............................... 103,800 99,823
Accounts receivable, unbilled............................. 73,352 79,911
Deferred tax asset........................................ -- 36,177
Other..................................................... 10,936 12,129
--------- ---------
Total current assets.............................. 199,682 255,239
Property and equipment...................................... 80,756 97,850
Deferred tax asset.......................................... 75,599 50,211
Intangible assets........................................... 374,453 389,033
Other....................................................... 4,972 1,570
--------- ---------
$ 735,462 $ 793,903
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 16,019 $ 11,765
Accrued compensation...................................... 36,377 30,332
Accrued expenses.......................................... 73,994 100,675
Current portion of long-term debt......................... 160,589 55,975
Deferred tax liability.................................... 9,312 --
--------- ---------
Total current liabilities......................... 296,291 198,747
Long-term debt.............................................. 6,595 215,752
Accrued litigation settlement............................... 52,500 --
Other obligations........................................... 11,737 13,830
--------- ---------
Total liabilities................................. 367,123 428,329
--------- ---------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1997;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1997 and 1996; issued and outstanding 73,143 in 1997
and 71,705 in 1996..................................... 731 717
Common stock, non-voting, $0.01 par value, 600 authorized
in 1997 and 1996; none issued.......................... -- --
Paid-in capital........................................... 530,661 522,491
Accumulated deficit....................................... (163,053) (157,465)
--------- ---------
368,339 365,743
Less treasury stock, at cost -- 16 shares in 1996......... -- 169
--------- ---------
Total stockholders' equity........................ 368,339 365,574
--------- ---------
$ 735,462 $ 793,903
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
--------- -------------
<S> <C> <C>
(AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (5,467) $(30,645)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 35,269 35,007
Gain on sale of HRI.................................... (76,391) --
Impairment loss of property and equipment.............. 8,661 10,713
Deferred income taxes.................................. (15,309) (10,442)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Decrease in restricted cash.......................... 799 1,030
Increase in accounts receivable, billed.............. (6,217) (11,570)
Decrease (increase) in accounts receivable,
unbilled............................................ 7,829 (6,756)
Increase (decrease) in accounts payable.............. 5,015 (13,177)
Increase in accrued compensation..................... 8,193 6,784
(Decrease) increase in accrued expenses.............. (15,243) 6,226
Increase in accrued litigation settlement............ 52,500 --
Other, net........................................... (4,456) 5,303
--------- --------
Net cash used for operating activities............ (4,817) (7,527)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (5,897) (13,569)
Purchases of property and equipment....................... (15,198) (44,801)
Proceeds from sale of HRI, net............................ 126,375 --
Proceeds from sale of property and equipment.............. 3,644 19
Software development costs................................ (4,452) (33,937)
--------- --------
Net cash provided by (used for) investing
activities...................................... 104,472 (92,288)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options............... 6,808 6,853
Proceeds from borrowings.................................. 98,992 110,615
Principal payments of long-term debt...................... (203,368) (33,429)
Other..................................................... (3,008) 3,813
--------- --------
Net cash (used for) provided by financing
activities...................................... (100,576) 87,852
--------- --------
CASH:
Net change................................................ (921) (11,963)
Balance at beginning of period............................ 7,631 18,979
--------- --------
Balance at end of period.................................. $ 6,710 $ 7,016
========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest............................................... $ 12,503 $ 10,921
Income taxes........................................... 10,347 6,797
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... -- 2,737
Additions to capital lease obligations................. -- 14,043
Common stock issued upon conversion of subordinated
debentures............................................ -- 63,375
Issuance of stock warrants............................. 4,969 --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
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.
The Company's consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that may be necessary should the Company, contrary to plans and
expectations, be unable to continue as a going concern.
2. LONG-TERM DEBT
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement, increased the
revolving line of credit from $250 million to $285 million and had a maturity
date of June 30, 1998. The Second Amended Facility also required mandatory loan
commitment reductions to $200 million and $150 million on July 31, 1997 and
January 31, 1998, respectively. 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 had adopted a plan to
divest HRI. On May 28, 1997, the Company was successful in divesting HRI through
an initial public offering of 100% of its stock. This sale generated
approximately $117 million of net proceeds that were used to reduce the
Company's borrowings under the Second Amended Facility and it also reduced the
loan commitment under the Second Amended Facility to $168 million, which more
than satisfied the required reduction for July 31, 1997.
On September 18, 1997, the Company entered into a letter agreement with the
requisite lenders under the Second Amended Facility which, among other things
(i) waived the Company's compliance with the remaining financial covenants and
(ii) required the Company to repay all loans and terminate all the lenders'
6
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments by November 30, 1997. On October 24, 1997, the Company entered into
a letter agreement with the requisite lenders under the Second Amended Facility
which, among other things, waived any defaults or events of default which might
otherwise result in the event of certain restatements of the Company's financial
statements and extended the mandatory repayment and termination date to January
31, 1998.
On November 19, 1997, the Company entered into the First Modification of
the Second Amended Facility ("The First Modification"), which among other
things: (i) waived any defaults or events of default which might otherwise
result from the restatement of the Company's financial statements as reported in
this Form 10-Q; (ii) eliminated the step-down in loan commitments to $150
million scheduled to occur on January 31, 1998; and (iii) reinstated the
maturity of the Second Amended Facility to June 30, 1998. The First
Modification, which is filed as Exhibit 10.9 to this Form 10-Q and incorporated
herein by reference, also establishes certain financial covenants for the fiscal
year 1997 and for monthly and quarterly periods in fiscal year 1998.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the accompanying September 30, 1997 balance sheet. 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
Company's previous 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, capital expenditures and the Company's
ability to declare or pay cash dividends on its voting common stock ("Common
Stock"). The Second Amended Facility provides for "base rate" loans that bear
interest equal to prime plus 1% as long as certain financial covenants are met.
At September 30, 1997, the Company had $147.9 million in borrowings outstanding
under the Second Amended Facility that bore interest at 9.5%.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the Company's Common Stock on each of
January 1, 1998 and April 1, 1998, provided that the Second Amended Facility has
not been repaid and terminated prior to such vesting dates. Prior to July 1,
1997, the Company had not ascribed any value to these warrants because the
warrants vest only if amounts are outstanding or commitments are not terminated
under the Second Amended Facility on December 31, 1997. Management continues to
believe the Company may generate sufficient cash flows from the refinancing of
the Second Amended Facility or from asset sales to repay all borrowings under
and terminate the Second Amended Facility by December 31, 1997. However, due to
the uncertainty of completing a refinancing of the Second Amended Facility prior
to such time, the Company ascribed a value of $4,969,000 to the warrants vesting
on January 1, 1998 and amortized $2,338,000 to interest expense as of September
30, 1997.
3. LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally from
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued
7
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to payors with respect to such global billing reports in the Company's various
offices, including the Designated Offices. Although the precise scope of the
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 billing and collection practices in the
Designated Offices. No charges or claims by the government have been made.
Although the Company continues to believe that the principal focus of the
investigation remains on the billing and collection practices in the Designated
Offices, there can be no assurance that the investigation will not expand to
other offices, that the investigation will be resolved promptly, that additional
subpoenas or search warrants will not be received by Medaphis or MPSC or that
the investigation will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the investigation and the putative
class action lawsuits described below which were filed in 1995 following the
Company's announcement of the investigation. The charges are intended to cover
only the anticipated expenses of the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed to settle this action on a class-wide basis
for $4.75 million, subject to court approval (the "1995 Class Action
Settlement"). The 1995 Class Action Settlement included the related putative
class action lawsuit currently pending in the Superior Court of Cobb County,
Georgia, described more fully below. On October 29, 1997 the court certified a
class for settlement purposes, approved the settlement and entered final
judgment dismissing the action with prejudice. One of Medaphis' directors and
officers' liability insurance carriers has paid $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ended December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
8
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
As originally disclosed in its Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying with that request. Although the precise scope and subject matter of
the investigation are not known to the Company, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. Currently, the Company has recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, solely for legal and administrative fees, costs and expenses in
connection with the investigation, which charges do not include any provision
for fines, penalties, damages, assessments, judgments or sanctions that may
arise out of this matter.
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.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended 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"). The
Consolidated Second Amended Complaint seeks compensatory and rescissory damages,
as well as fees, interest and other costs. On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. Discovery
currently is proceeding. 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 such 1933
Act claims.
9
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (to be
paid by the Company's directors' and officers' liability insurance carriers),
3,355,556 shares of Medaphis Common Stock, and warrants to purchase 5,309,523
shares of Medaphis Common Stock at $12 per share for a five-year period. The
Memorandum of Understanding also includes: (i) an obligation on the part of
Medaphis to contribute up to 600,000 additional shares of Common Stock to the
settlement under certain conditions if the aggregate value of the Medaphis
Common Stock proposed to be issued in the settlement falls below $30.2 million
during a specified time period; and (ii) certain anti-dilution rights in favor
of plaintiffs with respect to certain future issuances of shares of Medaphis
Common Stock or warrants or rights to acquire Medaphis Common Stock to settle
existing civil litigation and claims currently pending or asserted against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The aggregate value of the Medaphis Common Stock during
the specified time period is now known, and, as a result, all of the additional
600,000 shares of Medaphis Common Stock will be included in the settlement. The
Memorandum of Understanding also contains other conditions including, but not
limited to, consent and approval of the Company's insurance carriers and the
insurance carriers' payment of the cash portion of the settlement, the Company's
receiving assurances from its independent accountants that the proposed
settlement will not adversely affect pooling-of-interests accounting treatment
on previous acquisitions (which assurances have been received by the Company),
the execution of mutually acceptable settlement papers and the approval of the
settlement by the court. The Company recorded a $52.5 million charge in the
quarter ended September 30, 1997 for this settlement. Such amount has been
reflected as a non-current liability as the Company does not anticipate
satisfying the obligation within the next twelve months due to the anticipated
time required to receive the requisite approvals.
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 behalf of the Company. 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. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss 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, 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. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the 1933 Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such 1933 Act claims.
10
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
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. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
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. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
11
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. 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. Further, there can be no assurance 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, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring charges............................. $ 5,465 $ 2,317 $ 5,465 $ 8,666
Software abandonment.............................. -- 6,862 -- 6,862
Property and equipment impairment................. 6,959 6,394 6,959 6,394
Legal costs....................................... 600 5,000 2,600 5,000
Pooling charges................................... (46) (1,200) (46) 9,007
Severance costs................................... 859 1,727 1,683 1,727
Other............................................. -- 3,250 -- 3,525
------- ------- ------- -------
$13,837 $24,350 $16,661 $41,181
======= ======= ======= =======
</TABLE>
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two components
of the Reengineering Project: (1) workflow, process and operational improvements
along with new technology development, and (2) office consolidation within its
wholly owned operating subsidiary, Medaphis Physician Services Corporation
("MPSC") (the "MPSC Restructuring Plan"). The Company had recorded a
restructuring reserve for the exit costs associated with the MPSC Restructuring
Plan in 1995. In August 1996, the Company revised the MPSC Restructuring Plan
and reduced the reserves established in 1995 by $1.8 million. During the first
half of 1996, the Company incurred $5.2 million of costs that were related to
the Reengineering Project, which had not previously been reserved. In September
1997, the Company reevaluated the adequacy of the reserves established for the
MPSC Restructuring Plan and recorded an additional charge of $1.7 million.
During the third quarter of 1996, the Company adopted a plan to consolidate
its system integration businesses, BSG Corporation ("BSG"), Rapid Systems
Solutions, Inc. ("Rapid Systems") and Imonics Corporation ("Imonics")(the "BSG
Group Restructuring"). In connection with the BSG Group Restructuring, Medaphis
recorded charges of $1.3 million for the costs associated with the termination
of certain leases
12
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $2.8 million for severance costs for the Imonics employees who had been
notified of their termination. Medaphis had previously recorded an additional
$1.2 million of severance costs for Imonics employees in the second quarter of
1996.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies, the BSG and HIT Groups, into Per-Se Technologies (the
"Per-Se Restructuring"). In connection with the Per-Se Restructuring, the
Company recorded charges of $2.7 million for the costs associated with the
termination of certain leases and $1.1 million for severance costs related to
the employees who had been notified of their termination by September 30, 1997.
The type and amount of restructuring reserves established and paid in the
nine months ended September 30, 1997 are described below:
<TABLE>
<CAPTION>
RESERVE PAID RESERVE
BALANCE THROUGH BALANCE
DECEMBER 31, RESERVE SEPTEMBER 30, SEPTEMBER 30,
1996 ADDITIONS 1997 1997
------------ --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Lease termination costs................. $ 7,514 $4,395 $(3,249) $ 8,660
Severance............................... 2,748 1,070 (2,369) 1,449
Other................................... 1,222 (1,166) 56
------- ------ ------- -------
$11,484 $5,465 $(6,784) $10,165
======= ====== ======= =======
</TABLE>
Software Abandonment. In connection with the BSG Group Restructuring, the
Company abandoned certain of the Imonics software development projects and,
during the period ended September 30, 1996, recorded a charge for the write-off
of $6.9 million of capitalized software development costs related to these
projects.
Property and Equipment Impairment. In connection with the BSG Group
Restructuring and the revised MPSC Restructuring Plan, the Company assessed the
recoverability of its long-lived assets and recorded impairment losses of $6.4
million in the three month period ended September 30, 1996.
In connection with the Per-Se Restructuring and the Company's assessment of
the recoverability of certain of its long-lived assets, the Company recorded a
charge of $7.0 million for impairment losses during the quarter ended September
30, 1997.
Legal Costs. The Company recorded charges of $5.0 million and $3.0 million
in September 1996 and 1997, respectively, for the legal and administrative fees,
costs and expenses it anticipated incurring in connection with the various 1996
lawsuits and shareholder demands filed against the Company and certain of its
former officers, one of whom was also a director.
In June 1997 and September 1997, the Company recorded charges of $2.0
million and $1.0 million, respectively, for the legal and administrative fees,
costs and expenses it has incurred and plans to incur in connection with the
federal inquiry of the billing procedures at GFS.
In September 1997, the Company also evaluated the adequacy of the reserves
established for the federal investigation in California and the turnaround plan
adopted in December 1996 and reduced these reserves by $3.4 million.
13
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pooling Charges. In 1995 and 1996, Medaphis acquired eight companies in
merger transactions accounted for under the pooling of interests method of
accounting. In connection therewith, the Company incurred transaction fees,
costs and expenses, which have been reflected in Medaphis' operating results and
are set forth below as (income)/expense:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- --------------
1997 1996 1997 1996
----- ------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Automation Atwork Companies................................. $ -- $ (22) $ -- $ (430)
HRI......................................................... -- (13) -- (778)
Consort Technologies, Inc................................... -- (3) -- (529)
MMS......................................................... -- (187) -- (845)
Intelligent Visual Computing, Inc. ("IVC").................. -- (31) -- 169
Rapid Systems............................................... (15) (236) (15) 664
BSG......................................................... (14) (321) (14) 5,893
HDS......................................................... (17) (387) (17) 4,863
----- ------- ----- ------
$ (46) $(1,200) $ (46) $9,007
===== ======= ===== ======
</TABLE>
Severance Costs. In accordance with its involuntary severance benefit
plan, the Company recorded a charge of $0.9 million in September 1996 to reflect
the expense for employees' rights to involuntary severance benefits that have
accumulated to date.
The Company also recorded charges of $0.8 million and $0.9 million in the
third quarter of 1996 and 1997, respectively, for compensation costs associated
with members of the former executive management team. The Company recorded $0.8
million of compensation costs associated with former executive management in the
second quarter of 1997.
Other Costs. During the third quarter of 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 write-off of 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.
5. INCOME TAXES
In 1996, Medaphis acquired IVC, Rapid Systems and BSG in merger
transactions, which were accounted for as "poolings-of-interests". Prior to such
mergers, IVC, Rapid Systems and a company acquired by BSG prior to the BSG
merger had elected "S" corporation status for income tax purposes. As a result
of such 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
loss and pro forma net loss per common share are presented as if the entities
had been "C" corporations during the nine months ended September 30, 1996.
Effective income tax rates for the periods presented vary from statutory
rates primarily as a result of nondeductible expenses associated with the
proposed settlement of litigation and merger transactions.
6. RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at HDS, which was
acquired in a merger transaction in June 1996 and accounted for as a "pooling of
interests." These practices related principally to revenue recognized in fiscal
years 1994, 1995 and 1996. As a result of this evaluation, management has
determined that the revenue was
14
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improperly recognized and, accordingly, has restated the Company's financial
statements for the period ended September 30, 1996 and will be restating the
Company's financial statements for all of the other periods indicated. The
effect of such restatements on the Company's net income (loss) for the years
ended December 31, 1994, 1995, and 1996 was $(5.9) million, $(1.1) million and
$(7.3) million, respectively. The cumulative reduction in assets caused by the
restatements was $20.5 million.
Because Deloitte & Touche has advised the Company that it intends to
withdraw its opinions in respect of the Company's 1994, 1995 and 1996 fiscal
years, Price Waterhouse has been engaged to re-audit the Company's financial
statements for its 1995 and 1996 fiscal years. The Company intends to file
restated 10K's with respect to such years promptly after the completion of such
re-audit. Although the Company has determined that it will also restate the
financial statements for its 1994 fiscal year, it has not yet determined whether
it will cause such financial statements to be re-audited. The Company will also
promptly file such 10-QA's as are required as a result of the restatement.
In March 1997, as a result of a review initiated by senior management and
the Audit Committee of the Board of Directors 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 consisted
primarily of the following: (i) incorrect quarterly recording of revenues and
the related costs and expenses for certain contracts; (ii) incorrect quarterly
recording of certain liabilities for employee bonuses and related expenses;
(iii) 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 (iv) incorrect
depreciation of certain assets related to the Company's comprehensive
reengineering and consolidation project.
15
<PAGE> 16
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The impact on both restatements on the 1996, three- and nine-month results
of operations are presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------------------------- -------------------------------------------
AS RESTATED AS RESTATED
AS ORIGINALLY IN THE 1996 AS ORIGINALLY IN THE 1996
REPORTED FORM 10-K AS RESTATED REPORTED FORM 10-K AS RESTATED
------------- ----------- ----------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue.............. $126,731 $132,874 $132,121 $465,551 $464,842 $455,138
Salaries and wages... 109,615 106,473 106,473 292,843 293,425 293,425
Other Operating
expenses........... 39,016 39,370 39,370 117,169 118,594 118,594
Depreciation......... 6,221 7,201 7,201 16,496 19,981 19,981
Amortization......... 4,937 4,809 4,809 14,672 15,026 15,026
Loss before income
taxes.............. (60,617) (52,613) (53,366) (25,248) (31,384) (41,088)
Net loss............. (36,995) (32,127) (32,599) (20,933) (24,565) (30,645)
Pro forma net loss... (36,370) (31,502) (31,974) (19,954) (23,586) (29,666)
Pro forma net loss
per common share... $ (0.51) $ (0.44) $ (0.45) $ (0.28) $ (0.33) $ (0.42)
</TABLE>
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1994
Revenue................................................... $ 398,934 $ 390,204
Pro forma net income...................................... 32,523 26,691
Pro forma net income per share............................ $ 0.51 $ 0.41
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue................................................... $ 559,877 $ 558,155
Pro forma net loss........................................ (5,621) (6,742)
Pro forma net loss per share.............................. $ (0.15) $ (0.17)
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenue................................................... $ 608,313 $ 596,714
Pro forma net loss........................................ (123,642) (130,909)
Pro forma net loss per share.............................. $ (1.74) $ (1.84)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Revenue................................................... $ 295,516 $ 298,513
Restructuring and other changes........................... 2,000 2,824
Net income................................................ 74,304 74,517
Pro forma net income per share............................ $ 0.99 $ 0.99
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 provides for new accounting principles used in the
calculation of earnings per share and shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This pronouncement cannot
16
<PAGE> 17
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be adopted early. The following table presents basic and diluted weighted
average shares outstanding and a calculation of the pro forma net loss per share
using the guidelines of SFAS No. 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding............. 72,942 71,665 72,542 71,123
======== ======== ======== ========
Pro forma net loss before extraordinary item.......... $(79,984) $(31,974) $(81,858) $(29,666)
Extraordinary income on sale of HRI................... -- -- 76,391 --
-------- -------- -------- --------
Pro forma net loss.................................... $(79,984) $(31,974) $ (5,467) $(29,666)
======== ======== ======== ========
Basic earnings per share(1):
Pro forma net loss before extraordinary item........ $ (1.10) $ (0.45) $ (1.13) $ (0.42)
Extraordinary income on sale of HRI................. -- -- 1.05 --
-------- -------- -------- --------
Pro forma net loss.................................. $ (1.10) $ (0.45) $ (0.08) $ (0.42)
======== ======== ======== ========
</TABLE>
- ---------------
(1) Diluted earnings per share equals basic earnings per share due to the
reported losses before extraordinary item.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way companies
report information about operating segments including the related disclosures
about products and services. The Company has elected to adopt SFAS No. 131
during the period ended September 30, 1997. See Note 8 where the Company
discloses information about its operating segments.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company is currently assessing the impact of SOP
97-2 on the Company's financial position and results of operation.
8. SEGMENT REPORTING
Medaphis has five reportable segments: Physician Services, Hospital
Services, HRI, HIT, and the BSG Group. Physician Services is the largest
provider of business management solutions and claims processing to physicians in
the United States. Hospital Services is the largest provider of business
management services to hospitals in the United States. HRI provided subrogation
and related recovery services primarily to healthcare payors. HRI was sold on
May 28, 1997. HIT provides application software and systems integration services
to both hospitals and physicians. The BSG Group provides full-service systems
integration, information technology consulting and tailored software development
to more than 100 clients in a variety of markets, including healthcare.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies included in the Form 10-K.
