<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 JUNE 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>
<S> <C>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive
offices)
</TABLE>
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF CLASS AT AUGUST 8, 1997
- -------------- ------------------
<S> <C>
Common Stock $0.01 Par Value........................... 72,905,294 Shares
Non-voting Common Stock $0.01 Par Value................ 0 Shares
</TABLE>
================================================================================
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and
six months ended June 30, 1997 and 1996................ 1
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996...................................... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996........................... 3
Notes to Consolidated Financial Statements................ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
Part II: OTHER INFORMATION
Legal Proceedings......................................... II-1
Changes in Securities..................................... II-4
Submission of Matters to a Vote of Security Holders....... II-5
Other Information......................................... II-5
Exhibits and Reports on Form 8-K.