Medaphis evaluates each segments' performance based on operating profit or loss.
The Company also accounts for intersegment sales as if the sales were to third
parties.
17
<PAGE> 18
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's reportable segments are strategic business units that offer
different products and services. Information concerning the operations in these
segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Physician Services........................................ $ 59,971 $ 71,723 $206,685 $222,676
Hospital Services......................................... 24,179 21,485 73,096 66,806
HRI....................................................... -- 7,790 14,720 23,116
HIT....................................................... 19,146 19,151 62,319 55,208
BSG Group................................................. 21,677 13,214 67,375 89,853
Corporate and eliminations................................ (324) (1,242) (1,033) (2,521)
-------- -------- -------- --------
124,649 132,121 423,162 455,138
======== ======== ======== ========
Operating profit (loss)(1):
Physician Services........................................ (10,687) (2,416) (1,859) (1,859)
Hospital Services......................................... 777 2,387 7,179 11,736
HRI....................................................... -- 1,857 3,685 6,342
HIT....................................................... 1,647 4,933 12,839 15,322
BSG Group................................................. (3,879) (24,599) (4,370) (5,434)
Corporate................................................. (8,450) (7,894) (26,930) (17,995)
-------- -------- -------- --------
(20,592) (25,732) (9,457) 8,112
======== ======== ======== ========
Interest expense, net....................................... 7,246 3,284 19,417 8,019
-------- -------- -------- --------
Restructuring and other charges (including litigation
settlement):
Physician Services........................................ 4,894 5,528 6,894 10,292
Hospital Services......................................... -- -- -- --
HRI....................................................... -- (13) -- (778)
HIT....................................................... 3,253 (357) 3,253 3,959
BSG Group................................................. 2,430 14,193 2,430 22,709
Corporate................................................. 55,760 4,999 56,584 4,999
-------- -------- -------- --------
66,337 24,350 69,161 41,181
-------- -------- -------- --------
Loss before income taxes and extraordinary item............. $(94,175) (53,366) (98,034) (41,088)
======== ======== ======== ========
Depreciation and amortization:
Physician Services........................................ 7,173 6,732 21,717 19,685
Hospital Services......................................... 1,540 1,217 4,143 3,606
HRI....................................................... -- 236 401 643
HIT....................................................... 1,645 1,462 4,614 4,306
BSG Group................................................. 1,118 1,930 3,292 5,630
Corporate................................................. 403 433 1,102 1,137
-------- -------- -------- --------
$ 11,879 12,010 35,269 35,007
======== ======== ======== ========
Capital expenditures:
Physician Services........................................ 2,183 2,792 4,000 21,453
Hospital Services......................................... 2,949 1,961 5,938 5,489
HRI....................................................... -- 329 108 1,144
HIT....................................................... 603 831 1,914 2,694
BSG Group................................................. 949 4,007 2,045 12,386
Corporate................................................. 824 339 1,193 1,635
-------- -------- -------- --------
$ 7,508 10,259 15,198 44,801
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Identifiable assets:
Physician Services........................................ $425,700 $460,033
Hospital Services......................................... 105,931 97,626
HIT....................................................... 76,736 67,961
BSG Group................................................. 36,770 51,972
Corporate................................................. $ 90,325 $ 92,448
-------- --------
$735,462 $793,903
======== ========
</TABLE>
- ---------------
(1) Operating profit (loss) is revenue less salaries and wages, other operating
expenses, depreciation and amortization.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Medaphis is a leading provider of business management services, systems
integration services and medical software, primarily to the healthcare provider
market. Medaphis serves approximately 20,700 physicians and 2,700 hospitals
predominantly in North America, as well as internationally. Medaphis is well-
positioned to capitalize on the healthcare industry trends towards
consolidation, managed care and cost containment through a broad range of
services and products that enable clients to provide quality patient care
efficiently and cost effectively. The Company's large client base and national
presence further support the Company's competitive position. The Company
provides its services and products through its Healthcare Services Group, which
includes Physicians Services and Hospital Services, and its Information
Technology Group, recently renamed Per-Se Technologies.
During the past year a new management team has been assembled to address a
number of issues that had arisen in recent years and substantially weakened the
Company's financial condition. In February 1997, after assessing various
alternatives and refinancing the Company's senior debt, new management announced
its 1997 operating plan refocusing the Company on its core businesses of
providing business management services and information products to healthcare
providers. The major components of the plan included: (i) exiting non-core
business; (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
client service; and (v) implementing cross-selling initiatives.
Medaphis has already completed certain phases of this operating plan.
Medaphis sold its non-core insurance subrogation business, Healthcare Recoveries
Inc. ("HRI"), on May 28, 1997, for net proceeds of approximately $117 million,
through an initial public offering of 100% of HRI's common stock. Medaphis also
completed its assessment of its systems integration businesses (the "BSG Group")
and determined that the BSG Group is compatible with its core business of
delivering solutions to the healthcare market. As a result, in August 1997,
management decided to retain the BSG Group and to consolidate its operations
with the operations of HIT. This combination will assist Medaphis in continuing
its 1997 operating plan by reducing duplicative costs and creating efficiencies
via the combination of management and administrative functions at these
operations. During the third quarter of 1997, the Company recorded approximately
$3.7 million in restructuring charges related to this combination and recorded
other charges of $10.1 million, principally relating to the impairment of fixed
assets. (See "Results of Operations" for additional information).
The Company also reached a proposed settlement in 1997 with the plaintiffs
in the major class-action securities lawsuits pending against it, and during the
third quarter of 1997 the Company recorded a non-cash charge of $52.5 million
related to this proposed settlement.
During the third quarter of 1997, in connection with a refinancing effort,
management and its independent accountants evaluated certain revenue recognition
practices at HDS, which was acquired in a merger transaction in June 1996 and
accounted for as a "pooling-of-interests." These practices related principally
to revenue recognized in fiscal years 1994, 1995 and 1996. As a result of this
evaluation, management, with concurrence from its independent accountants, has
determined that the revenue was improperly recognized and, accordingly, has
restated the Company's financial statements for all of the periods indicated.
The effect of such restatements on the Company's net income (loss) for all of
the years ended December 31, 1994, 1995, and 1996 was ($5.9) million, ($1.1)
million and ($7.3) million, respectively.
TRENDS IN HEALTHCARE INDUSTRY
Medaphis' business is impacted by, among other things, trends in the U.S.
healthcare industry. As healthcare expenditures have grown as a percentage of
the U.S. gross national product, public and private healthcare cost containment
measures have applied pressure to the margins of healthcare providers.
Historically, some healthcare payors have willingly paid the prices established
by providers while other healthcare payors, notably government agencies 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
19
<PAGE> 20
of services purchased by government agencies and others but not paid by them
(i.e., "cost shifting"). The increasing complexity in the reimbursement system
resulting from continuing changes in laws, regulations, rules and protocols
relative to billing for services provided to patients mandated by federal and
state agencies and private payors 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 these pressures, management
believes that the revenue growth rate experienced by the Company's clients
continues to be adversely affected by increased managed care and other industry
factors 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. The federal government has
initiated a series of programs to investigate broadly the billing practices of
healthcare providers. Management believes that these trends have adversely
affected and could continue to adversely affect the rate of the revenue growth
and profit margins of the Company's operations.
RESULTS OF OPERATIONS
The following table presents certain items reflected in the Company's
statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue.............................. 100.0% 100.0% 100.0% 100.0%
Salaries and wages................... 76.7 80.6 66.5 64.5
Other operating expenses............. 30.3 29.8 27.4 26.1
Depreciation......................... 6.0 5.5 5.1 4.4
Amortization......................... 3.5 3.6 3.2 3.3
Interest expense, net................ 5.8 2.5 4.6 1.8
Litigation settlement................ 42.1 -- 12.4 --
Restructuring and other charges...... 11.1 18.4 3.9 9.0
----- ----- ----- -----
Total expenses............. 175.5 140.4 123.1 109.1
Loss before income taxes
and extraordinary item............. (75.5) (40.4) (23.1) (9.1)
----- ----- ----- -----
Income tax benefit................... (11.4) (15.7) (3.8) (2.3)
----- ----- ----- -----
Loss before extraordinary item....... (64.1) (24.7) (19.3) (6.8)
Extraordinary income on sale of HRI,
net of tax......................... -- -- 18.1 --
----- ----- ----- -----
Net loss................... (64.1) (24.7) (1.2) (6.8)
Pro forma income tax adjustments..... -- 0.5 -- 0.2
----- ----- ----- -----
Pro forma net loss......... (64.1)% (24.2)% (1.2)% (6.6)%
===== ===== ===== =====
</TABLE>
20
<PAGE> 21
Revenue. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Physician Services...................... $ 59,971 $ 71,723 $206,685 $222,676
Hospital Services....................... 24,179 21,485 73,096 66,806
HRI..................................... -- 7,790 14,720 23,116
HIT..................................... 19,146 19,151 62,319 55,208
BSG Group............................... 21,677 13,214 67,375 89,853
Corporate and eliminations.............. (324) (1,242) (1,033) (2,521)
-------- -------- -------- --------
$124,649 $132,121 $423,162 $455,138
======== ======== ======== ========
</TABLE>
Physician Services' revenue for the three- and nine-month periods ended
September 30, 1997 declined 16% and 7%, respectively. Both comparisons were also
unfavorably impacted by a one-time adjustment to revenue of $10.7 million in the
third quarter of 1997 that resulted from a detailed review, performed by the
Company, to update the assumptions and methodology underlying the calculation of
unbilled accounts receivable for Physician Services. Excluding this adjustment,
three-and-nine-month sales were down 1% and 2%, respectively, versus the prior
year figures. During 1997, management's emphasis has been on enhancing client
service to its existing clients and not on expanding the client base.
Hospital Services' revenue for both the three- and nine-month periods ended
September 30, 1997 increased 13% and 9%, respectively, as compared to the
comparable periods in 1996. These increases reflect internally-generated volume
growth.
On May 28, 1997 Medaphis completed the sale of HRI and, as a result, there
are only five months of revenue in 1997 compared with nine months in 1996.
HIT's revenue for the three-month period ended September 30, 1997 was flat
when compared with the three-month period ended September 30, 1996, as the sale
of one Ulticare software license during this quarter was essentially offset by
lower revenue in the scheduling systems division. HIT's revenue increased 13% in
the nine-month period ended September 30, 1997 versus the prior year period,
principally reflecting higher revenue associated with the Ulticare software
product.
The BSG Group's revenue in 1996 includes the results of the Company's
wholly-owned operating subsidiary, Imonics Corporation ("Imonics"), which was
shut down at the end of 1996. Imonics generated $(10.0) million and $15.7
million of revenue during the three- and nine-month periods ended September 30,
1996, respectively. Excluding the Imonics revenue, the BSG Group's revenue
decreased 7% and 9% for the three- and nine-month periods ended September 30,
1997, as compared with the three- and nine-month periods ended September 30,
1996, respectively. Disruptions associated with the restructuring of this
division have negatively affected revenue.
Salaries and Wages. Salaries and wages decreased to $95.5 million and
$281.5 million in the three- and nine-month periods ended September 30, 1997,
respectively, versus $106.5 million and $293.4 million in the comparable 1996
periods. Salaries and wages as a percentage of revenue for the three-month
period declined to 76.7% from 80.6% in 1996. The figures in both periods were
negatively impacted by unusual charges. In 1997, the percentage was inflated by
revenue adjustments, principally in Physician Services, while in 1996 the
percentage was inflated by the impact of certain Imonics charges. Excluding
these unusual charges, salaries and wages as a percentage of revenue increased
slightly on a year-to-year basis. Salaries and wages as a percentage of revenue
in the nine-month period ended September 30, 1997 increased to 66.5% of revenue
from 64.5% in the same period of 1996. The increase in salaries and wages as a
percentage of revenue is primarily due to the decline in revenue. The Company
has not reduced its employment levels proportionately with the decrease in
revenue because of a renewed emphasis on client service and expected growth in
Per-Se Technologies.
21
<PAGE> 22
Other Operating Expenses. Other operating expenses as a percentage of
revenue increased to 30.3% in the three-month period ended September 30, 1997
from 29.8% in the comparable period of 1996, and increased to 27.4% for the
nine-month period ended September 30, 1997 from 26.1% in the same period of
1996. The increase in other operating expenses as a percentage of revenue for
1997, as compared with 1996, is due to the previously mentioned decrease in the
Company's revenue. This increase is also attributable to professional fees the
Company has incurred to assist with a variety of financial, operational and
organizational projects undertaken by current management. The Company
anticipates it will continue to incur these professional fees for the remainder
of 1997. Other operating expenses are primarily comprised of postage, facility
and equipment rental, telecommunications, travel, outside consulting services
and office supplies.
Depreciation. Depreciation expense rose to $7.5 million in the third
quarter of 1997 as compared with $7.2 million in the third quarter of 1996 and
$21.5 million in the nine-month period ended September 30, 1997 as compared with
$20.0 million in the same period of 1996. These increases reflect the Company's
investment in property and equipment to support growth in its business.
Amortization. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $4.4 million in the third quarter of 1997 as compared with $4.8 million in
the third quarter of 1996 and $13.7 million in the nine-month period ended
September 30, 1997 as compared with $15.0 million in the same period of 1996.
The decreases are primarily due to the goodwill and software write-offs
associated with the shut down of Imonics.
Operating Profit (Loss). The operating loss for the third quarter shrank
by 20% to $20.6 million in 1997 from $25.7 million in 1996. Excluding the impact
of unusual adjustments, principally impacting revenue (see Revenues for
additional information), the operating loss declined by 32% to $2.0 million from
$2.9 million. This improvement principally reflects higher earnings at HIT and
improved results at Physician Services, to near breakeven in this year's third
quarter from a $2.4 million loss in 1996. These improvements in results of
operations were partially offset by unfavorable Hospital Services and BSG
comparisons and the absence of HRI operating profits due to the sale of that
business in the first half of 1997.
Interest. Net interest expense was $7.2 million in the third quarter of
1997 as compared with $3.3 million in the third quarter of 1996 and $19.4
million in the nine-month period ended September 30, 1997 as compared with $8.0
million in the same period of 1996. The increases in interest expense were due
to increased borrowing under the Company's credit facilities to fund the
Company's reengineering program in 1996, which was subsequently abandoned, its
working capital needs in both 1996 and 1997, amortization of debt issuance costs
and increased interest rates. Management expects to receive approximately $11
million (based on current interest rates) in annualized interest expense savings
as a result of the pay down of the Second Amended and Restated Credit Agreement
(the "Second Amended Facility") with the net proceeds from the sale of HRI.
Management also anticipates that interest rate fluctuations and changes in the
amount of borrowings under its Second Amended Facility will impact future
interest expense.
Restructuring and Other Charges. Components of restructuring and other
charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring charges............................. $ 5,465 $ 2,317 $ 5,465 $ 8,666
Software abandonment.............................. -- 6,862 -- 6,862
Property and equipment impairment................. 6,959 6,394 6,959 6,394
Legal costs....................................... 600 5,000 2,600 5,000
Pooling charges................................... (46) (1,200) (46) 9,007
Severance costs................................... 859 1,727 1,683 1,727
Other............................................. -- 3,250 -- 3,525
------- ------- ------- -------
$13,837 $24,350 $16,661 $41,181
======= ======= ======= =======
</TABLE>
22
<PAGE> 23
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two
components of the Reengineering Project: (i) workflow, process and
operational improvements along with new technology development, and (ii)
office consolidation within its wholly owned operating subsidiary, Medaphis
Physician Services Corporation ("MPSC") (the "MPSC Restructuring Plan").
The Company had recorded a restructuring reserve for the exit costs
associated with the MPSC Restructuring Plan in 1995. In August 1996, the
Company revised the MPSC Restructuring Plan and reduced the reserves
established in 1995 by $1.8 million. During the first half of 1996, the
Company incurred $5.2 million of costs that were related to the
Reengineering Project, which had not previously been reserved. In September
1997, the Company reevaluated the adequacy of the reserves established for
the MPSC Restructuring Plan and recorded an additional charge of $1.7
million.
During the third quarter of 1996, the Company adopted a plan to consolidate
its system integration businesses, BSG Corporation ("BSG"), Rapid Systems
Solutions, Inc. ("Rapid Systems") and Imonics Corporation ("Imonics")(the
"BSG Group Restructuring"). In connection with the BSG Group Restructuring,
Medaphis recorded charges of $1.3 million for the costs associated with the
termination of certain leases and $2.8 million for severance costs for the
Imonics employees who had been notified of their termination. Medaphis had
previously recorded an additional $1.2 million of severance costs for
Imonics employees in the second quarter of 1996.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies, the BSG and HIT Groups, into Per-Se Technologies (the
"Per-Se Restructuring"). In connection with the Per-Se Restructuring, the
Company recorded charges of $2.7 million for the costs associated with the
termination of certain leases and $1.1 million for severance costs related
to the employees who had been notified of their termination by September
30, 1997.
Software Abandonment. In connection with the BSG Group Restructuring,
the Company abandoned certain of the Imonics software development projects
and recorded a charge in the period ended September 30, 1996 for the
write-off of $6.9 million of capitalized software development costs related
to these projects.
Property and Equipment Impairment. In connection with the BSG Group
Restructuring and the revised MPSC Restructuring Plan, the Company assessed
the recoverability of its long-lived assets and recorded impairment losses
of $6.4 million in the three-month period ended September 30, 1996.
In connection with the Per-Se Restructuring and the Company's
assessment of the recoverability of certain of its long-lived assets, the
Company recorded a charge of $7.0 million for impairment losses during the
quarter ended September 30, 1997.
23
<PAGE> 24
Legal Costs. The Company recorded charges of $5.0 million and $3.0
million in September 1996 and 1997, respectively, for the legal and
administrative fees, costs and expenses it anticipated incurring in
connection with the various 1996 lawsuits and shareholder demands filed
against the Company and certain of its former officers, one of whom was
also a director.
In June 1997 and September 1997, the Company recorded charges of $2.0
million and $1.0 million, respectively, for the legal and administrative
fees, costs and expenses it has incurred and plans to incur in connection
with the federal inquiry of the billing procedures at GFS.
In September 1997, the Company also evaluated the adequacy of the
reserves established for the federal investigation in California and the
turnaround plan adopted in December 1996 and reduced these reserves by $3.4
million.
Pooling Charges. In 1995 and 1996, Medaphis acquired eight companies
in merger transactions accounted for under the pooling of interests method
of accounting. In connection therewith, the Company incurred transaction
fees, costs and expenses, which have been reflected in Medaphis' operating
results and are set forth below as (income)/expense:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- --------------
1997 1996 1997 1996
----- ------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Automation Atwork Companies............... $ -- $ (22) $ -- $ (430)
HRI....................................... -- (13) -- (778)
Consort Technologies, Inc................. -- (3) -- (529)
MMS....................................... -- (187) -- (845)
Intelligent Visual Computing, Inc.
("IVC")................................. -- (31) -- 169
Rapid Systems............................. (15) (236) (15) 664
BSG....................................... (14) (321) (14) 5,893
HDS....................................... (17) (387) (17) 4,863
----- ------- ----- ------
$ (46) $(1,200) $ (46) $9,007
===== ======= ===== ======
</TABLE>
Severance Costs. In accordance with its involuntary severance benefit
plan, the Company recorded a charge of $0.9 million in September 1996 to
reflect the expense for employees' rights to involuntary severance benefits
that have accumulated to date.
The Company also recorded charges of $0.8 million and $0.9 million in
the third quarter of 1996 and 1997, respectively, for compensation costs
associated with members of the former executive management team. The
Company recorded $0.8 million of compensation costs associated with former
executive management in the second quarter of 1997.
Other Costs. During the third quarter of 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 write-off
of 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.
Income Taxes. Effective income tax rates for the periods presented
vary from statutory rates primarily as a result of nondeductible expenses
associated with the proposed settlement of litigation and merger
transactions. Pro forma adjustments for income taxes have been provided in
1996 for companies which had elected to be treated as "S" Corporations
under the Internal Revenue Code of 1986, as amended, prior to merging with
the Company.
Extraordinary Item. On May 28, 1997, Medaphis sold HRI through an
initial public offering of 100% of its stock, which generated net proceeds
to the Company of approximately $117 million.
24
<PAGE> 25
Medaphis had acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests.
LIQUIDITY AND CAPITAL RESOURCES
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement, increased the
revolving line of credit from $250 million to $285 million and matured on June
30, 1998. 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 Company's previous 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, capital expenditures and the Company's ability to declare or pay cash
dividends on its common stock. The Second Amended Facility provides for "base
rate" loans that bear interest equal to prime plus 1% as long as certain
financial covenants are met. At September 30, 1997, the Company had $147.9
million in borrowings outstanding under the Second Amended Facility that bore
interest at 9.5%.
The Second Amended Facility required mandatory loan commitment reductions
to $200 million and $150 million on July 31, 1997 and January 31, 1998,
respectively. On May 28, 1997, in connection with the divestiture of HRI through
an initial public offering of 100% of its stock, the Company used the net
proceeds from the HRI sale in the amount of approximately $117 million to reduce
the Company's borrowings under the Second Amended Facility and the loan
commitment under the Second Amended Facility to $168 million, which more than
satisfied the required reduction for July 31, 1997.
On September 18, 1997, the Company entered into a letter agreement with the
requisite lenders under the Second Amended Facility which, among other things
(1) waived the Company's compliance with the remaining financial covenants and
(2) required the Company to repay all loans and terminate all the lenders'
commitments by November 30, 1997. On October 24, 1997, the Company entered into
a letter agreement with the requisite lenders under the Second Amended Facility
which, among other things, waived any defaults or events of default which might
otherwise result in the event of certain restatements of the Company's financial
statements and extended the mandatory repayment and termination date to January
31, 1998.
On November 19, 1997, the Company entered into the First Modification of
the Second Amended and Restated Credit Agreement ("The First Modification"),
which among other things: (1) waived any defaults or events of default which
might otherwise result from the restatement of the Company's financial
statements as reported in this Form 10-Q; (2) eliminated the step-down in loan
commitments to $150 million scheduled to occur on January 31, 1998; and (3)
reinstated the maturity of the Second Amended Facility to June 30, 1998. The
First Modification, which is filed as Exhibit 10.9 to this Form 10-Q and
incorporated herein by reference, also establishes certain financial covenants
for the fiscal year 1997 and for monthly and quarterly periods in fiscal year
1998.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the September 30, 1997 balance sheet. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $51.3 million of working
capital, which included $6.7 million of cash at September 30, 1997. Also at
September 30, 1997, the Company had approximately $20 million available under
the Second Amended Facility. The Company used $4.8 million of cash for operating
activities during the nine months ended September 30, 1997 as compared with $7.5
million during the nine months ended September 30, 1996. The increase in the
Company's operating cash flow resulted primarily from the collection of
outstanding receivables and management's cash management initiative.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of Medaphis' voting common stock (the
"Common Stock") on each of January 1, 1998 and April 1, 1998, provided that the
Second Amended Facility has not been repaid and terminated prior to such vesting
dates. Prior to July 1, 1997, the Company had not ascribed any value to these
warrants because the warrants vest only if amounts are outstanding or
commitments are not terminated under the Second Amended Facility
25
<PAGE> 26
on December 31, 1997. Management continues to believe the Company may generate
sufficient cash flows from the refinancing of the Second Amended Facility or
from asset sales to repay all borrowings under and terminate the Second Amended
Facility by December 31, 1997. However, due to the uncertainty of completing a
refinancing of the Second Amended Facility, the Company ascribed a value of
$4,969,000 to the warrants vesting on January 1, 1998 and amortized $2,338,000
to interest expense as of September 30, 1997.
During the remainder of 1997 and, if necessary, the first quarter of 1998,
the Company expects to continue to explore a refinancing of its bank credit
facilities to enhance its credit, liquidity and financial flexibility and to
enable the Company under its current financial forecast to meet its committed
and other capital needs and scheduled debt repayments throughout 1998 and later
years. In that connection, the Company also intends to explore other
alternatives, including the possible divestiture of additional assets and the
sale of debt or equity securities. These refinancing efforts currently include,
but are not necessarily limited to, (1) discussions with its existing lending
syndicate for a longer term committed facility and increased liquidity; and (2)
as previously announced, a refinancing package, the components of which are a
$100 million senior bank financing facility and the completion of an offering of
at least $125 million in senior subordinated notes. The Company previously
announced that the senior bank refinancing commitment letter expired on November
15, 1997 and the planned closing of the refinancing package would be delayed
beyond November 30, 1997. There can be no assurance, however, as to the
Company's ability to effect any such refinancing or modifications in its capital
structure or as to the terms thereof.
Although the Company's liquidity is presently sufficient to meet its
current and, subject to effecting the refinancings or modifications described in
the preceding paragraph, its anticipated needs, should events negatively impact
the Company's forecasts, the Company may need to consider alternative sources of
funds, a reduction in capital expenditures, a more significant restructuring of
its capital structure or a combination of one or more of the foregoing.
OTHER MATTERS
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at HDS, which was
acquired in a merger transaction in June 1996 and accounted for as a
"pooling-of-interests." These practices related principally to revenue
recognized in fiscal years 1994, 1995 and 1996. As a result of this evaluation,
management has determined that the revenue was improperly recognized and,
accordingly, has restated the Company's financial statements for all of the
periods indicated. The effect of such restatements on the Company's net income
(loss) for all of the years ended December 31, 1994, 1995, and 1996 was ($5.9)
million, ($1.1) million and ($7.3) million, respectively.
In March 1997, as a result of a review initiated by senior management and
the Audit Committee of the Board of Directors 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 consisted
primarily of the following: (i) incorrect quarterly recording of revenues and
the related costs and expenses for certain contracts; (ii) incorrect quarterly
recording of certain liabilities for employee bonuses and related expenses;
(iii) 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
26
<PAGE> 27
Company's earnings subsequent to those acquisitions; and (iv) incorrect
depreciation of certain assets related to the Company's comprehensive
reengineering and consolidation project.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------------------------- -------------------------------------------
AS RESTATED AS RESTATED
AS ORIGINALLY IN THE 1996 AS ORIGINALLY IN THE 1996
REPORTED FORM 10-K AS RESTATED REPORTED FORM 10-K AS RESTATED
------------- ----------- ----------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue.............. $126,731 $132,874 $132,121 $465,551 $464,842 $455,138
Salaries and wages... 109,615 106,473 106,473 292,843 293,425 293,425
Other operating
expenses........... 39,016 39,370 39,370 117,169 118,594 118,594
Depreciation......... 6,221 7,201 7,201 16,496 19,981 19,981
Amortization......... 4,937 4,809 4,809 14,672 15,026 15,026
Loss before income
taxes.............. (60,617) (52,613) (53,366) (25,248) (31,384) (41,088)
Net loss............. (36,995) (32,127) (32,599) (20,933) (24,565) (30,645)
Pro forma net loss... (36,370) (31,502) (31,974) (19,954) (23,586) (29,666)
Pro forma net loss
per common share... $ (0.51) $ (0.44) $ (0.45) $ (0.28) $ (0.33) $ (0.42)
</TABLE>
27
<PAGE> 28
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally from
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices. Although the
precise scope of the 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 billing and collection
practices in the Designated Offices. No charges or claims by the government have
been made. Although the Company continues to believe that the principal focus of
the investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the investigation will not
expand to other offices, that the investigation will be resolved promptly, that
additional subpoenas or search warrants will not be received by Medaphis or MPSC
or that the investigation will not have a material adverse effect on the
Company. The Company recorded charges of $12 million in the third quarter of
1995 and $2 million in the fourth quarter of 1996 and a credit of $2.8 million
in the third quarter of 1997, solely for legal and administrative fees, costs
and expenses it anticipates incurring in connection with the investigation and
the putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the investigation. The charges are
intended to cover only the anticipated expenses of the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors have caused overpayments on certain claims submitted on behalf of clients
in the State of California. The full extent of overpayments by carriers and
beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated
28
<PAGE> 29
Complaint no longer contained any claims based on the Securities Act of 1933, as
amended (the "1933 Act"), and the Company's underwriters and outside directors
were no longer named as defendants. On June 26, 1996, the court denied
plaintiffs' motion to certify plaintiffs' class. The plaintiffs and the
defendants agreed to settle this action on a class-wide basis for $4.75 million,
subject to court approval (the "1995 Class Action Settlement"). The 1995 Class
Action Settlement included the related putative class action lawsuit filed in
the Superior Court of Cobb County, Georgia, described more fully below. On
October 29, 1997, the court certified a class for settlement purposes, approved
the settlement and entered final judgment dismissing the action with prejudice.
One of the Company's directors and officers' liability insurance carriers has
paid $3.7 million of the 1995 Class Action Settlement. The Company accrued
approximately $1.2 million in the quarter ended December 31, 1996 for the
anticipated balance of the 1995 Class Action Settlement and to pay certain fees
incident thereto. On November 6, 1997, the Company paid the remaining $1.05
million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
As originally disclosed in its Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying with that request. Although the precise scope and subject matter of
the investigation are not known to the Company, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. Currently, the Company has recorded
charges of $2 million and $1 million in the second and third quarter of 1997,
respectively, solely for legal and administrative fees, costs and expenses in
connection with the investigation, which charges do not include any provision
for fines, penalties, damages, assessments, judgments or sanctions that may
arise out of this matter.
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.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
29
<PAGE> 30
merger between Medaphis and Health Data Sciences Corporation ("HDS"). The
Consolidated Second Amended Complaint seeks compensatory and recissory damages,
as well as fees, interest and other costs. On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. Discovery
currently is proceeding. 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 such 1933
Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (to be
paid by the Company's directors' and officers' liability insurance carriers),
3,355,556 shares of Medaphis Common Stock, and warrants to purchase 5,309,523
shares of Medaphis Common Stock at $12 per share for a five-year period. The
Memorandum of Understanding also includes: (i) an obligation on the part of
Medaphis to contribute up to 600,000 additional shares of Common Stock to the
settlement under certain conditions if the aggregate value of the Medaphis
Common Stock proposed to be issued in the settlement falls below $30.2 million
during a specified time period; and (ii) certain anti-dilution rights in favor
of plaintiffs with respect to certain future issuances of shares of Medaphis
Common Stock or warrants or rights to acquire Medaphis Common Stock to settle
existing civil litigation and claims currently pending or asserted against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The aggregate value of the Medaphis Common Stock during
the specified time period is now known, and, as a result, all of the additional
600,000 shares of Medaphis Common Stock will be included in the settlement. The
Memorandum of Understanding also contains other customary terms and conditions
including, but not limited to, consent and approval of the Company's insurance
carriers and the insurance carriers' payment of the cash portion of the
settlement, the Company's receiving assurances from its independent accountants
that the proposed settlement will not adversely affect pooling-of-interests
accounting treatment on previous acquisitions (which assurances have been
received by the Company), the execution of mutually acceptable settlement papers
and the approval of the settlement by the court. The Company recorded a $52.5
million charge in the quarter ended September 30, 1997 for this settlement.
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 behalf of the Company. 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. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss 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, 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. On February 5, 1997 the court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and current and former officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the
30
<PAGE> 31
1933 Act but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
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. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
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. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
31
<PAGE> 32
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996. In
addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. 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. Further, there can be no assurance 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, or
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <C> <S>
2.1 -- 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. 333-2506).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
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 of
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 Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8, File No.
333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.5 to Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1997).
3.6 -- Amended and Restated By-Laws of Registrant (incorporated by
reference to Exhibit 3.6 to Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997).
10.1 -- Third Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan.
10.2 -- First Amendment to the Medaphis Deferred Compensation Plan.
10.3 -- Second Amendment to the Medaphis Deferred Compensation Plan.
10.4 -- Written description of Registrant's Non-Employee Director
Compensation Plan.
10.5 -- Medaphis Corporation Non-Employee Director Deferred Stock
Credit Plan.
10.6 -- Waiver and Extension Letter Agreement, dated September 18,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent.
10.7 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent (incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed on October 27, 1997).
</TABLE>
32
<PAGE> 33
10.8 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Participation Agreement, dated
April 21, 1995, as amended, among Registrant, SunTrust Bank,
Atlanta, and Creditanstalt Corporate Finance, Inc., and
SunTrust Bank, Atlanta, as agent (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K filed on
October 27, 1997).
10.9 -- First Modification, dated November 19, 1997, of the Second
Amended and Restated Credit Agreement, dated February 4,
1997, among Registrant, the lenders signatory thereto and
SunTrust Bank, Atlanta, as agent.
10.10 -- Employment Agreement dated July 28, 1997, between Registrant
and Randolph L.M. Hutto.
10.11 -- Employment Agreement dated September 30, 1997, between
Registrant and Mark P. Colonnese.
10.12 -- Separation Agreement dated as of May 28, 1997, between
Registrant and Healthcare Recoveries, Inc.
11 -- Statement regarding Computation of Earnings Per Share
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
(b) Reports on Form 8-K
The Company has filed the following reports on Form 8-K or 8-K/A during the
quarter ended September 30, 1997:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -------------
<S> <C> <C> <C>
Changes in Registrant's Certifying Accountants,
Dismissal of Deloitte & Touche LLP................... No June 27, 1997 July 7, 1997
Changes in Registrant's Certifying Accountants,
Deloitte & Touche LLP Letter of agreement............ No June 27, 1997 July 10, 1997
Changes in Registrant's Certifying Accountants,
Appointment of Price Waterhouse LLP.................. No July 9, 1997 July 11, 1997
</TABLE>
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDAPHIS CORPORATION
By: /s/ JEROME H. BAGLIEN
------------------------------------
Jerome H. Baglien
Senior Vice President,
Chief Financial Officer and
Assistant Secretary
Date: November 19, 1997
34
<PAGE> 1
EXHIBIT 10.1
THIRD AMENDMENT TO THE
MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
THIS AMENDMENT, made as of the 23rd day of October, 1997, 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 adjust the
schedule by which participants in the Plan vest in matching contributions made
to the Plan on participants' behalf; and
WHEREAS, the Primary Sponsor desires to amend the Plan to allow
participants to receive hardship distributions from their matching accounts to
the extent such accounts are vested.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan,
effective January 1, 1997, as follows:
1. Section 10.3 of the Plan shall be amended by replacing the vesting
schedule provided for in the last sentence thereof with the following:
"Full Years of Percentage
Service Vested
------- ------
1 33%
2 66%
3 100%
provided, however, that effective January 1, 1998, for Members
with less than three Years of Service as of January 1, 1998,
such Member's Matching Account and Company Account shall vest
in accordance with the following vesting schedule:
<PAGE> 2
Full Years of Percentage
Service Vested
------- ------
Less than 2 0%
2 50%
3 100%
provided further, however, that under no circumstances shall a
Member's vested Accrued Benefit be decreased as a result of
such change in the vesting schedule on January 1, 1998."
2. 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), Prior Company Account and Matching Account (to the
extent vested) 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."
* * * * *
Except as specifically amended hereby, the Plan shall remain in full
force and effect as prior to this Amendment.
2
<PAGE> 3
IN WITNESS WHEREOF, the Primary Sponsor has executed this Amendment as
of the day and the year first above written.
MEDAPHIS CORPORATION
By: /s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
ATTEST:
By:/s/ Randolph L. M. Hutto
--------------------------
Randolph L. M. Hutto
Secretary
3
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT TO THE
MEDAPHIS DEFERRED COMPENSATION PLAN
THIS AMENDMENT, made as of the 18th day of December, 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 Deferred Compensation
Plan (the "Plan") by indenture dated April 1, 1995; and
WHEREAS, the Primary Sponsor desires to amend the Plan to vest fully
participants in their matching accounts under the Plan.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan as
follows, effective January 1, 1996 as to each Member in the Plan:
1. Section 1.26 shall be deleted.
2. Section 7.2 of the Plan shall be amended by replacing Section 7.2 with
the following:
"Upon the death of a Member who is no longer an Employee, but
prior to the complete payment of his Account, the Member's
Beneficiary shall be entitled to receive the balance of the
Member's Account in a lump sum in cash."
3. Section 7.3 of the Plan shall be amended by replacing Section 7.3 with
the following:
"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 Accrued
Benefit shall be paid to the personal representative of the
deceased Beneficiary's estate."
<PAGE> 2
4. Section 8.2 of the Plan shall be amended by replacing Section 8.2 with
the following:
"After a Member terminates employment, the Member shall be
entitled to payment of his Account. The Account of the Member
shall be determined as of the Valuation Date coinciding with
or immediately preceding the Member's termination of
employment and shall be increased by any Deferral Amounts
credited to the Member's Employee Deferred Account since that
Valuation Date and any deferrals credited to the Member's
Company Matching Account since that Valuation Date. In
addition, the Member's Account shall be adjusted for earnings
credited pursuant to Plan Section 4 through the Valuation Date
immediately preceding the date the Accrued Benefit is paid."
5. Section 8.4 shall be deleted.
Except as specifically amended by this Amendment, the Plan shall remain
in full force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Primary Sponsor has executed this Amendment as
of the day and the year first above written.
MEDAPHIS CORPORATION
By: /s/ William R. Spalding
------------------------------------------
Title: Senior Vice President, General Counsel
and Secretary
ATTEST:
By: /s/ Peggy B. Sherman
--------------------------
Title: Assistant Secretary
[CORPORATE SEAL]
<PAGE> 1
SECOND AMENDMENT TO THE EXHIBIT 10.3
MEDAPHIS DEFERRED COMPENSATION PLAN
THIS AMENDMENT, made as of the 23rd day of October, 1997, 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 Deferred Compensation
Plan (the "Plan") by indenture dated April 1, 1995; and
WHEREAS, the Primary Sponsor desires to amend the Plan to change the
deferral percentage thereunder to 11% from 12%.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan,
effective January 1, 1997, as follows:
The final sentence of Section 3.1 of the Plan shall be deleted in its
entirety and replaced with the following:
"The deferrals under this Section 3.1 shall be in an amount equal to
the amount specified in the Member's enrollment form, but not greater
than eleven percent (11%) of the Member's Regular Compensation or, for
those Members who elect to defer a portion of any annual management
bonus received, Annual Compensation."
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 Amendment as
of the day and the year first above written.
MEDAPHIS CORPORATION
By:/s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
ATTEST:
By:/s/ Randolph L. M. Hutto
--------------------------
Randolph L. M. Hutto
Secretary
<PAGE> 1
EXHIBIT 10.4
BOARD OF DIRECTORS COMPENSATION PROGRAM
NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
The following outlines the terms of the compensation plan for all non-employees
serving on the Board of Directors (the "Board") of Medaphis Corporation
("Medaphis"). The intent of this plan is to compensate these individuals fairly
for their talents and time spent on behalf of Medaphis.
<TABLE>
<CAPTION>
PAY ELEMENTS:
CASH COMPENSATION
<S> <C> <C>
Board Fees
Annual Retainer: $16,000.00
Board Meeting Fee: $ 1,000.00
(per meeting attended)
Committee Fees
(a) Committee Chairman
Annual Retainer: $ 2,000.00
Committee Meeting Fee: $ 750.00
(per meeting attended)
(b) Committee Member
Committee Meeting Fee: $ 650.00
(per meeting attended)
EQUITY COMPENSATION
Stock Options
Initial Grant: 10,000 Shares
(upon first election or appointment)
Annual Grant: 2,000 Shares
</TABLE>
1
<PAGE> 2
ADMINISTRATION:
General. The Medaphis Human Resources Department will be responsible
for administering the plan. The Human Resources Department will act to ensure
timely payment of both the cash and equity pay elements of the plan according to
the guidelines set forth below and will monitor and control deferred
compensation under the plan pursuant to the Medaphis Corporation Non-Employee
Director Deferred Stock Credit Plan (the "Deferred Stock Credit Plan"). All
compensation will be calculated on the basis of a "Board Year," which is defined
as beginning with the Annual Meeting of the Board held each year immediately
following the Annual Meeting of Stockholders (generally during the month of
May), and ending on the day before the next Annual Meeting of the Board. The
plan is retroactive to May 19, 1997 for implementation purposes.
Meeting Attendance. Meeting attendance is required for payment of the
associated fee. Attendance will be determined by the official minutes of the
meeting of the Board or committee, as recorded by the Secretary of the meeting
(typically, the Secretary of Medaphis). It will be the responsibility of the
Secretary of the meeting to ensure that the Medaphis Human Resources Department
has the information required to ensure accurate and timely payment of meeting
fees. A valid meeting for purposes of compensation can be held in person or by
means of conference telephone or similar communications equipment as long as the
necessary quorum is present; provided, however, that telephone meetings of
committee members held to conclude business of previously adjourned meetings and
of less than thirty (30) minutes in duration will be considered to be normal
contacts in the performance of duties as a Board member and will not be
compensable as committee meetings. No fee will be payable in connection with
Board or committee action taken by unanimous written consent in lieu of a
meeting.
Cash Compensation. Cash compensation will be paid by check or direct
deposit, as requested by the Director, on a quarterly basis, no later than the
15th of the month following the end of the quarter in which the fees were
earned. No taxes will be withheld. Each Director will receive a Form 1099 at the
end of the calendar year for tax purposes.
Equity Compensation. Equity compensation will be in the form of stock
options granted from the Medaphis Corporation Non-Employee Director Stock Option
Plan. Initial Grants will occur as of the date of first election or appointment
to the Board. Annual Grants will occur as of the date of the Annual Meeting of
the Board and will be for services rendered during the previous Board Year. Any
new Board member who joins Board service during a Board Year will receive a
prorated portion of the Annual Grant based on the number of months served in
that Board Year.
Deferral of Compensation. The terms and conditions upon which cash
compensation may be deferred under the plan are set forth in the Deferred Stock
Credit Plan. Initial deferred compensation elections for new Directors must be
made within thirty (30) days of election or appointment to the Board. Deferred
compensation elections thereafter will be accepted once per year during the
thirty (30) days prior to the Annual Board Meeting and will be effective for the
coming year's compensation.
2
<PAGE> 1
EXHIBIT 10.5
MEDAPHIS CORPORATION
NON-EMPLOYEE DIRECTOR DEFERRED STOCK CREDIT PLAN
<PAGE> 2
MEDAPHIS CORPORATION
NON-EMPLOYEE DIRECTOR DEFERRED STOCK CREDIT PLAN
MEDAPHIS CORPORATION, a Delaware corporation (the "Company"), hereby
adopts the Medaphis Corporation Non-Employee Director Deferred Stock Credit Plan
for the purpose of providing an incentive to certain of its directors to
encourage them to devote their abilities to the success of the Company's
business. It is intended that this purpose be achieved by extending to Eligible
Directors (as herein defined) of the Company long-term incentive for high levels
of performance through participation in this plan.
SECTION I
DEFINITIONS
Whenever 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:
A. "Account" means the bookkeeping accounts established and maintained
by the Plan Administrator to reflect a Member's interest under the Plan.
B. "Accrued Benefit" means the balance of a Member's Account.
C. "Beneficiary" means the person 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.
D. "Change in Capitalization" means any increase or reduction in the
number of shares of Company Stock, or any change (including, but not limited to,
a change in value) in the shares of Company Stock or exchange of shares of
Company Stock for a different number or kind of shares or other securities of
the Company, by reason of a stock dividend, stock split, combination or exchange
of shares, reclassification, recapitalization, merger, consolidation,
reorganization, or the distribution of property of the corporation (including
interests in subsidiaries) to shareholders of record pursuant to spin-offs,
split-ups, the issuance of warrants or other rights or debentures, or
extraordinary dividends, or otherwise.
E. "Board of Directors" means the Board of Directors of the Company.
F. "Code" means the Internal Revenue Code of 1986, as amended.
1
<PAGE> 3
G. "Company Stock" means the common stock, par value $.01 per share,
of the Company.
H. "Director" means a member of the Board of Directors.
I. "Effective Date" means November 19, 1997.
J. "Eligible Director" means any person who is not a common law
employee of the Company or any of its affiliates.
K. "Fair Market Value" means the average closing price, for the five
business days prior to the date for which the determination is being made, of a
share of Company Stock on the principal national securities exchange on which
such shares are listed or in the event such shares are not listed, the value
established by the Plan Administrator in good faith.
L. "Member" means any Eligible Director or former Eligible Director
who has become a participant in the Plan, for so long as such director's
benefits hereunder have not been distributed.
M. "Plan" means the Medaphis Corporation Non-Employee Director
Deferred Stock Credit Plan.
N. "Plan Administrator" means the organization or person designated
by the Company to administer the Plan or, in the absence of any such
designation, the Company.
SECTION II.
ELIGIBILITY
An Eligible Director will become a Member after completing a Plan
election form (in the form prescribed by the Plan Administrator) and returning
this form to the Plan Administrator.
SECTION III.
DEFERRAL ELECTIONS
3.1 A Member who is an Eligible Director may elect to defer under the
Plan a whole number percentage, in 25 percent increments, of the committee,
meeting and annual retainer fees otherwise payable to him during the Member's
current term as a Director. The deferrals under this Section 3.1 will be
computed by reference to the percentage election specified on the Member's
completed election form.
3.2 (a) All elections are effective as of the first day of the
Member's current term as a Director provided the Member has completed
an election form prior to the start of such term. Once made, a Member
cannot modify his elections during the current term.
2
<PAGE> 4
(b) Notwithstanding the foregoing Subsection (a), for initial
elections under the Plan effective as of the Effective Date, all
elections to participate will be effective as of the Effective Date,
provided the Member's election form has been completed and returned to
the Plan Administrator within 30 days following the Effective Date.
(c) Notwithstanding the foregoing subsection (a), elections for a
newly elected or appointed Director may be returned to the Plan
Administrator at any time prior to the date that is 30 days after the
date on which such Director's term begins. Any such election shall be
effective as of the start of such newly elected or appointed Director's
term.
(d) Notwithstanding the foregoing subsection (a), elections for a
Director that becomes an Eligible Director by virtue of such Director
ceasing to be a common law employee of the Company may be returned to
the Plan Administrator at any time prior to the date that is 30 days
after the date on which such Director ceases to be a common law
employee of the Company. Any such election shall be effective as of the
first day such Director becomes an Eligible Director and becomes
entitled to any committee, meeting or annual retainer fees.
(e) Elections to participate in the Plan are effective for current term
during which an electing Member serves as a Director. In the event that
the Member is elected or appointed to an additional term as Director
and such Member wishes to participate in the Plan in such new term, the
Director must, in accordance with Subsection (a), complete a new
election form and return it to the Plan Administrator prior to the
start of the Director's new term.
SECTION IV.
CREDITING ACCOUNTS
4.1 The Company will credit amounts deferred under Plan Section 3 to
the Member's Account as of the date the related committee, meeting or retainer
fees are otherwise payable by the Company to the Member. Each Member's Account
will be credited with a hypothetical number of shares (and fractional shares) of
Company Stock equal to the quotient obtained by dividing (i) the product of the
amount of any committee, meeting or retainer fees otherwise payable by the
Company to such Member times the electing Member's percentage deferral reflected
on such Member's election form, by (ii) the Fair Market Value of a share of
Company Stock as of the first business day of the month that includes the date
on which such fees are otherwise payable.
4.2 In the event of a Change in Capitalization, the Plan
Administrator will adjust the number and kind of shares of Company Stock
hypothetically credited to a Member's Account under Section 4.1 in the same
manner as a share of Common Stock is adjusted. In the event that the Change of
Capitalization involves the issuance of cash, securities or property to the
holders
3
<PAGE> 5
of Common Stock of record, an amount equivalent to the cash and the fair market
value of the property and securities distributed with respect to a share of
Common Stock will be credited to each Member's Account for each hypothetical
share of Common Stock held in the Member's Account as of the record date for
such distribution. All such amounts shall be hypothetically invested in
additional shares of Common Stock as of the date of such distribution.
SECTION V
DEATH BENEFITS
5.1 Upon the death of a Member who dies prior to the date on which he
is entitled to the commencement of payments of his Account, the Member's
Beneficiary shall be entitled to the full value of the Member's Account in a
lump sum in cash.
5.2 Upon the death of a Member who is no longer a Director, but prior
to the complete payment of his Account, the Member's Beneficiary shall be
entitled to receive the entire unpaid portion of the Member's Account in a lump
sum in cash.
5.3 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 Accrued Benefit shall be paid to the personal representative of
the deceased Beneficiary's estate.
5.4 Any benefit payable under this Section shall be paid in accordance
with and subject to the provisions of Plan Section 5 after receipt by the Plan
Administrator of notice of the death of the Member.
SECTION VI
PAYMENT OF BENEFITS
6.1 As soon as practical after a Member's ceasing to a Director, the
value of such Member's Accrued Benefit will be distributed in accordance with
this Section VI.
6.2 Payment of a Member's Accrued Benefit will be made in one of the
following forms, as elected by the Member in accordance with the provisions of
Section 6.2 hereof:
(a) one lump sum payment in cash equal to the number of shares of
Company Stock that has been credited to such Member's Account
multiplied by the Fair Market
4
<PAGE> 6
Value of a share of Company Stock determined as of the first business
day of the month in which such distribution is to be made; or
(b) ten (10) annual installment payments, with the first such
payment being made as soon as reasonably practical following the date
the Member ceases to be a Director. The amount of each installment
payment made to a Member shall be equal to the product of (i) (1) the
number of hypothetical shares of Company Stock credited to the Member's
Account as of the first business day of the month in which the
installment payment is being made, divided by (2) the number of
installment payments remaining to be made to such Member, times (ii)
the Fair Market Value of one share of Company Stock as of the first
business day of the month in which an installment payment is made. The
number of shares of Company Stock held in a Member's Account will be
reduced by the number of shares determined under clause (i) of the
immediately preceding sentence.
6.3 A Member shall elect one of the forms of payment set forth in
Section 6.2 at the time of his initial enrollment in the Plan. Any such election
may be changed by the Director, provided, that no such change may be effective
prior to the date which is one (1) year following the date that the Member
delivers such change to the Plan Administrator in the form and manner prescribed
by the Plan Administrator.
SECTION VII
ADMINISTRATION OF THE PLAN
7.1 Operation of the Plan Administrator. The Company shall be the Plan
Administrator, unless it appoints another 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 Company 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 or resignation to the Company. Upon removal or resignation, or in the
event of the dissolution of the Plan Administrator, the Company shall appoint a
successor.
7.2 Duties of the Plan Administrator.
(a) The Plan Administrator shall perform any act which the Plan
authorizes or requires of the Plan Administrator by action taken in
compliance with the Plan and may designate in writing other persons to
carry out its duties under the Plan. The Plan Administrator may employ
persons to render advice with regard to any of the Plan Administrator's
duties.
(b) The Plan Administrator shall from time to time establish
rules, not contrary to the provisions of the Plan, for the
administration of the Plan and the transaction of its business. All
elections and designations under the Plan by a Member or Beneficiary
shall be made on forms prescribed by the Plan Administrator. The Plan
Administrator shall
5
<PAGE> 7
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 Members and
Beneficiaries, subject to the provisions of the Plan and subject to
applicable law.
(c) 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 under applicable
law.
7.3 Action under the Plan. Any action to be taken by the Company 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 the Company 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 to determine the basis of any
payment obligations of the Company.
SECTION VIII
LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS
8.1 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 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.
8.2 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 Plan Administrator shall 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.
8.3 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
6
<PAGE> 8
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.
8.4 Whenever the Plan Administrator cannot, within a reasonable time
after payments are to commence, locate any person to or for the benefit of whom
such payments are to be made, after making a reasonable effort to locate such
person, the Plan Administrator may direct that the payment and any remaining
payments otherwise due to the Member be cancelled on the records of the Plan,
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 Company
shall re-credit the Member's account and provide for payment of the re-credited
amount to the Member as soon as administratively feasible.
SECTION IX
LIMITATION OF RIGHTS
Membership in the Plan shall not give any Eligible Director any right
or claim except to the extent that such right is specifically fixed under the
terms of the Plan.
SECTION X
AMENDMENT TO OR TERMINATION OF THE PLAN
The Company reserves the right at any time to modify or amend or
terminate the Plan. No such modifications or amendments shall have the effect of
retroactively changing or depriving Members or Beneficiaries of benefits already
accrued under the Plan.
SECTION XI
MISCELLANEOUS
11.1 All payments provided under the Plan shall be paid from the
Company's general assets and no separate fund shall be established to secure
payment. Notwithstanding the foregoing, the Company may establish a grantor
trust for the purpose of helping to defray the obligations under the Plan and to
the extent that any payment is made from any such trust to a Member or
Beneficiary, such payment will be in satisfaction of the Company's obligations
hereunder.
11.2 The Company has discretionary authority to interpret the
provisions of this Agreement and all such determinations shall be final and
binding.
11.3 To the extent not preempted by applicable federal law, the Plan
shall be governed by and construed in accordance with the laws of the State of
Georgia.
7
<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this document effective as
of the 19th day of November, 1997.
MEDAPHIS CORPORATION
By:/s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
[CORPORATE SEAL]
ATTEST:
By:/s/ Randolph L. M. Hutto
------------------------
Randolph L. M. Hutto
Secretary
8
<PAGE> 1
EXHIBIT 10.6
September 18, 1997
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339
Attn: David McDowell
Chief Executive Officer
RE: Second Amended and Restated Credit Agreement, dated as
of February 4, 1997 (the "Credit Agreement"), among
Medaphis Corporation (the "Borrower"), the lenders
signatory thereto (collectively, the "Lenders"),
and SunTrust Bank, Atlanta, as agent for the Lenders
(the "Agent")
Gentlemen:
All capitalized terms used herein and not otherwise defined
herein shall have the meanings given such terms in the Credit Agreement.
You have requested that the Required Lenders (a) grant a
waiver of compliance with the financial covenants set forth in Section 7.09(a),
7.09(b), 7.09(c) and 7.09(d) of the Credit Agreement as of and for the periods
ending September 30, 1997, December 31, 1997 and March 31, 1998, and (b)
consent to the sale by Imonics Corporation of the excess equipment of such
Subsidiary described on Exhibit A attached hereto (collectively, the
"Excess Imonics Equipment").
The purpose of this letter is to confirm that, subject to the terms
and conditions of this letter, the Required Lenders hereby waive any
requirement under the Credit Agreement that the Borrower comply with any of the
covenants set forth in Section 7.09(a), 7.09(b), 7.09(c) or 7.09(d) of the
Credit Agreement as of and for the periods ending September 30, 1997, December
31, 1997 and March 31, 1998; provided however, that in consideration of such
waivers:
(i) Borrower shall pay to the Agent, on the effective date of
this letter as provided below, a waiver fee (which fee shall be fully
earned upon the effectiveness of this letter) in an amount equal to
three-eighths of one percent (0.375%) of the aggregate Revolving Loan
Commitments of all Lenders, and such fee shall be distributed by the
Agent to those Lenders who are signatories to this letter in
accordance with their respective pro rata shares thereof (based on
the proportion that each signing Lender's Revolving Loan Commitment
bears to the sum of all of
<PAGE> 2
such signing Lenders' Revolving Loan Commitments - it being
understood and agreed that Section 4.09 of the Credit Agreement
shall not apply to such fee); and
(ii) Borrower also shall be obligated to cause all of the
Lenders' Revolving Loan Commitments to be terminated and all
Obligations owed to all Lenders for the payment of money (other
than (X) indemnity obligations not yet due and payable and (y)
Cash Management Services Obligations) to be paid in full by
November 30, 1997 (or such other date no later than June 30, 1998
to which such deadline may be extended by the Required Lenders in
their discretion), and any failure on the Borrower's part to
cause such termination and payment to occur by the applicable
deadline shall constitute an Event of Default under Section
9.01(v) of the Credit Agreement which may be waived or acted
upon by the Required Lenders in their discretion in accordance
with the terms and conditions of the Credit Agreement as amended
and supplemented by this letter (it being understood and agreed
that Section 11.08(a)(iv) of the Credit Agreement shall not
apply to any extension of the aforesaid deadline to a date which
occurs on or before June 30, 1998 or any waiver of any Event of
Default arising from Borrower's failure to cause such
termination and payment to occur by such deadline, and Section
11.08(a)(iv) shall continue to apply to any extension of such
dealine beyond June 30, 1998 or to any waiver of any Event of
Default arising from Borrower's failure to cause such payment to
occur by June 30, 1998).
This Letter also confirms that, subject to the terms and
conditions of this letter, the Required Lenders hereby consent to the sale by
Imonics Corporation of the Excess Imonics Equipment (and all of the Lenders' and
the Agent's Liens on such Collateral under the Security Documents shall be
released upon the sale thereof), provided that (i) the Net Proceeds of such sale
are applied in accordance with Section 2.06 of the Credit Agreement (and,
pending such application, the Lenders' and the Agent's Liens shall attach
thereto pursuant to the Security Documents and such proceeds shall constitute
Collateral for the Obligations) and (ii) no Default or Event of Default exists
at the time of such sale.
Please note that this letter (and the waivers and consent
confirmed herein) shall not become effective unless and until (a) the aforesaid
waiver fee has been paid and (b) this letter has been signed by the Required
Lenders and this letter has been accepted and agreed to by Borrower, in each
case by such person's signing a copy of this letter in the appropriate space
indicated below and returning the same to the Agent's counsel (which may be
done by telecopy and in counterparts).
<PAGE> 3
Please note that the waivers and consent confirmed in this
letter relate solely to the specific covenants, dates and time periods
described above and nothing in this letter is intended (or shall be construed)
to constitute a waiver of or a consent to a departure from any other covenants
in the Credit Agreement.
SUNTRUST BANK, ATLANTA, as Agent
and as a Lender
By: /s/ R.E. Tincher
-----------------------------------------
Name: Robert E. Tincher
------------------------------------
Title: SVP
-----------------------------------
By: /s/ David H. Eidson
-----------------------------------------
Name: David H. Eidson
-------------------------------------
Title: SVP
------------------------------------
THE CHASE MANHATTAN BANK, as a
Lender
By: /s/ C.T. Moore
-----------------------------------------
Name: C.T. Moore
-------------------------------------
Title: Managing Director
------------------------------------
CREDITANSTALT-BANKVEREIN, as a
Lender
By: /s/ John G. Taylor
-----------------------------------------
Name: John G. Taylor
-------------------------------------
Title: Senior Associate
------------------------------------
By: /s/ Stephen W. Hipp
-----------------------------------------
Name: Stephen w. Hipp
-------------------------------------
Title: Associate
------------------------------------
NATIONSBANK, N.A., as a Lender
By: /s/ DeWitt W. King, III
-----------------------------------------
Name: DeWitt W. King, III
-------------------------------------
Title: Senior Vice President
------------------------------------
<PAGE> 4
PNC BANK, N.A., as a Lender
By: /s/ Thomas J. McCool
-----------------------------------------
Name: Thomas J. McCool
-------------------------------------
Title: Senior Vice President
------------------------------------
WACHOVIA BANK, N.A., as a Lender
By: /s/ Ann B. Edwards
-----------------------------------------
Name: Ann B. Edwards
-------------------------------------
Title: Assistant Vice President
------------------------------------
ACCEPTED AND AGREED TO
this 18th day of September, 1997:
MEDAPHIS CORPORATION
By: /s/ Caryn Dickerson
-----------------------------------------
Name: Caryn Dickerson
-------------------------------------
Title: Treasurer
------------------------------------
cc: Each Guarantor
<PAGE> 1
EXHIBIT 10.9
FIRST MODIFICATION OF SECOND
AMENDED AND RESTATED CREDIT AGREEMENT
THIS MODIFICATION is made and entered into as of this 18th day of
November, 1997, among MEDAPHIS CORPORATION, a Delaware corporation (hereinafter
referred to as the "Borrower"), the banks and other lending institutions listed
on Annex I attached to the Credit Agreement described below (collectively, the
"Lenders"), and SUNTRUST BANK, ATLANTA, a Georgia banking corporation, acting in
its capacity as the Agent for the Lenders pursuant to Article X of such Credit
Agreement (the "Agent").
STATEMENT OF FACTS
Pursuant to that certain Second Amended and Restated Credit Agreement,
dated as of February 4, 1997, among Borrower, the Lenders signatory thereto and
the Agent (the "Credit Agreement"), such Lenders agreed to provide Borrower with
certain credit facilities on the terms and conditions set forth in the Credit
Agreement (all capitalized terms used in this Modification which are not
otherwise expressly defined herein shall have the respective meanings given such
terms in the Credit Agreement).
Pursuant to letter agreements dated September 18, 1997 and October 24,
1997 entered into among the Lenders, the Agent and the Borrower (collectively,
the "Waiver Letters"), the Lenders and the Agent granted certain waivers to the
Borrower subject to the requirement that, among other things, the Borrower
terminate the Revolving Loan Commitments and pay all outstanding Obligations
(subject to certain exceptions as stated therein) by January 31, 1998.
The parties are entering into this Modification in order to make certain
modifications of the Credit Agreement, to waive the refinancing deadline
referred to in the immediately preceding paragraph, and to set forth certain
other waivers and agreements relating to the Credit Agreement, all in accordance
with and subject to the terms and conditions hereinafter set forth in this
Modification.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants herein set forth, as well as for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Lenders and the Agent do hereby agree as follows:
<PAGE> 2
STATEMENT OF TERMS
SECTION 1. WAIVERS OF REFINANCING DEADLINE AND CERTAIN OTHER MATTERS.
(A) Subject to the terms and conditions of this Modification
(including without limitation the fulfillment of the conditions precedent to
the effectiveness of this Modification which are set forth in Section 3 below),
the Lenders and the Agent do hereby waive the requirement in the Waiver Letters
that the Borrower cause all of the Lenders' Revolving Loan Commitments to be
terminated and all Obligations owed to all Lenders for the payment of money
(other than (x) indemnity obligations not yet due and payable and (y) Cash
Management Services Obligations) to be paid in full by January 31, 1998;
provided, however, that this waiver relates solely to such refinancing deadline
and nothing in this Section 1(A) is intended, or shall be construed, to
constitute a waiver of or a consent to any departure from any of the other
provisions of the Waiver Letters.
(B) Subject to the terms and conditions of this Modification
(including without limitation the fulfillment of the conditions precedent to the
effectiveness of this Modification which are set forth in Section 3 below), the
Lenders and the Agent do hereby waive any breach of the Borrower's
representations and warranties in Section 6.02 of the Credit Agreement and the
last unnumbered paragraph of Section 5.02 of the Credit Agreement and any
breaches of Borrower's covenants in Section 7.01(a), 7.01(b), 7.01(c) and 7.03
of the Credit Agreement (and any resultant failure on Borrower's part to satisfy
the conditions specified in Section 5.02 of the Credit Agreement and any
resultant Defaults or Events of Default) solely to the extent any such
representation, warranty and covenant breaches (and resultant failure or
Default or Event of Default) result from any restatement of Borrower's
consolidated financial statements for each or any of its fiscal years ending
December 31, 1994, December 31, 1995 and December 31, 1996 and its two fiscal
quarters ending June 30, 1997 but only so long as any downward restatement of
Borrower's consolidated revenues for its fiscal years ended December 31, 1994,
December 31, 1995 and December 31, 1996 and its two (2) fiscal quarters ending
June 30, 1997 does not exceed $41,000,000 in total for all of the
above-referenced periods (of which no more than $5,000,000 of any such
restatement may relate to downward adjustments of results for the 2-quarter
period ending June 30, 1997), and the Lenders and the Agent hereby further
confirm that any such restatement and the commencement of any investigation,
legal action or proceeding before or by any court or governmental or regulatory
authority as a result thereof will not result in a Material Adverse Effect;
provided, however, that (i) the aforesaid waiver relates solely to the specific
provisions, restatement and time periods described above and nothing in this
Section 1(b) is intended, or shall be construed, to constitute a waiver of or
a consent to a departure from any other provisions of the Credit Agreement; and
(ii) the aforesaid confirmation relates solely to the specific restatement
described above and the commencement of the aforesaid investigations, legal
actions or proceedings and nothing in this Section 1(B) is intended, or shall
be construed, to constitute the confirmation or agreement by any Lender or the
Agent that any other event that is or may be a direct or indirect result of
such restatement or that any subsequent development in
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<PAGE> 3
any such investigation, legal action or proceedings (including without
limitation any adverse outcome therein) will not result in a Material Adverse
Effect.
(c) Also subject to the terms and conditions of this Modification
(including without limitation the fulfillment of the conditions precedent to
the effectiveness of this Modification which are set forth in Section 3 below),
the Lenders and the Agent do hereby waive any breach of Borrower's covenants
in Sections 7.01(c), 7.01(d) and 7.01(e) of the Credit Agreement (and any
resultant failure on Borrower's part to satisfy the conditions specified in
Section 5.02 of the Credit Agreement and any resultant Defaults or Events of
Default) solely to the extent any such covenant breach (and resultant failure
or Default or Event of Default) results from any withdrawal by Deloitte &
Touche of its opinions or reports on or certifications of the Borrower's annual
financial statements for its fiscal years ending December 31, 1994, December 31,
1995 and December 31, 1996, and the Lenders and the Agent hereby confirm that
any such withdrawal or the commencement of any investigation, legal action or
proceeding before or by any court or governmental or regulatory authority as a
result of such withdrawal will not result in a Material Adverse Effect;
provided, however, that (i) the aforesaid waiver relates solely to the specific
withdrawals described above and nothing in this Section 1(C) is intended, or
shall be construed, to constitute a waiver of or a consent to any departure from
any other provisions of the Credit Agreement; and (ii) the aforesaid
confirmation also relates solely to the specific events described above and
nothing in this Section 1(C) is intended, or shall be construed, to constitute
the confirmation or agreement by any Lender or the Agent that any other event
which is or may be a direct or indirect result of any such withdrawal,
commencement, a suspension or delisting or that any subsequent development in
any such investigation, legal action or proceeding (including without
limitation any adverse outcome therein) will not result in a Material Adverse
Effect.
SECTION 2. MODIFICATIONS OF THE CREDIT AGREEMENT. Subject to the
terms and conditions of this Modification (including without limitation the
fulfillment of the conditions precedent to the effectiveness of this
Modification which are set forth in Section 3 below), the Borrower, the Lenders
and the Agent hereby agree to modify the Credit Agrement in the following
respects:
(A) Section 1.01 of the Credit Agreement shall be amended by
adding the following new definition:
"First Modification" shall mean the First Modification of Second
Amended and Restated Credit Agreement, dated as of November 18, 1997, among
Borrower, the Lenders and the Agent.
(B) Section 1.01 of the Credit Agrement shall be further amended
by deleting the definition therein of the term "Consolidated EBIT" and by
substituting in lieu thereof the following new definition of such term:
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<PAGE> 4
"Consolidated EBIT" shall mean, for any fiscal period of the
Borrower, an amount equal to the sum of the Consolidated Net Income
(Loss) plus, to the extent subtracted in determining such Consolidated
Net Income (Loss) and without duplication, (i) provisions for taxes based
on income, (ii) Consolidated Interest Expense (including any portion of
such expenses attributable to the discontinued operations), (iii)
restructuring charges, option-related charges and litigation settlement
charges taken by Borrower in its fiscal quarters ending June 30, 1997,
September 30, 1997 and December 31, 1997 (of which up to $12,000,000 in
total may be related to cash expenditures made in its fiscal year ending
December 31, 1997 and its two fiscal quarters ending June 30, 1998), (iv)
solely for purposes of computing Consolidated EBITDA for Borrower's
fiscal year ending December 31, 1997, any additional non-cash charges
in its fiscal quarter ending September 30, 1997 in an amount not to
exceed $19,500,000, and (v) the non-cash accounting treatments for or
amortization of any original issue discount arising as a result of the
Warrants or any shares of Borrower's stock issued thereunder.
(C) Section 1.01 of the Credit Agreement shall be further
amended by deleting the last sentence of the definition of the term
"Consolidated EBITDA" therein.
(D) The Credit Agreement shall be further amended by deleting
Section 2.06(a) thereof in its entirety.
(E) Section 7.01(c) of the Credit Agreement shall be amended
by adding the following new clause at the end thereof:
, and, if required to be restated, on or before January 31, 1998,
Borrower shall deliver to the Lenders and the Agent its restated annual
financial statements for its fiscal years ended December 31, 1995 and
December 31, 1996 audited in accordance with generally accepted auditing
standards together with the Borrower's independent public accountant's
reports on such financial statements;
(F) Section 7.09 of the Credit Agreement shall be deleted in
its entirety and the following new Section 7.09 substituted in lieu thereof:
SECTION 7.09. FINANCIAL COVENANTS. Borrower shall comply with the
following financial covenants:
(a) Minimum Consolidated EBITDA. Borrower's Consolidated
EBITDA for each period shown below shall not be less that the amount
shown below for such period.
<TABLE>
<CAPTION>
Minimum
Period Consolidated EBITDA
------ -------------------
<S> <C>
Fiscal year ending December 31,
</TABLE>
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<PAGE> 5
1997 $50,000,000
Fiscal quarter ending March 31, 1998 10,000,000;
(b) Maximum Funded Debt Ratio. Borrower's Funded Debt Ratio for its
fiscal quarter ending March 31, 1998 shall not exceed 3.5:1.0;
(c) Minimum Fixed Charge Coverage Ratio. Borrower's Fixed Charge
Coverage Ratio for its fiscal quarter ending March 31, 1998 shall not be
less than 1.0:1.0;
(d) Maximum Capital Expenditures. Borrower's Capital Expenditures
during each of its fiscal quarters ending March 31, 1998 and June 30, 1998
shall not exceed $7,500,000 for each such fiscal quarter; provided,
however, that if the full $7,500,000 of Capital Expenditure capacity for
the fiscal quarter ending March 31, 1998 is not utilized by such date, then
any unused amount may be utilized during the quarter ending June 30, 1998
so long as the aggregate of the Capital Expenditures made during those two
fiscal quarters does not exceed $15,000,000; and
(e) Positive Monthly Consolidated EBITDA. Borrower shall have a
Consolidated EBITDA of more than zero dollars for each monthly accounting
period in its fiscal year ending December 31, 1998.
Solely for the purposes of this Section 7.09, and notwithstanding
anything in this Agreement to the contrary, in no event shall any Default
or Event of Default in respect of any financial covenant for any particular
accounting period be deemed to exist at any time prior to the tenth (10th)
day after the end of such period. For example, if Borrower's Consolidated
EBITDA for its fiscal year ending December 31, 1997 is less than the
required minimum amount set forth in Section 7.09(a) above, no Default or
Event of Default arising from such violation shall be deemed to exist
earlier than January 10, 1998.
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS. This
Modification shall become effective, from and after the date hereof, upon the
satisfaction of each and every one of the following conditions to such
effectiveness:
(A) The Agent shall have received the following documents in form
and substance reasonably satisfactory to the Agent (the documents described in
items (i) and (ii) below being herein collectively called the "Supplemental
Credit Documents"):
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<PAGE> 6
(i) This Modification duly completed and executed by
Borrower, the Agent and the Lenders;
(ii) The written consent of each of the Guarantors to the
execution, delivery and performance of this Modification, which consent
shall be evidenced by such Guarantor's executing one or more counterparts
of this Modification in the appropriate space indicated below; and
(iii) A certificate of the Borrower in substantially the form
of Attachment 2 attached hereto, duly executed and appropriately
completed.
(B) Borrower shall have paid the Agent the modification and waiver fee
required under Section 4 below;
(C) Each and every representation and warranty of Borrower set forth
in Section 5 below shall be true and correct in all material respects as of the
date of and after giving effect to this Modification; and
(D) There shall not exist as of the date of and after giving effect to
this Modification any Default or Event of Default under the Credit Agreement as
amended by this Modification and the Waiver Letters.
SECTION 4. MODIFICATION AND WAIVER FEE. In consideration of the
modifications and waivers set forth herein, the Borrower shall pay to the Agent
(for ratable distribution by the Agent to the Lenders in accordance with their
respective Pro Rata Shares as in effect on this date) a modification and waiver
fee in the amount of $100,000, which fee shall be non-refundable and deemed
fully earned upon the effectiveness of this Modification.
SECTION 5. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to the Lenders and the Agent that (a) each of Borrower
and the Guarantors has all requisite corporate power and authority to execute
and deliver each Supplemental Credit Document to which it is a party and to
perform its obligations under such Supplemental Credit Document, and the
Supplemental Credit Document to which each such Credit Party is a party have
been duly authorized by all requisite corporate action on the part of such
Credit Party, have been duly executed and delivered by authorized officers of
such Credit
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<PAGE> 7
Party, and constitute valid obligations of such Credit Party, legally binding
upon and enforceable against such Credit Party in accordance with their terms,
except as such enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity;
and (b) after giving effect to this Modification and the Waiver Letters, (i) no
Default or Event of Default is existing under the Credit Agreement on and as of
the date of this Modification and (ii) the representations and warranties of
the Borrower set forth in Article VI of the Credit Agreement are true and
correct in all material respects on and as of the date of this Modification as
if made on and as of such date (except as to the extent that (x) any of such
representations or warranties relates to specific prior date or period or (y)
any breach of any of such representations or warranties has been waived in the
Waiver Letters or in this Modification).
SECTION 6. AGENT AND LENDER EXPENSES. Without limiting its
obligations under Section 11.03 of the Credit Agreement, the Borrower agrees to
pay on demand all of the Agent's and each Lender's reasonable attorneys' fees
and expenses (including the allocated cost of in-house counsel) and all other
reasonable out-of-pocket costs incurred by each of the Agent and the Lenders in
connection with its evaluation, negotiation, documentation or consummation of
this Modification and the transactions contemplated hereby.
SECTION 7. MISCELLANEOUS.
(A) Except as herein expressly provided, the Credit Agreement and
the Waiver Letters shall remain unchanged and in full force and effect, and
each reference to the Credit Agreement in the Credit Agreement and the other
Credit Documents shall be deemed to be a reference to the Credit Agreement as
amended by this Modification and the Waiver Letters and as the same may be
further amended, supplemented or otherwise modified and in effect from time to
time hereafter.
(B) This Modification may be executed in any number of several
counterparts, each of which shall be identical and all of which when taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Modification by signing one or more of such
counterparts.
(C) This Modification shall be governed by, and construed in
accordance with, the internal laws of the State of Georgia (without giving
effect to its conflicts of law rules).
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<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 28th day of July, 1997, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and RANDOLPH L. M. HUTTO, a resident of the State
of Georgia (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: (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 Systems Business, the Systems Integration
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<PAGE> 2
Business and any other distinct business segment in which the Company engages
during Employee's employment are collectively referred to herein 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.
2. Duties of Employee. Employee's title will be Executive Vice President,
General Counsel and Secretary of Medaphis Corporation 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, General Counsel and Secretary of
Medaphis Corporation. Employee also agrees to comply with all of the
Company's policies, standards and regulations as promulgated by the
officers of the Company, and to follow the instructions and directives
of Employee's superiors within 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.
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<PAGE> 3
3. Term. The term of this Agreement will be for a three (3) year period of
time, commencing as of July 28, 1997 and expiring on July 28, 2000,
subject to earlier termination as provided for in Section 4 of this
Agreement. This Agreement shall be automatically renewed for successive
one (1) year periods at the end of the initial three-year term, unless
either party gives notice to the other of its intent to terminate this
Agreement not less than sixty (60) days prior to commencement of any
such one-year renewal period. In the event such notice to terminate is
properly given, this Agreement shall terminate at the end of the
initial term or the one-year renewal period during which the notice is
given.
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 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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<PAGE> 4
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
Employee's employment pursuant to this Agreement without cause upon at
least thirty (30) days' prior written notice to Employee. In the event
Employee's employment with the Company is terminated by the Company
without cause, Employee shall be entitled to elect a severance
consideration equal to (i) two (2) years of salary and benefit
continuation (this severance consideration does not include the right
to receive any incentive bonus payments) at Employee's then current
salary and benefit levels, or (ii) Employee's then-current monthly
salary (this severance consideration does not include the right to
receive any incentive bonus payments) multiplied by the number of
months remaining in the initial term of this Agreement.
(c) Termination by Employee With Good Reason. Except as set forth in
Paragraph (d) below, in the event Employee elects to voluntarily
terminate his employment following the occurrence of events
constituting "Good Reason" for his voluntary termination of employment,
Employee will be entitled to elect a severance consideration equal to
(i) two (2) years of salary and benefit continuation (this severance
consideration does not include the right to receive any incentive bonus
payments) at Employee's then current salary and benefit levels, or (ii)
Employee's then-current monthly salary (this severance consideration
does not include the right to receive any incentive bonus payments)
multiplied by the number of months remaining in the initial term of
this Agreement. For purposes of this Agreement, "Good Reason" is
defined as (w) a material reduction (greater than 10%) in Employee's
annual base salary; (x) a change in Employee's work location to a work
location more than 50 miles from Employee's existing work location,
except for required travel on the Company's business to an extent
consistent with Employee's then present business travel obligations;
(y) an assignment to any duties inconsistent in any material adverse
respect with Employee's current position, duties or responsibilities,
other than an insubstantial and inadvertent act that is remedied by the
Company promptly after receipt of notice thereof given by Employee; or
(z) the failure by the Company to continue any material benefit or
compensation plan in which Employee is participating unless Employee is
provided with comparable benefits.
(d) Change in Control. In the event there is a Change in Control (as
defined herein) of Medaphis Corporation, Employee will be entitled to
receive a severance payment equal to two (2) years of salary and
benefits (including any bonus payment to which Employee would be
entitled which will be calculated by doubling the incentive bonus
payment received by Employee during the year immediately prior to the
Change in Control), if (A) Employee's employment is
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<PAGE> 5
terminated by the Company without cause within one (1) year following
any such Change in Control; (B) if Employee's employment is terminated
by the Company at the request of or pursuant to an agreement with a
third party who has taken steps reasonably calculated to effect a
Change in Control; (C) if Employee's employment is terminated by the
Company in connection with or in anticipation of a Change in Control;
(D) if Employee voluntarily terminates his employment for Good Reason
(as defined above in Paragraph (c)) within one (1) year following any
such Change in Control; or (E) if Employee voluntarily terminates his
employment for Good Reason within one (1) year following any action
taken by the Company at the request of or pursuant to an agreement with
a third party who has taken steps reasonably calculated to effect a
Change in Control or any action taken by the Company in connection with
or in anticipation of a Change in Control, in each case which action
constitutes Good Reason. 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 the shares of the Company's
common stock outstanding immediately prior to any such
consolidation or merger represents immediately thereafter more
than 50% of the combined voting power 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 the shares
of the Company's common stock outstanding immediately prior to
any such reorganization represents immediately thereafter more
than 50% of the combined voting power of the resulting entity
after the transaction; or
(iii) the failure for any reason of individuals who constitute
the Incumbent Board to continue to constitute at least a
majority of the Board. For purposes of this Section 4 (d), the
term "Board" shall mean the Board of Directors of the Company
and the term "Incumbent Board" shall mean the members of the
Board as of the date hereof and any person becoming a member
of the Board hereafter whose election or nomination is by a
vote of at least a majority of the directors then comprising
the Incumbent Board (other than an election or nomination of
an individual whose initial
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<PAGE> 6
assumption of office is in connection with an actual or
threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended).
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 to be paid in accordance with the Company's
regular payroll practices, provided, however, that such payments shall
be made no less frequently than in equal monthly 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 (and any comparable future incentive compensation
plans during the term of this Agreement) at a participation category of
up to 80% of Employee's base salary, payable at the discretion of the
Board of Directors of the Company. Employee's incentive compensation
for fiscal year 1997 is guaranteed and such incentive compensation
shall be pro-rated based on the number of months Employee is employed
by the Company during fiscal year 1997.
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. Except as
expressly set
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<PAGE> 7
forth herein, 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, financial counseling services, 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
provide Employee with a loan in the amount of One Hundred Thousand
Dollars ($100,000). This loan, which will be evidenced by a separate
loan agreement, will be forgiven in whole by the Company in the event
Employee remains employed by the Company through and until July 28,
1998. In the event Employee terminates his employment prior to July 28,
1998, other than in the case of a Change in Control or for Good Reason
as defined herein, Employee agrees that he will repay a pro- rata
portion of the loan to the Company based on a rate of Eight Thousand
Three Hundred and Thirty Three Dollars ($8,333.00) for each month
remaining in the initial twelve month period of this Agreement.
Employee further agrees that he will be responsible for the payment of
any and all federal and state taxes that may accrue as a result of the
payment of the signing bonus.
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
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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 in connection with performing 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 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, without regard to form, 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 is not
commonly known by or available to the public and (i) 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, and (ii) is the
subject of efforts that are reasonable under the circumstances to
maintain its secrecy. 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.
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7.A. Non-Competition Covenant. During Employee's employment by the Company
Employee will be a member of the Company's executive management team.
Employee agrees that during his employment 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 services of any marketing, management, sales, administrative,
supervisory or consulting nature, 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, provided that nothing in
this Agreement will preclude Employee from rendering legal services in
the role of outside counsel on behalf of any entity, including those
entities that compete with the Company, following the termination of
his employment with the Company. For purposes of this Agreement, the
term "Geographical Area" means the territory located within a
seventy-five (75) mile radius of any Company facility for which
Employee exercised managerial control or provided legal services on
behalf of 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 divert or 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
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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 or solicit, or attempt to
divert or solicit, to or for any individual or entity which is engaged
in providing Business services or products, any person employed by the
Company, whether or not such employee is a full-time employee or
temporary employee of the Company, whether or not such employee is
employed pursuant to written agreement and whether or not such employee
is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, in any form
or medium, and any other properties, files or documents obtained as a
result of
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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 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
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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 Randolph L. M. Hutto
Suite 300 3609 Kingsboro Road, N.E.
Atlanta, GA 30339 Atlanta, Ga. 30319
Attn: Chief Executive Officer
or to such other address or agent as may be hereafter designated in
writing by either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
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. 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:
By: /s/ David E. McDowell /s/ Randolph L. M. Hutto
------------------------- ------------------------
Title: Chairman and CEO Randolph L. M. Hutto
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EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
/s/ RLMH
-----------------
Employee Initials
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EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 30th day of September, 1997, by and between MEDAPHIS CORPORATION, a
Delaware corporation (the "Company"), and MARK COLONNESE, a resident of the
State of North Carolina (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: (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,
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optical character recognition or other related technologies (the "System
Integration Business") (the Processing 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 herein 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.
2. Duties of Employee. Employee's title will be Controller of Medaphis
Corporation and Employee will report directly to the Chief Financial
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 Controller of Medaphis Corporation.
Employee also agrees to comply with all of the Company's policies,
standards and regulations as promulgated by the officers of the
Company, and to follow the instructions and directives of Employee's
superiors within 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 Financial 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 Financial Officer of the Company
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<PAGE> 3
approves such participation, preparation and publication or teaching
prior to Employee's engaging therein.
3. Term. The term of this Agreement will be for an eighteen (18) month
period of time, commencing as of September 30, 1997 and expiring on
March 31, a1999, 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 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.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
Employee's employment pursuant to this Agreement without cause upon at
least thirty (30) days' prior written notice to Employee. In the event
Employee's employment with the Company is terminated by the Company
without cause, the Company shall remain subject to its
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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 Seventy Five Thousand Dollars
($175,000.00) per annum to be paid in accordance with the Company's
regular payroll practices, provided, however, that such payments shall
be made no less frequently than in equal monthly 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 (and any comparable future incentive compensation
plans during the term of this Agreement) at a participation category of
up to 50% of Employee's base salary, payable at the 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 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 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. Except as expressly set forth herein,
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
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<PAGE> 5
limited to, financial counseling services, 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.
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 in connection with performing 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 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, without regard to form, 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 is not
commonly known by or available to the public and (i) 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
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<PAGE> 6
its disclosure or use, and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. 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
Employee will be a member of the Company's executive management team.
Employee agrees that during his employment 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 services of any marketing, management, sales, administrative,
supervisory or consulting nature, 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, provided that nothing in
this Agreement will preclude Employee from rendering legal services in
the role of outside counsel on behalf of any entity, including those
entities that compete with the Company, following the termination of
his employment with the Company. For purposes of this Agreement, the
term "Geographical Area" means the territory located within a
seventy-five (75) mile radius of any Company facility for which
Employee exercised managerial control or provided legal services on
behalf of the Company.
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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 divert or 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 or solicit, or attempt to
divert or solicit, to or for any individual or entity which is engaged
in providing Business services or products, any person employed by the
Company, whether or not such employee is a full-time employee or
temporary employee of the Company, whether or not such employee is
employed pursuant to written agreement and whether or not such employee
is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer.
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<PAGE> 8
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, in any form
or medium, 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
8
<PAGE> 9
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.
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 Mark Colonnese
Suite 300 1307 Woodfield Court
Atlanta, GA 30339 Wilmington, NC 28409
Attn: Chief Executive Officer
or to such other address or agent as may be hereafter designated in
writing by either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
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.
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<PAGE> 10
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.
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:
By: /s/ Jerome H. Baglien /s/ Mark Colonnese
----------------------------- ---------------------
Mark Colonnese
Title: CFO
--------------------------
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EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
/s/ MPC
-----------------
Employee Initials
11
<PAGE> 1
EXHIBIT 10.12
SEPARATION AGREEMENT
BY AND BETWEEN
MEDAPHIS CORPORATION
AND
HEALTHCARE RECOVERIES, INC.
DATED AS OF MAY 28, 1997
<PAGE> 2
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT, dated as of the IPO Effective Date, is
entered into by and between Medaphis and HRI. Capitalized terms used in this
Agreement and not otherwise defined shall have the respective meanings assigned
to them in Section 1.
WHEREAS, the Board of Directors of Medaphis has determined that it is
appropriate and desirable for Medaphis to sell for its account all of the
shares of HRI Common Stock owned by Medaphis; and
WHEREAS, it is appropriate and desirable to set forth certain
agreements of the parties in connection with the Separation.
NOW, THEREFORE, the parties agree as follows:
Section 1. Definitions.
For the purpose of this Agreement the following terms shall have the
following meanings:
"Action" means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.
"Affiliate" of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein, "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.
"Agreement" means this Separation Agreement, including all of the
Schedules.
"Ancillary Agreements" means any and all supplemental and other
agreements and instruments contemplated by this Agreement or entered into in
connection with this Agreement.
"Arbitration Act" means the Federal Arbitration Act, 9 U.S.C. Sections
1-14, as the same may be amended from time to time.
"Arbitration Demand Date" has the meaning set forth in Section 20.3.
<PAGE> 3
"Arbitration Demand Notice" has the meaning set forth in Section 20.3.
"Closing" means the receipt by Medaphis of the proceeds of the IPO in
accordance with the terms of the Underwriting Agreement.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"CPR" means the Center for Public Resources.
"Environmental Law" means any federal, state, local, foreign or
international statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law (including tort and environmental
nuisance law), legal doctrine, order, judgment, decree, injunction, requirement
or agreement with any Governmental Authority, now or hereafter in effect
relating to health, safety, pollution or the environment (including ambient
air, surface water, groundwater, land surface or subsurface strata) or to
emissions, discharges, releases or threatened releases of any substance
currently or at any subsequent time listed, defined, designated or classified
as hazardous, toxic, waste, radioactive or dangerous, or otherwise regulated,
under any of the foregoing, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any such substances, including the Comprehensive Environmental
Response, Compensation and Liability Act, the Superfund Amendments and
Reauthorization Act and the Resource Conservation and Recovery Act and
comparable provisions in state, local, foreign or international law.
"Environmental Liabilities" means all Liabilities relating to, arising
out of or resulting from any Environmental Law or contract or agreement
relating to environmental, health or safety matters (including all removal,
remediation or cleanup costs, investigatory costs, governmental response costs,
natural resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability
and indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection with such
liabilities.
"Escalation Notice" has the meaning set forth in Section 20.2.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under the Exchange Act.
"GAAP" means generally accepted accounting principles.
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<PAGE> 4
"Governmental Authority" shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
"HRI" means Healthcare Resources, Inc., a Delaware corporation.
"HRI Audited Balance Sheet" means the audited balance sheet of HRI,
including the notes thereto, as of December 31, 1996, a copy of which is
included in the Registration Statement when it becomes effective.
"HRI April 30 Balance Sheet" means the unaudited balance sheet of HRI
as of April 30, 1997, prepared in accordance with GAAP on a basis consistent
with the preparation of the HRI Audited Balance Sheet.
"HRI Common Stock" means the Common Stock, $0.001 par value per share,
of HRI.
"HRI Indemnitees" has the meaning set forth in Section 15.3.
"Indemnifying Party" has the meaning set forth in Section 15.4.
"Indemnitee" has the meaning set forth in Section 15.4.
"Indemnity Payment" has the meaning set forth in Section 15.4.
"Information" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
"Insurance Proceeds" means those monies:
(a) received by an insured from an insurance carrier;
(b) paid by an insurance carrier on behalf of the insured; or
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<PAGE> 5
(c) received (including by way of set off) from any third party in the
nature of insurance, contribution or indemnification in respect of any
Liability; in any such case net of any applicable premium adjustments
(including reserves and retrospectively rated premium adjustments) and net of
any costs or expenses (including allocated costs of in-house counsel and other
personnel) incurred in the collection of proceeds.
"IPO" means the public offering for sale by Medaphis of shares of HRI
Common Stock pursuant to the IPO Registration Statement.
"IPO Effective Date" means May __, 1997, which is the date on which the
IPO Registration Statement was declared effective by the Commission.
"IPO Registration Statement" means the registration statement,
Registration No. 333-23287, on Form S-1 filed under the Securities Act,
pursuant to which the HRI Common Stock to be sold in the IPO has been
registered.
"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, costs and
expenses, including those arising under any law, rule, regulation, Action,
threatened or contemplated Action (including the costs and expenses of demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses (including allocated costs
of in-house counsel and other personnel) whatsoever reasonably incurred in
investigating, preparing or defending against any such Actions or threatened or
contemplated Actions), order or consent decree of any Governmental Authority or
any award of any arbitrator or mediator of any kind.
"Medaphis" means Medaphis Corporation, a Delaware corporation.
"Medaphis Group" means Medaphis and each Person (other than HRI) that
is an Affiliate of Medaphis immediately after the Closing Date.
"Medaphis Indemnitees" has the meaning set forth in Section 17.2.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
limited liability entity, any other entity and any Governmental Authority.
"Prime Rate" means the rate which SunTrust Bank (or any successor or
other major money center commercial bank agreed to by the parties) announces
from time to time as its prime lending rate, as in effect from time to time.
"Prospectus" means each preliminary, final or supplemental prospectus
forming a part of the IPO Registration Statement.
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<PAGE> 6
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under the Securities Act.
"Separation" means the transactions, arrangements and agreements
embodied in this Agreement entered into by the parties in preparation for the
sale by Medaphis of all HRI Common Stock held by Medaphis.
"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however that no Person that is not directly or indirectly wholly
owned by any other Person shall be a Subsidiary of such other Person unless
such other Person controls, or has the right, power or ability to control, that
Person.
"Tax" or "Taxes" means all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupations, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees
and charges, imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof, whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest, fines, penalties or additional amounts attributable to or imposed
on or with respect to any such taxes, charges, fees, levies or other
assessments.
"Third Party Claim" has the meaning set forth in Section 15.5
"Underwriters" means the managing Underwriters for the IPO.
"Underwriting Agreement" means the underwriting agreement entered into
among Medaphis, HRI and the Underwriters with respect to the IPO.
Section 2. Effect of Agreement. This Agreement is being executed and
delivered on the IPO Effective Date to memorialize actions that have been taken
by the parties prior to the IPO Effective Date in connection with the
Separation, and to govern the conduct of the parties subsequent to the IPO
Effective Date as to the matters addressed in this Agreement. If the Closing
does not occur, this Agreement shall terminate.
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<PAGE> 7
Section 3. HRI Stockholders' Equity and Net Tangible Assets.
3.1 HRI April 30, 1997 Balance Sheet. A copy of the HRI April 30, 1997
Balance Sheet is attached as Schedule 3.1. As of April 30, 1997, as reflected
in the HRI April 30, 1997 Balance Sheet, the stockholders' equity of HRI was
not less than $4,100,000, and the net tangible assets of HRI were not less than
$4,100,000. After December 31, 1996 and prior to April 30, 1997, Medaphis and
HRI took the following actions affecting HRI's stockholders' equity and net
tangible assets:
(a) On May 19, 1997 (the "Dividend Date"), HRI declared
a dividend to Medaphis in the amount of $8,559,727, which dividend
was paid by means of satisfaction of the account receivable from
Medaphis on the books of HRI in the amount of $8,599,727 (no cash
owed or to be paid to Medaphis under this Section 3.1(a)).
(b) From the HRI April 30, 1997 Balance Sheet, HRI
transferred to Medaphis from time to time all of HRI's
unrestricted cash on hand in excess of cash required for working
capital. Such transfers were effected by transferring all of
HRI's cash to Medaphis, with Medaphis then providing funds as
necessary for HRI's working capital requirements, by HRI's
funding its working capital requirements and transferring excess
cash to Medaphis, or by a combination of the foregoing, as was
convenient from time to time.
(c) On or before the Closing Date, HRI will declare a
dividend in the amount equal to stockholders' equity of HRI on
April 30, 1997 (the Balance Sheet date) minus $4,100,000, which
dividend equals $601,194. The dividend will be paid and evidenced
by HRI's non-interest bearing promissory note due on the earlier
of (i) thirty days after the Closing Date and (ii) the date on
which HRI receives net proceeds from exercise of the Underwriters'
over-allotment option in an amount equal to or greater than the
amount of such dividend.
3.2 Closing Date Stockholders' Equity and Net Tangible Assets.
Medaphis shall take such actions as shall be necessary, including, without
limitation, any required contribution to capital, so that, at the Closing Date,
(i) the stockholders' equity of HRI is not less than $4,100,000, and the net
tangible assets of HRI are not less than $4,100,000, in each case as determined
in accordance with GAAP on a basis consistent with the determination thereof in
connection with the HRI Audited Balance Sheet, (ii) the assets of HRI do not
include any indebtedness of Medaphis to HRI (except for obligations expressly
created by this Agreement and any Ancillary Agreements), and (iii) the
liabilities of HRI do not include any indebtedness of HRI
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<PAGE> 8
to Medaphis (except for obligations expressly created by this Agreement and
any Ancillary Agreements). The parties acknowledge and agree that, as of the
Closing Date, HRI's unrestricted cash on hand is not likely to exceed a nominal
amount, and that there is no requirement that Medaphis take any action to
cause HRI's unrestricted cash on hand to be any particular amount. Prior to the
Closing Date, Medaphis shall be entitled to all unrestricted cash of HRI
subject to the restrictions set forth in the first sentence of this Section
3.2.
Section 4. Certain Tax Matters.
4.1 Federal Income Tax Returns. Medaphis will include the income of
HRI (including any deferred income required to be recognized under Treasury
Regulation ss. 1.1502-13 and any excess loss account taken into income under
Treasury Regulation ss. 1.1502-19) on the Medaphis consolidated federal income
tax returns for all periods from August 29, 1995 through the Closing Date and
will pay all Taxes assessed with respect to such consolidated federal income
tax returns. HRI will furnish all information reasonably required by Medaphis
for inclusion in Medaphis' federal consolidated income tax returns in
accordance with HRI's past custom and practice. Medaphis will allow HRI an
opportunity to review and comment on such federal consolidated income tax
returns (including any amended returns) to the extent they relate to HRI. HRI
will include its income on its separate federal income tax returns for all
taxable periods ended on or before August 28, 1995, and all taxable periods
beginning after the Closing Date. The income of HRI will be apportioned to the
period up to and including the Closing Date and the period after the Closing
Date by closing the books of HRI as of the end of the Closing Date, unless
Medaphis and HRI elect ratable allocation pursuant to Treasury Regulation ss.
1.1502-76(b)(2)(ii).
4.2 State, Local and Foreign Income Tax and Other Tax Returns. Medaphis
and HRI will file their tax returns for state, local and foreign income tax
purposes and all other Tax returns on a separate basis and shall be separately
responsible for all Taxes assessed with respect to such returns.
4.3 Audits. Medaphis will allow HRI and its counsel to participate at
HRI's own expense in any audits of the consolidated federal income tax returns
of Medaphis to the extent that such returns relate to HRI. Medaphis will not
settle any such audit in a manner that would adversely affect HRI after the
Closing Date unless such settlement would be reasonable in the case of a person
that owned HRI both before and after the Closing Date.
4.4 Post-Closing Elections. At Medaphis' request, HRI will make or
join with Medaphis in making any election for Tax purposes if the making of
such election does not have a material adverse impact on HRI for any taxable
period after the Closing Date.
4.5 Termination of Other Tax Sharing Agreements. Any Tax sharing or
allocation agreements between Medaphis and HRI other than this Agreement shall
terminate on the Closing Date.
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<PAGE> 9
Section 5. Insurance Matters.
5.1 New Policies. As of the respective dates indicated on Schedule
5.1, HRI obtained binders for the new business insurance policies listed on
such Schedule, which policies by their terms became or become effective no
later than the Closing Date. HRI is responsible for paying all premiums
required under such policies, and to the extent any such premiums became due
prior to the IPO Effective Date HRI has paid such premiums.
5.2 Tail Coverages. HRI is or has been a named insured under various
blanket business insurance policies owned by Medaphis that in their current
forms are listed on Schedule 5.2 (the "Medaphis Blanket Policies"). Medaphis
has made available to HRI the opportunity to purchase extended discovery period
coverage for the benefit of HRI under the Medaphis Blanket Policies, and HRI
has purchased the extended discovery period coverages listed on Schedule 5.2.
5.3 Refunds. The parties acknowledge that certain of the premiums paid
by Medaphis under the Medaphis Blanket Policies are subject to reduction after
the applicable insurer audits the related claims history. Refunds reflecting
any such reductions shall be solely for the account of Medaphis, and HRI shall
have no claim with respect thereto. To the extent that HRI receives any such
refund, HRI shall immediately pay it over to Medaphis.
5.4 Workers' Compensation. Effective as of Closing Date (the "WC
Switch Date"), HRI obtained the workers' compensation insurance arrangements
described on Schedule 5.4, and HRI shall be solely responsible for all workers'
compensation claims of HRI employees incurred after the WC Switch Date. As of
the WC Switch Date, Medaphis' recorded reserve for workers' compensation claims
by HRI employees was $51,736.36 (which amount, plus that amount of reserve to
be determined within one month of the date hereof by Medaphis' insurance
carrier with respect to those HRI employees who have reported or filed claims
prior to the WC Switch Date but whose claims are not reflected in the
$51,736.36 figure, are referred to as the "WC Reserve"). Medaphis shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims do not exceed the WC Reserve. HRI shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims exceed the WC Reserve.
Section 6. Telecommunications Services. Since April 25, 1997 (the
"Telecom Switch Date"), HRI has obtained telecommunications services,
separately billed from Medaphis, from one or more vendors selected by HRI. To
the extent known at the date of the HRI April 30, 1997 Balance Sheet,
telecommunications charges incurred by HRI prior to the Telecom Switch Date
were taken into account and charged to HRI in determining the amount of the
account payable from Medaphis to HRI as of that date that is referred to in
Section 3.1(b). Subject to Medaphis' obligation under Section 3.2, to the
extent that, as of the Closing Date, the parties have been able to identify
telecommunications charges incurred by HRI prior to the Telecom Switch Date
that have not been previously taken into account, HRI shall reimburse Medaphis
for such charges on the Closing Date. The parties have diligently attempted to
identify all telecommunications charges incurred by HRI prior to the Telecom
Switch Date, to minimize any need to settle such charges after the Closing
Date. Upon presentation by Medaphis of reasonable
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<PAGE> 10
supporting documentation after the Closing Date, HRI will reimburse
Medaphis for any telecommunications charges incurred by HRI prior to the Telecom
Switch Date and not previously taken into account as of the Closing Date or the
date of the HRI April 30, 1997 Balance Sheet.
Section 7. Pittsburgh Telephone Equipment. On the Closing Date,
Medaphis shall execute and deliver to HRI a bill of sale transferring to HRI,
free and clear of any lien or other encumbrance, the assets identified on
Schedule 7 relating to the telephone system in HRI's Pittsburgh, Pennsylvania
offices. The parties acknowledge that such assets originally were acquired by
HRI and later were included as collateral in a financing lease facility
obtained by Medaphis, the lien of which shall be released as contemplated by
Section 8 and title to which shall be (if necessary) transferred to HRI.
Section 8. Lien and Guaranty Releases. It is the parties' intention
that, from and after the Closing Date, (a) no assets (including, without
limitation, cash balances in bank accounts and rights as lessee) or capital
stock of HRI will be subject to any lien, security interest, mortgage or other
encumbrance relating to any indebtedness of Medaphis or of any member of the
Medaphis Group, and (b) HRI will have no obligation, as guarantor or otherwise,
for any indebtedness of Medaphis or of any member of the Medaphis Group. To
that end, the parties have conducted a lien search in all jurisdictions deemed
by them to be relevant, and have otherwise diligently attempted to identify all
such liens and guaranties. Medaphis shall cause all such liens and guaranties
to be released on or before the Closing Date. If, after the Closing Date, any
lien or guaranty is discovered that encumbers any asset or capital stock of
HRI, or under which HRI has any obligation, and that relates to any
indebtedness of Medaphis or of any member of the Medaphis Group, Medaphis shall
take all actions that shall be necessary to obtain the release of such lien or
guaranty.
Section 9. Asset Transfer. As of the Closing Date, Medaphis shall
execute and deliver to HRI a quitclaim bill of sale, transferring to HRI any
interest Medaphis might have in any of the assets used by HRI in the conduct of
its business.
Section 10. Payroll. Since May 2, 1997 (the "Payroll Switch Date") and
effective for the payroll period ended April 26, 1997, HRI has obtained,
separately from Medaphis, payroll and employment tax administrative services
from one or more vendors selected by HRI and approved by Medaphis. Since the
Payroll Switch Date, HRI has borne all costs relating to payroll services for
its employees and has funded all payroll costs incurred with respect to its
employees. In determining the amount of the account due from Medaphis to HRI
that has been addressed as described in Section 3.1(b), the parties have taken
into account the obligation of HRI to fund all payroll related costs after the
Payroll Switch Date. Without limiting the foregoing, the parties have taken
such steps as they have deemed to be appropriate to cause HRI to have the
benefit of any deposits of payroll or withholding taxes for periods prior to
the Payroll Switch Date, to the extent that, under applicable law and
regulations, HRI will have liability for such taxes.
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Section 11. Purchases of Goods and Services. Prior to the IPO
Effective Date, those vendors specified by Medaphis that have supplied goods or
services to HRI through Medaphis' centralized purchasing program have
been notified that, from and after the Closing Date, all goods and services
ordered by HRI are for the account of HRI and that Medaphis has no obligation
with respect thereto. To the extent deemed appropriate by HRI, on or prior to
the Closing Date HRI shall enter into purchase contracts with such vendors,
under which Medaphis shall have no liability. Any purchases made by HRI prior
to the date of the HRI April 30, 1997 Balance Sheet through Medaphis'
centralized purchasing program were taken into account in the settlement
referred to in Section 3.1(b). Any such purchases made by HRI since such date
shall be paid for by HRI on or prior to the Closing Date, subject to Medaphis'
obligation set forth in Section 3.2.
Section 12. Bank Accounts/Cash Management. Prior to the IPO Effective
Date, HRI has established such bank accounts as it deems to be necessary to
conduct its business (and/or, with the assistance of Medaphis, has amended the
authorizations relating to mutually agreed existing bank accounts so that they
are controlled exclusively by HRI personnel), and all authorizations, standing
wire instructions and the like relating to HRI's participation in Medaphis'
cash management system have been terminated.
Section 13. Employee Benefit Plans. Simultaneously with the execution
of this Agreement, HRI and Medaphis have executed the Agreement Respecting
Employee Benefits Matters attached as Schedule 13, which agreement constitutes
the agreement between HRI and Medaphis with respect to employee benefit aspects
of the Separation.
Section 14. Termination of Agreements. Except for this Agreement and
any Ancillary Agreements, in furtherance of the Separation, HRI and Medaphis
hereby terminate any and all agreements, arrangements, commitments or
understandings, whether or not in writing, between or among HRI, on the one
hand, and Medaphis and/or any member of the Medaphis Group, on the other hand,
effective as of the Closing Date.
Section 15. Mutual Releases; Indemnification.
15.1 Release of Pre-Closing Claims. (a) Except as provided in Section
15.1(c), effective as of the Closing Date, HRI does, for itself and its
successors and assigns, remise, release and forever discharge Medaphis, the
members of the Medaphis Group, their respective Affiliates (other than HRI),
successors and assigns, and all Persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of any
member of the Medaphis Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities to HRI, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or
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<PAGE> 12
events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date.
(b) Except as provided in Section 15.1(c), effective as of the Closing
Date, Medaphis does, for itself and each other member of the Medaphis Group,
their respective Affiliates (other than HRI), successors and assigns, remise,
release and forever discharge HRI, and all Persons who at any time prior to the
Closing Date have been shareholders, directors, officers, agents or employees
of HRI (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all Liabilities to Medaphis or any of the Medaphis Group, whether at law or
in equity (including any right of contribution), whether arising under any
contract or agreement, by operation of law or otherwise, existing or arising
from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur or any conditions existing or alleged to
have existed on or before the Closing Date.
(c) Nothing contained in Section 15.1(a) or (b) shall impair any
obligation under this Agreement or any Ancillary Agreement or any right of any
Person to enforce this Agreement or any Ancillary Agreement.
15.2 Indemnification by HRI. Except as provided in Section 15.4, HRI
shall indemnify, defend and hold harmless Medaphis, each member of the Medaphis
Group and each of their respective directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Medaphis Indemnitees"), from and against any and all
Liabilities of the Medaphis Indemnitees relating to, arising out of or
resulting from any of the following items (without duplication):
(i) the conduct by HRI of its business after the Closing Date;
(ii) the conduct by HRI of its business prior to August 28, 1995;
and
(iii) any breach by HRI of this Agreement or any Ancillary
Agreement;
(iv) Taxes incurred by HRI, or arising with respect to the
business conducted by HRI, during or with respect to any and all
periods ending on or prior to August 28, 1995, or after the Closing
Date.
15.3 Indemnification by Medaphis. Medaphis shall indemnify, defend and
hold harmless HRI, and each of its directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "HRI Indemnitees"), from and against any and all Liabilities
of the HRI Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):
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<PAGE> 13
(i) the conduct by Medaphis or any member of the Medaphis Group,
of its business at any time;
(ii) any breach by Medaphis or any member of the Medaphis Group of
this Agreement or any Ancillary Agreement; and
(iii) federal income Taxes incurred by, or arising with respect
to the business conducted by, HRI or any member of the Medaphis Group,
and state and local income and other Tax liabilities relating to
Medaphis or any member of the Medaphis Group, during or with respect
to any and all periods ending after August 28, 1995 and on or prior to
the Closing Date.
15.4 Indemnification Obligations Net of Insurance Proceeds and Other
Amounts. The parties intend that any Liability subject to indemnification or
reimbursement pursuant to this Section 15 will be net of Insurance Proceeds.
15.5 Procedures for Indemnification of Third Party Claims. (a) If an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
of any claim or of the commencement by any such Person of any Action
(collectively, a "Third Party Claim") with respect to which an Indemnifying
Party may be obligated to provide indemnification to such Indemnitee pursuant
to Section 15.2 or 15.3, or any other Section of this Agreement or any
Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written
notice within 20 days after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the failure of any Indemnitee or other Person to
give notice as provided in this Section 15.5(a) shall not relieve the related
Indemnifying Party of its obligations under this Section 15, except to the
extent that such Indemnifying Party is actually prejudiced by such failure to
give notice.
(b) An Indemnifying Party may elect to defend (and to seek to settle
or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 15.5(a) (or
sooner, if the nature of such Third Party Claim so requires), the Indemnifying
Party shall notify the Indemnitee whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 15.5(d), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel
and other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.
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<PAGE> 14
(e) No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
15.6 Additional Matters. (a) Any claim on account of a Liability that
does not result from a Third Party Claim shall be asserted by written notice
given by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice within
which to respond. If such Indemnifying Party does not respond within such
30-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such 30-day period or rejects such claim in whole or in part,
such Indemnitee shall be free to pursue such remedies as may be available to
such party as contemplated by this Agreement and any Ancillary Agreement.
(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnitee in connection with any Third Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnitee as
to any events or circumstances in respect of which such Indemnitee may have any
right, defense or claim relating to such Third Party Claim against any claimant
or plaintiff asserting such Third Party Claim or against any other person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner,
and at the cost and expense (including allocated costs of in-house counsel and
other personnel) of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.
15.7 Remedies Cumulative. The remedies provided in this Section 15
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
15.8 Survival of Indemnities. The rights and obligations of each of
Medaphis and HRI and their respective Indemnitees under this Section 15 shall
survive the Closing for a period of three years.
15.9 Certain HRI Directors. Medaphis shall, by a separate agreement,
indemnify those persons who have agreed to become HRI directors upon the
Closing against Liabilities relating to the IPO to the extent customary for
indemnification of directors by issuers relating to initial public offerings.
Section 16. Certain Business Matters. (a) Neither HRI, Medaphis nor
any member of the Medaphis Group shall have any duty to refrain from (i)
engaging in the same or similar activities or lines of business as any other of
such Persons, (ii) doing business with any potential or actual supplier or
customer of any other of such Persons, or (iii) engaging in, or refraining
from, any other activities relating to any of the potential or actual suppliers
or
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<PAGE> 15
customers of any other of such Persons. Until the first anniversary of the
Closing Date, HRI shall not solicit any employee of Medaphis or of any member of
the Medaphis Group to become an employee of HRI, and neither Medaphis nor any
member of the Medaphis Group shall solicit any employee of HRI to become an
employee of Medaphis or of any member of the Medaphis Group.
Section 17. Late Payments. Any amount not paid when due pursuant to
this Agreement or any Ancillary Agreement shall accrue interest at a rate per
annum equal to the Prime Rate plus 1%.
Section 18. Exchange of Information; Confidentiality.
18.1 Exchange of Information. (a) Each of Medaphis and HRI agrees to
provide, or cause to be provided, to each other, at any time after the Closing
Date, as soon as reasonably practicable after written request, any Information
in its possession or under its control that the requesting party reasonably
needs (i) to comply with reporting, disclosure, filing or other requirements
imposed on the requesting party (including under applicable securities or tax
laws) by a Governmental Authority having jurisdiction over the requesting
party, (ii) for use in any other judicial, regulatory, administrative, tax or
other proceeding or in order to satisfy audit, accounting, claims, regulatory,
litigation, tax or other similar requirements, or (iii) to comply with its
obligations under this Agreement or any Ancillary Agreement; provided, however,
that if any party determines that any such provision of Information could be
commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.
(b) Ownership of Information. Any Information that is provided to a
requesting party pursuant to Section 18.1(a) shall be deemed to remain the
property of the providing party. Unless specifically set forth in this
Agreement, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such Information.
(c) Costs of Providing Information. The party requesting Information
agrees to reimburse the other party for the reasonable costs, if any, of
creating, gathering and copying such Information, to the extent that such costs
are incurred for the benefit of the requesting party.
(d) Record Retention. To facilitate the possible exchange of
Information pursuant to this Section 18 after the Closing Date, the parties
agree to use their reasonable best efforts to retain all Information in their
respective possession or control on the Closing Date in accordance with the
policies of Medaphis as in effect on the Closing Date. No party will destroy,
or permit any of its Subsidiaries to destroy, any Information that the other
party may have the right to obtain pursuant to this Agreement prior to the
third anniversary of the date of this Agreement without first using its
reasonable best efforts to notify the other party of the proposed destruction
and giving the other party the opportunity to take possession of such
Information
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<PAGE> 16
prior to such destruction; provided, however, that in the case of any
Information relating to Taxes or to Environmental Liabilities, such period shall
be extended to the expiration of the applicable statute of limitations (giving
effect to any extensions).
(e) Production of Witnesses; Records; Cooperation. (i) After the
Closing Date, except in the case of an adversarial Action by one party against
another party, each party shall use its reasonable best efforts to make
available to each other party, upon written request, the former, current and
future directors, officers, employees, other personnel and agents of the
members of its respective organization as witnesses and any books, records or
other documents within its control or that it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any Action in which the requesting party may from time to time be involved,
regardless of whether such Action is a matter with respect to which
indemnification may be sought under this Agreement. The requesting party shall
bear all costs and expenses (including allocated costs of in-house counsel and
other personnel) in connection with complying with the request.
(ii) If an Indemnifying Party chooses to defend or to
seek to compromise or settle any Third Party Claim, the other
parties shall make available to such Indemnifying Party, upon
written request, the former, current and future directors,
officers, employees, other personnel and agents of the members
of its respective organization as witnesses and any books,
records or other documents within its control or which it
otherwise has the ability to make available, to the extent
that any such person (giving consideration to business demands
of such directors, officers, employees, other personnel and
agents) or books, records or other documents may reasonably be
required in connection with such defense, settlement or
compromise, or such prosecution, evaluation or pursuit, as the
case may be, and shall otherwise cooperate in such defense,
settlement or compromise, or such prosecution, evaluation or
pursuit, as the case may be.
(ii) In connection with any matter contemplated by
this Section 18(e), the parties will enter into a mutually
acceptable joint defense agreement so as to maintain to the
extent practicable any applicable attorney-client privilege or
work product immunity.
Section 19. Confidentiality. (a) Each of Medaphis and HRI agrees to
hold, and to cause its respective directors, officers, employees, agents,
accountants, counsel, other advisors and representatives, and Subsidiaries to
hold, in strict confidence, with at least the same degree of care that applies
to Medaphis' confidential and proprietary information pursuant to policies in
effect as of the Closing Date, all Information concerning the other that is
either in its possession (including Information in its possession prior to the
Closing Date) or furnished by such other or its respective directors, officers,
employees, agents, accountants, counsel and other advisors and
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<PAGE> 17
representatives at any time pursuant to this Agreement, any Ancillary Agreement
or otherwise, and shall not use any such Information other than for such
purposes as shall be expressly permitted by such agreements, except, in each
case, to the extent that such Information has been (i) in the public domain
through no fault of such party or any of its directors, officers, employees,
agents, accountants, counsel and other advisors and representatives, (ii) later
lawfully acquired from other sources by such party, which sources are not
themselves bound by a confidentiality obligation), or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.
(b) Protective Arrangements. In the event that any party either
determines on the advice of its counsel that it is required to disclose any
Information pursuant to applicable law or receives any demand under lawful
process or from any Governmental Authority to disclose or provide Information
of any other party that is subject to the confidentiality provisions of this
Agreement, such party shall notify the other party prior to disclosing or
providing such Information and shall cooperate at the expense of the requesting
party in seeking any reasonable protective arrangements requested by such other
party. Subject to the foregoing, the Person that received such request may
subsequently disclose or provide Information to the extent required by such law
(as so advised by counsel) or by lawful process or such Governmental Authority.
Section 20. Arbitration; Dispute Resolution.
20.1 Agreement to Arbitrate. The procedures for discussion,
negotiation and arbitration set forth in this Section 20 shall apply to all
disputes, controversies or claims that may arise out of or relate to, or arise
under or in connection with this Agreement or any Ancillary Agreement, or the
transactions contemplated by any such agreement. Each party agrees that the
procedures set forth in this Section 20 shall be the sole and exclusive remedy
in connection with any dispute, controversy or claim relating to any of the
foregoing matters and irrevocably waives any right to commence any Action in or
before any Governmental Authority, except to the extent provided under the
Arbitration Act in the case of judicial review of arbitration results or
awards. Each party irrevocably waives any right to any trial by jury with
respect to any claim, controversy or dispute set forth in the first sentence of
this Section 20.1.
20.2 Escalation. (a) It is the intent of the parties to use their
respective reasonable best efforts to resolve expeditiously any dispute,
controversy or claim between or among them with respect to the matters covered
hereby that may arise from time to time on a mutually acceptable negotiated
basis. In furtherance of the foregoing, any party involved in a dispute,
controversy or claim may deliver a notice (an "Escalation Notice") demanding an
in person meeting involving representatives of the parties at a senior level of
management of the parties (or if the parties agree, of the appropriate
strategic business unit or division within such entity). A copy of any such
Escalation Notice shall be given to the general counsel, or like officer or
official, of each party involved in the dispute, controversy or claim (which
copy shall state that it is an Escalation Notice pursuant to this Agreement) .
Any agenda, location or procedures for such discussions or negotiations between
the parties may be established by the parties from
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time to time; provided, however, that the parties shall use their
reasonable best efforts to meet within 30 days of the Escalation Notice.
(b) The parties may, by mutual consent, retain a mediator to aid the
parties in their discussions and negotiations by informally providing advice to
the parties. Any opinion expressed by the mediator shall be strictly advisory
and shall not be binding on the parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceedings. Mediation is not a
prerequisite to a demand for arbitration under Section 20.3.
20.3 Demand for Arbitration. At any time after the first to occur of
(i) the date of the meeting actually held pursuant to the applicable Escalation
Notice or (ii) 45 days after the delivery of an Escalation Notice (as
applicable, the "Arbitration Demand Date"), any party involved in the dispute,
controversy or claim (regardless of whether such party delivered the Escalation
Notice) may make a written demand (the "Arbitration Demand Notice") that the
dispute be resolved by binding arbitration.
20.4 Arbitrators. (a) Within 15 days after a valid Arbitration Demand
Notice is given, the parties involved in the dispute, controversy or referenced
claim shall attempt to select a sole arbitrator satisfactory to all such
parties.
(b) If such parties are not able jointly to select a sole arbitrator
within such 15-day period, such parties shall each appoint an arbitrator (who
need not be disinterested as to the parties or the matter) within 30 days after
delivery of the Arbitration Demand Notice. If one party appoints an arbitrator
within such time period and the other party or parties fail to appoint an
arbitrator within such time period, the arbitrator appointed by the one party
shall be the sole arbitrator of the matter.
(c) If a sole arbitrator is not selected pursuant to paragraph (a) or
(b) above and, instead, two or three arbitrators are selected pursuant to
paragraph (b) above, the two or three arbitrators will, within 30 days after
the appointment of the later of them to be appointed, select an additional
arbitrator who shall act as the sole arbitrator of the dispute. After selection
of such sole arbitrator, the initial arbitrators shall have no further role
with respect to the dispute. In the event that the arbitrators so appointed do
not, within 30 days after the appointment of the later of them to be appointed,
agree on the selection of the sole arbitrator, any party involved in such
dispute may apply to CPR, New York, New York to select the sole arbitrator,
which selection shall be made by such organization within 30 days after such
application. Any arbitrator selected pursuant to this paragraph (c) shall be
disinterested with respect to any of the parties and the matter and shall be
reasonably competent in the applicable subject matter.
(d) The sole arbitrator selected pursuant to paragraph (a), (b) or (c)
above will set a time for the hearing of the matter which will commence no
later than 90 days after the date of appointment cf the sole arbitrator
pursuant to paragraph (a), (b) or (c) above and which hearing will be no longer
than 30 days (unless in the judgment of the arbitrator the matter is
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unusually complex and sophisticated and thereby requires a longer time, in which
event such hearing shall be no longer than 90 days) . The final decision or such
arbitrator will be rendered in writing to the parties not later than 60 days
after the last hearing date, unless otherwise agreed by the parties in writing.
(e) The place of any arbitration will be Atlanta, Georgia, unless
otherwise agreed by the parties.
20.5 Hearings. Within the time period specified in Section 20.4(d),
the matter shall be presented to the arbitrator at a hearing by means of
written submissions of memoranda and verified witness statements, filed
simultaneously, and responses, if necessary in the judgment of the arbitrator
or both the parties. If the arbitrator deems it to be essential to a fair
resolution of the dispute, live cross-examination or direct examination may be
permitted, but is not generally contemplated to be necessary. The arbitrator
shall actively manage the arbitration with a view to achieving a just, speedy
and cost-effective resolution of the dispute, claim or controversy. The
arbitrator may, in his or her discretion, set time and other limits on the
presentation of each party's case, its memoranda or other submissions, and
refuse to receive any proffered evidence, which the arbitrator, in his or her
discretion, finds to be cumulative, unnecessary, irrelevant or of low probative
nature. Except as otherwise set forth herein, any arbitration hereunder will be
conducted in accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes then prevailing. The decision of the arbitrator will be final
and binding on the parties, and judgment thereon may be had and will be
enforceable in any court having jurisdiction over the parties. Arbitration
awards will bear interest at an annual rate of the Prime Rate plus 1% per
annum. To the extent that the provisions of this Agreement and the prevailing
rules of the CPR conflict, the provisions of this Agreement shall govern.
20.6 Discovery and Certain Other Matters.
(a) The arbitrator shall have full power and authority to set rules
for discovery and to determine issues of arbitrability but shall otherwise be
limited to interpreting or construing the applicable provisions of this
Agreement or any Ancillary Agreement, and will have no authority or power to
limit, expand, alter, amend, modify, revoke or suspend any condition or
provision of this Agreement or any Ancillary Agreement; it being understood,
however, that the arbitrator will have full authority to implement the
provisions of this Agreement or any Ancillary Agreement and to fashion
appropriate remedies for breaches of this Agreement (including interim or
permanent injunctive relief); provided that the arbitrator shall not have (i)
any authority in excess of the authority a court having jurisdiction over the
parties and the controversy or dispute would have absent these arbitration
provisions or (ii) any right or power to award punitive or treble damages. It
is the intention of the parties that in rendering a decision the arbitrator
give effect to the applicable provisions of this Agreement and the Ancillary
Agreements and follow applicable law (it being understood and agreed that this
sentence shall not give rise to a right of judicial review of the arbitrator's
award).
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<PAGE> 20
(b) If a party fails or refuses to appear at and participate in an
arbitration hearing after due notice, the arbitrator may hear and determine the
controversy upon evidence produced by the appearing party.
(c) Arbitration costs will be borne equally by each party involved in
the matter, except that each party will be responsible for its own attorney's
fees and other costs and expenses, including the costs of witnesses selected by
such party.
(d) Judgment upon any arbitration award may be entered in any court
having jurisdiction.
(e) Prior to the time at which an arbitrator is appointed, any party
may seek one or more temporary restraining orders in a court of competent
jurisdiction if necessary in order to preserve and protect the status quo.
Neither the request for, or grant or denial cf, any such temporary restraining
order shall be deemed a waiver of the obligation to arbitrate as set forth in
this Agreement and the arbitrator may dissolve, continue or modify any such
order. Any such temporary restraining order shall remain in effect until the
first to occur of the expiration of the order in accordance with its terms or
the dissolution of the order by the arbitrator.
20.7 Law Governing Arbitration Procedures. The interpretation of the
provisions of this Section, only insofar as they relate to the agreement to
arbitrate and any related procedures, shall be governed by the Arbitration Act
and other applicable federal law. In all other respects, the interpretation of
this Agreement shall be governed as set forth in Section 22.2.
Section 21. Further Assurances. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use its reasonable best efforts, prior to, on and after the
Closing Date, to take, or cause to be taken, all actions, and to do, or cause
to be done, all things, reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective
the transactions contemplated by this Agreement and the Ancillary Agreements.
Section 22. Miscellaneous.
22.1 Counterparts; Entire Agreement. (a) This Agreement and each
Ancillary Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party.
(b) This Agreement any Ancillary Agreements and the Schedules hereto
and thereto contain the entire agreement between the parties with respect to
the subject matter hereof, supersede all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter and there are no agreements or understandings
between the parties other than those set forth or referred to herein or
therein.
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22.2 Governing Law. Except as set forth in Section 20.7, this
Agreement and each Ancillary Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Georgia (other than as
to its laws of arbitration which shall be governed under the Arbitration Act or
other applicable federal law pursuant to Section 20.7), irrespective of the
choice of laws principles of the State of Georgia, as to all matters, including
matters of validity, construction, effect, enforceability, performance and
remedies.
22.3 Assignability. This Agreement and each Ancillary Agreement shall
be binding upon and inure to the benefit of the parties to such agreements,
respectively, and their respective successors and assigns; provided, however,
that no party may assign its respective rights or delegate its respective
obligations under this Agreement or any Ancillary Agreement without the express
prior written consent of the other parties.
22.4 Third Party Beneficiaries. Except for the indemnification rights
under this Agreement of any Medaphis Indemnitee or HRI Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any Person except the parties any rights or remedies
under this Agreement, and (b) there are no third party beneficiaries of this
Agreement or any Ancillary Agreement and neither this Agreement nor any
Ancillary Agreement shall provide any third person with any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those
existing without reference to this Agreement or any Ancillary Agreement.
22.5 Notices. All notices or other communications under this Agreement
or any Ancillary Agreement shall be in writing and shall be deemed to be duly
given when (a) delivered in person or (b) deposited in the United States mail
or private express mail, postage prepaid, addressed as follows:
If to Medaphis, to: Secretary
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339
If to HRI, to: Secretary
Healthcare Recoveries, Inc.
1400 Watterson Tower
Louisville, Kentucky 40218
Any party may, by notice to the other party, change the address to which such
notices are to be given.
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22.6 Severability. If any provision of this Agreement or any Ancillary
Agreement or its application to any Person or circumstance is determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions of such agreement, or the application of such provision to
Persons or circumstances or in jurisdictions other than those as to which it
has been held invalid or unenforceable, shall remain in full force and effect
and shall in no way be affected, impaired or invalidated, so long as the
economic or legal substance of the transactions contemplated by such agreement,
as the case may be, is not affected in any manner adverse to any party. Upon
such determination, the parties shall negotiate in good faith in an effort to
agree upon such a suitable and equitable provision to effect the original
intent of the parties.
22.7 Force Majeure. No party shall be deemed in default of this
Agreement or any Ancillary Agreement to the extent that any delay or failure in
the performance of its obligations under this Agreement or any Ancillary
Agreement results from any cause beyond its reasonable control and without its
fault or negligence, such as acts of God, acts of civil or military authority,
embargoes, epidemics, war, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions, labor problems or
unavailability of parts, or, in the case of computer systems, any failure in
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the
time lost by reason of the delay.
22.8 Publicity; Expenses. Prior to the Closing Date, each of HRI and
Medaphis shall consult with each other prior to issuing any press releases or
otherwise making public statements with respect to the IPO, the Separation or
any of the other transactions contemplated hereby. Certain expenses incurred in
connection with the implementation of the IPO and the Separation, as set forth
on Schedule 22.8, shall be for the account of HRI. Except as otherwise
expressly provided for in this Agreement, all other expenses incurred in
connection with the IPO and the Separation shall be for the account of
Medaphis.
22.9 Waivers of Default. Waiver by any party of any default by the
other party of any provision of this Agreement or any Ancillary Agreement shall
not be deemed a waiver by the waiving party of any subsequent or other default,
nor shall it prejudice the rights of the other party.
22.10 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
aggrieved shall have the right to specific performance and injunctive or other
equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including
monetary damages, are inadequate compensation for any loss and that any defense
in any action for specific performance that a remedy at law would be
- 21 -
<PAGE> 23
adequate is waived. Any requirements for the securing or posting of any bond
with such remedy are waived.
22.11 Amendments. No provision of this Agreement or any Ancillary
Agreement shall be deemed waived, amended, supplemented or modified by any
party, unless such waiver, amendment, supplement or modification is in writing
and signed by the authorized representative of the party against whom it is
sought to enforce such waiver, amendment, supplement or modification.
IN WITNESS WHEREOF, the parties have caused this Separation Agreement
to be executed by their duly authorized representatives.
MEDAPHIS CORPORATION
By:
----------------------------
Name:
-----------------------
Title:
----------------------
- 22 -
<PAGE> 24
HEALTHCARE RECOVERIES, INC.
By:
----------------------------
Name:
-----------------------
Title:
----------------------
- 23 -
<PAGE> 25
SCHEDULE 1(A)
See attached copy of the HRI Audited Balance Sheet
<PAGE> 26
SCHEDULE 3.1
See attached copy of the HRI _____________, 1997 Balance Sheet
<PAGE> 27
SCHEDULE 5.1
New HRI Insurance Policies:
Policy Date Bound
------ ----------
<PAGE> 28
SCHEDULE 5.2
Medaphis Blanket Polices:
Extended Discovery Period Coverages Purchased by HRI:
<PAGE> 29
SCHEDULE 5.4
HRI's workers' compensation coverage:
<PAGE> 30
SCHEDULE 7
Pittsburgh telephone assets:
<PAGE> 31
SCHEDULE 8
Liens and Guaranties to be Released:
<PAGE> 32
SCHEDULE 22.8
Certain IPO and Separation expenses allocated to HRI:
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1996 1997 1996
- ----------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY AND FULLY
Weighted average shares outstanding
during the period 72,942 71,665 72,542 71,123
Shares issuable upon assumed exercise
of stock options, less amounts assumed
repurchased under the treasury stock
method - - - -
--------- --------- --------- ---------
Total weighted average common stock
and common stock equivalent outstanding
during the period 72,942 71,665 72,542 71,123
========= ========= ========= =========
Pro forma net income (loss) before extraordinary item $ (79,984) $ (32,599) $ (81,858) $ (30,645)
Extraordinary income on sale of HRI - - 76,391 -
--------- --------- --------- ---------
Pro forma net income (loss) $ (79,984) $ (32,599) $ (5,467) $ (30,645)
========= ========= ========= =========
Pro forma net income (loss) per common share:
Pro forma net income (loss) before extraordinary item $ (1.10) $ (0.45) $ (1.13) $ (0.43)
Extraordinary income on sale of HRI - - 1.05 -
--------- --------- --------- ---------
Pro forma net income (loss) $ (1.10) $ (0.45) $ (0.08) $ (0.43)
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,710
<SECURITIES> 0
<RECEIVABLES> 177,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 199,682
<PP&E> 80,756
<DEPRECIATION> 0
<TOTAL-ASSETS> 735,462
<CURRENT-LIABILITIES> 296,291
<BONDS> 0
0
0
<COMMON> 731
<OTHER-SE> 367,608
<TOTAL-LIABILITY-AND-EQUITY> 735,462
<SALES> 423,162
<TOTAL-REVENUES> 423,162
<CGS> 0
<TOTAL-COSTS> 501,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,417
<INCOME-PRETAX> (98,034)
<INCOME-TAX> (16,176)
<INCOME-CONTINUING> (81,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,391
<CHANGES> 0
<NET-INCOME> (5,467)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
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 disclosures contained in the Quarterly Report on Form
10-Q to which this statement is appended as an exhibit and also include the
following:
FUTURE OPERATING RESULTS. The Company suffered several setbacks in recent
years, including (i) previously described government investigations: (a)
principally focused on the billing and collection practices in two offices of
Medaphis Physician Services Corporation, and (b) concerning the billing
procedures and computerized coding system used in GFS to process claims which
may lead to claims of errors in billing; (ii) difficulties encountered with the
integration of acquired companies; (iii) the restatement of the Company's fiscal
1995 and interim 1996 financial statements; (iv) the discontinuance of the
operations of certain acquired businesses; (v) the abandonment of an extensive
reengineering program that failed to realize the improvement in client service
and reduction of costs that were expected; and (vi) the filing of various
lawsuits and claims made against the Company. Consequently, the Company has
operated during 1997 in what is commonly described as a "turnaround" situation.
In addition to the risks generally associated with any entity in a turnaround
situation, the Company faces certain challenges more specific to its operations,
including (i) integrating several recent acquisitions into its ongoing
operations; (ii) shifting its strategic focus from acquiring compatible
businesses to running those businesses efficiently and profitably; (iii)
successfully operating BSG and integrating it with HIT within Per-Se
Technologies; (iv) managing existing clients' perceptions of the Company's
continued viability and refocusing on the high levels of client service required
to develop new clients and retain existing clients; (v) combating employee
turnover, particularly in light of recent declines in the market value of the
Company's common stock (such declines often play a role in compensation of
employees); and (vi) reevaluating the efficiency of its operations following the
Company's recent abandonment of its reengineering initiative to develop a
unified billing and information hardware and software system across all of its
operating platforms, the costs of which were determined to outweigh the
benefits.
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
<PAGE> 2
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.
The Company has consummated a number of significant acquisitions, many of
which the Company is in the process of integrating into its operations. In
addition, the Company announced its intention to focus on its core business of
delivering business management services and information products to healthcare
providers. 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' results of operations, particularly while such
acquisitions are being integrated into the Company.
The Company's expansion strategy in the past has involved both acquisitions
and internal growth. In February 1997, the Company 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.
During the six months ended December 31, 1996, the Company undertook to
reorganize its wholly owned operating subsidiary, Imonics Corporation
("Imonics"), to integrate the Imonics operations into BSG Corporation ("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, renegotiating 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.
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 Medaphis
Physician Services Corporation, a wholly owned operating subsidiary of the
Company ("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 continue to 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 past twelve
months, the Company experienced slower than expected sales of certain of its
enterprise-wide and departmental scheduling products. There can be no
2
<PAGE> 3
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 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 client/server integration businesses (the "BSG Group") have not
significantly contributed to the Company's overall results of operations for the
past year, and for the nine months ended September 30, 1997 they have negatively
impacted the Company's results. Management has undertaken certain initiatives to
reduce excess costs within the BSG Group and has implemented incentive programs
designed to retain and attract key personnel. There can be no assurances these
actions will have a positive impact on the BSG Group's operations or that they
will be successful in retaining and attracting key personnel.
In August 1997, the Company adopted a plan to combine the operations of the
BSG Group and its HIT Group into Per-Se Technologies. The combination will
assist the Company to attain its operating plan by reducing duplication costs
and creating efficiencies via the combination. There can be no assurance that
the combination will reduce costs, create efficiencies or enhance the BSG
Group's or HIT's business.
In February 1997, the Company 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 business, (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.
RAPID TECHNOLOGICAL CHANGES; EXISTING SYSTEMS AND TECHNOLOGY. The markets
for Medaphis' software products are characterized by rapidly changing
technology, evolving industry standards and frequent new products and product
enhancements. Medaphis' success in its business will depend in part upon its
continued ability to enhance its existing products, to introduce new products on
a timely and cost effective basis to meet evolving client requirements, to
achieve market acceptance for new product offerings and to respond to emerging
industry standards and other technological changes. There can be no assurance
that Medaphis will be able to respond effectively to technological changes or
new industry standards. Moreover, there can be no assurance that competitors of
Medaphis will not develop competitive products, or that any such competitive
products will not have an adverse effect upon Medaphis' operating results. 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; SECOND AMENDED FACILITY. During the nine months
ended September 30, 1997, the Company used approximately $4.8 million in cash
from operating activities. At September 30, 1997, approximately $147.9 million
in borrowings were outstanding under the Company's Second Amended and Restated
Loan Facility (the "Second Amended Facility"). The Second Amended Facility
matures on June 30, 1998 and, as such, all amounts outstanding under the Second
Amended Facility have been classified as current in the Company's September 30,
1997 balance sheet.
3
<PAGE> 4
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. 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 Company's previous 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, capital expenditures and the Company's
ability to declare or pay cash dividends on its common stock. The Second Amended
Facility provides for "base rate" loans that bear interest equal to prime plus
1% so long as certain financial covenants are met. At September 30, 1997, the
Company $147.9 million in borrowings outstanding under the Second Amended
Facility that bore interest at 9.5%.
The Second Amended Facility required mandatory loan commitment reductions
to $200 million and $150 million on July 31, 1997 and January 31, 1998,
respectively. On May 28, 1997, in connection with the divestiture of HRI through
an initial public offering of 100% of its stock, the Company used the net
proceeds from the HRI sale in the amount of approximately $115 million to reduce
the Company's borrowings under the Second Amended Facility and the loan
commitment under the Second Amended Facility to $170 million. Subsequently, the
Company further reduced the loan commitment under the Second Amended Facility to
$168 million. On November 19, 1997, the Company entered into the First
Modification of the Second Amended Facility (the "First Modification"), which
among other things: (1) waived any defaults or events of default which might
otherwise result from the restatement of the Company's financial statements as
reported in its Form 10-Q for the quarter ended September 30, 1997 or any
withdrawal by the Company's former independent accountants of its opinions on or
certifications of the Company's annual financial statements for its 1995 and
1996 fiscal years; (2) eliminated the step-down in loan commitments to $150
million scheduled to occur on January 31, 1998; and (3) reinstated the stated
maturity of the Second Amended Facility to June 30, 1998, which maturity date
may be extended or otherwise amended pursuant to the agreement. The First
Modification also establishes certain financial covenants for the fiscal year
1997 and for monthly and quarterly periods in fiscal year 1998.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the September 30, 1997 balance sheets. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $51.3 million of working
capital, which included $6.7 million of cash at September 30, 1997. Also at
September 30, 1997, the Company had approximately $21 million available under
the Second Amended Facility. The Company used $4.8 million of cash for operating
activities during the nine months ended September 30, 1997 as compared with $7.5
million during the nine months ended September 30, 1996. The increase in the
Company's operating cash flow resulted primarily from the collection of
outstanding receivables and management's cash control initiatives.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of Medaphis' voting common stock (the
"Common Stock") on each of January 1, 1998 and April 1, 1998, provided that the
Second Amended Facility has not been repaid and terminated prior to such vesting
date.
The Company continues to explore financing resources to refinance the
Second Amended Facility in order to provide longer term liquidity on more
customary market terms and conditions and to assure that the warrants will not
vest. These refinancing efforts include, but are not necessarily limited to: (1)
the previously announced discussions with its existing lending syndicate for a
longer term committed facility and increased liquidity; and (2) a $250 million
refinancing package, the components of which are a $100 million senior bank
financing facility and the completion of an offering of at least $125 million in
senior subordinated notes. The Company previously announced that the senior bank
refinancing commitment letter expired on November 15, 1997 and the planned
closing of the $250 million refinancing package would be delayed beyond November
30, 1997.
4
<PAGE> 5
While these refinancing efforts are continuing, the Company can give no
assurance that it will be able to refinance or otherwise pay in full the amounts
owed under the Second Amended Facility prior to either of the warrant vesting
dates on January 1, 1998 and April 1, 1998, prior to the maturity date of June
30, 1998, or at all. If the Company is unsuccessful in refinancing the Second
Amended Facility, the Company [may] attempt to generate the cash needed to repay
the borrowings under the Second Amended Facility through the sale of one or more
of its assets; however, the Company does not believe that the proceeds of asset
divestitures alone would be sufficient to both repay the Second Amended Facility
and provide sufficient operating liquidity for the Company's operating needs.
Based on facts and circumstances presently known to the Company, the
Company believes that the current unused availability under the existing credit
agreement, together with the continuation of stringent cash management policies,
should provide the Company with sufficient liquidity pending the satisfactory
renegotiation of the financing alternatives presently being pursued by the
Company to resolve longer term liquidity needs.
While the Second Amended Facility extends through June 30, 1998 without
required reduction, the Company will be required to renegotiate the Second
Amended Facility prior to maturity, obtain alternative financing, issue equity,
or generate sufficient proceeds from the sale of assets in order to provide
adequate liquidity for the Company's 1998 business plan. However, there can be
no assurance that the Company's existing lenders will agree to renegotiate the
Second Amended Facility. The Company may be required to consider alternative
financing arrangements, equity transactions, or both, which could prove costly
or involve further dilution to the Company's stockholders. There can be no
assurance that alternative financing arrangements, equity transactions or asset
sales will be available to the Company on acceptable terms or at all.
This summary of certain terms of the Second Amended Facility and the
warrants are subject to the terms of the agreements which have been incorporated
by reference as exhibits to the Company's Annual Report on Form 10-K filed March
31, 1997 (the "Form 10-K"), the Waiver Letter dated September 18, 1997 filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the Quarterly
Period ended September 30, 1997 (the "Third Quarter 10-Q"), the Waiver Letter
dated October 24, 1997 incorporated by reference as an exhibit to the Third
Quarter 10-Q and the First Modification of Second Amended and Restated Credit
Agreement filed as an exhibit to the Third Quarter 10-Q.
PENDING FEDERAL INVESTIGATION; PUTATIVE CLASS ACTION LAWSUITS. Numerous
federal and state civil and criminal laws govern medical billing and collection
activities. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally from
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices. Although the
precise scope of the 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 billing and collection
practices in the Designated Offices. No charges or claims by the government have
been made. Although the Company continues to believe that the principal focus of
the investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the investigation will not
expand to other offices, that the investigation will be resolved promptly, that
additional subpoenas or search warrants will not be received by Medaphis or MPSC
or that the investigation will not have a material adverse effect on the
Company. The Company recorded charges of $12 million in the third quarter of
1995, $2 million in the fourth quarter of 1996 and a credit of $2.8 million in
the
5
<PAGE> 6
third quarter of 1997, solely for legal and administrative fees, costs and
expenses it anticipates incurring in connection with the investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the investigation. The charges are
intended to cover only the anticipated expenses of the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors have caused overpayments on certain claims submitted on behalf of clients
in the State of California. The full extent of overpayments by carriers and
beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed to settle this action on a class-wide basis
for $4.75 million, subject to court approval (the "1995 Class Action
Settlement"). The 1995 Class Action Settlement included the related putative
class action lawsuit in the Superior Court of Cobb County, Georgia, described
more fully below. On October 18, 1997, the court certified a class for
settlement purposes, approved the settlement and entered final judgment
dismissing the action with prejudice. One of Medaphis' directors and officers'
liability insurance carriers has paid $3.7 million of the 1995 Class Action
Settlement. The Company accrued approximately $1.2 million in the quarter ended
December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
As originally disclosed in its Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily
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produce records, and GFS is complying with that request. Although the precise
scope and subject matter of the investigation are not known to the Company,
Medaphis believes that the investigation, which is being participated in by
federal law enforcement agencies having both civil and criminal authority,
involves GFS's billing procedures and the computerized coding system used in
Jacksonville and Grand Rapids to process claims and may lead to claims of errors
in billing. There can be no assurance that the investigation will be resolved
promptly or that the investigation will not have a material adverse effect upon
Medaphis. No charges or claims by the government have been made. Currently, the
Company has recorded charges of $2 million and $1 million in the second and
third quarters of 1997, respectively, solely for legal and administrative fees,
costs and expenses in connection with the investigation, which charges do not
include any provision for fines, penalties, damages, assessments, judgments or
sanctions that may arise out of this matter.
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.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended 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"). The
Consolidated Second Amended Complaint seeks compensatory and rescissory damages,
as well as fees, interest and other costs. On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. Discovery
currently is proceeding. 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 such 1933
Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (to be
paid by the Company's directors' and officers' liability insurance carriers),
3,355,556 shares of Medaphis Common Stock, and warrants to purchase 5,309,523
shares of Medaphis Common Stock at $12 per share for a five-year period. The
Memorandum of Understanding also includes: (i) an obligation on the part of
Medaphis to contribute up to 600,000 additional shares of Common Stock to the
settlement under certain conditions if the aggregate value of the Medaphis
Common Stock proposed to be issued in the settlement falls below $30.2 million
during a specified time period; and (ii) certain anti-dilution rights in favor
of plaintiffs with respect to certain future issuances of shares of Medaphis
Common Stock or warrants or rights to acquire Medaphis Common Stock to settle
existing civil litigation and claims currently pending or asserted against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The aggregate value of the Medaphis Common Stock during
the specified time period is now known, and, as a result, all of the additional
600,000 shares of Medaphis Common Stock will be included in the settlement. The
Memorandum of Understanding also contains other conditions including, but not
limited to, consent and approval of the Company's insurance carriers and the
insurance carriers' payment of the cash portion of the settlement, the Company's
receiving assurances from its independent accountants that the proposed
settlement will not adversely affect pooling-of-interests accounting treatment
on previous acquisitions (which assurances have been received by the Company),
the execution of mutually acceptable settlement papers and the approval of the
settlement by the
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court. The Company recorded a $52.5 million charge in the quarter ended
September 30, 1997 for this settlement.
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 behalf of the Company. 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. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss 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, 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. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the 1933 Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
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. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for
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the Southern District of New York arising out of Medaphis' acquisition of
Medical Management Sciences, Inc. ("MMS") in December of 1995. The complaint is
brought on behalf of all former shareholders of MMS who exchanged their MMS
holdings for unregistered shares of Medaphis Common Stock. In general, the
complaint alleges both common law fraud and violations of the federal securities
laws in connection with the merger. In addition, the complaint alleges breaches
of contract relating to the merger agreement and a registration rights
agreement, as well as tortious interference with economic advantage. The
plaintiffs seek rescission of the merger agreement and the return of all MMS
shares, as well as damages in excess of $100 million. Additionally, plaintiffs
seek to void various non-compete covenants and contract provisions between
Medaphis and plaintiffs. Defendants have filed a motion to dismiss the
complaint. Discovery has been stayed pending resolution of the motion to
dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks recission, recissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
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. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. 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. Further, there can be no assurance 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, or
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
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penalties to other federal healthcare programs, and creating additional criminal
offenses relating to "healthcare benefit programs," which are defined to include
both public and private payor programs. The Health Insurance Act also provides
for forfeitures and asset freezing orders in connection with such healthcare
offenses. Civil monetary penalties and program exclusion authority available to
the OIG also have been expanded. The Health Insurance Act contains provisions
for instituting greater coordination of federal, state and local enforcement
agency resources and actions through the OIG. There also have been several
recent healthcare reform proposals which have included an expansion of the
anti-kickback laws to include referrals of any patients regardless of payor
source.
In addition 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 between 25% and 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
between $5,000 and $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 August 1997, Congress enacted the Balanced Budget Act of 1997 (the
"Budget Act"). The Medicare-related provisions of the Budget Act are designed to
reduce Medicare expenditures over the next five years by $115 billion, compared
to projected Medicare expenditures before adoption of the Budget Act. The
Congressional Budget Office projected in July 1997 that $43.8 billion of the
reductions would come from reduced payments to hospitals, $21.8 billion from
increased enrollment in managed care plans and $11.7 from reduced payments to
physicians and ambulatory care providers. The five-year savings in projected
Medicare payments to physicians and hospitals would be achieved under the Budget
Act by reduced fee-for-service reimbursement and by changes in managed care
programs designed to increase enrollment of Medicare beneficiaries in managed
care plans. The increase in Medicare enrollment in managed care plans would be
achieved in part by allowing provider-sponsored organizations and preferred
provider organizations to compete with Medicare health maintenance organizations
for Medicare enrollees. Medaphis cannot predict the effect of the Budget Act 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
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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.
YEAR 2000 COMPLIANCE. The Company has numerous computer systems and
software programs which were developed employing six digit date structures.
Where date logic requires the year 2000 or beyond, such date structures may
produce inaccurate results. There can be no assurance that the Company will be
successful in implementing a program to comply with year 2000 requirements. Each
of the Company's systems has a solution that is potentially unique and often
dependent on third-party software providers and developers. A failure on the
part of the Company to ensure that its computer systems are year 2000 compliant
could have a material adverse effect on the Company's operations.
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.
Restatement of Financial Statements; Accounting Issues
In October 1996, the Company restated its financial results for the year
and three months ended December 31, 1995. This restatement related primarily to
a license agreement entered into by the Company's wholly-owned operating
subsidiary, Imonics Corporation ("Imonics"), in December 1995 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,
resulted 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,
the Company's restated results for the year ended December 31, 1995 was a net
loss of $8.5 million as compared with a previously reported net loss of $3.4
million. In addition, the restated results for the quarter ended December 31,
1995 reflected a net loss of $1.1 million, as compared with a previously
reported net income of $4.0 million.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the issuance of Deloitte & Touche's audit report dated March 31,
1997 on the Company's financial statements for the year ended December 31, 1996,
the Company recorded all adjustments to its interim financial statements deemed
appropriate and consequently restated such interim financial statements, so that
such interim financial statements, taken as a whole, presented fairly in all
material respects the Company's financial position, results of operations, and
cash flows for each interim fiscal period during the fiscal year ended December
31, 1996, and in conformity with generally accepted accounting principles. All
adjustments were for interim period transactions and had no effect on the
Company's 1996 annual pro forma net loss.
The reports of Deloitte & Touche on the Company's financial statements for
the fiscal year ended December 31, 1996, dated March 31, 1997, included an
unqualified opinion with an explanatory paragraph
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that stated Deloitte & Touche's conclusion that uncertainty then existed
regarding the ability of the Company to continue as a going concern due to a
mandatory commitment reduction in the Company's Existing Credit Facility that
was required by July 31, 1997. However, the Company satisfied such commitment
reduction on May 28, 1997 by applying the proceeds of the sale of HRI.
On June 30, 1997, following a competitive review and request for proposal
process in which the Company's present auditors and a number of nationally
recognized accounting firms participated, the Company notified Deloitte & Touche
that it had been dismissed as the Company's principal accountants and that the
Company intended to engage new principal accountants. This action was
recommended by the Audit Committee of the Company's Board of Directors, and the
Board approved such change on June 27, 1997. On July 9, 1997, the Company
engaged Price Waterhouse LLP as the Company's new principal accountants.
There can be no assurance that there will not be additional adjustments to
or reserves taken in the Company's financial statements in respect of the
pending or future lawsuits and government investigations.
There can be no assurance that there will not be any additional
restatements of the Company's financial statements as a result of the Company's
change in auditors and their continued review of the Company's financial
statements. Such restatement could relate to items which may be material,
including the use of pooling-of-interest accounting in respect of prior
acquisitions by the Company.
NASD ACTIONS. There can be no assurances that the NASD will not suspend
trading in the Company's common stock or de-list the Company's Common Stock as a
result of either the restatements described in this 10-Q or the withdrawal by
Deloitte & Touche LLP of its opinions in respect of the financial statements for
the Company's 1994, 1995 and 1996 fiscal years.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the investigation of the billing practices of certain offices of
MPSC by the United States Attorney's Office for the Central District of
California, the Company's liquidity and financial resources, divestiture of
businesses, the ongoing governmental investigations, 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 Statements filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 and as Exhibit 99.6 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
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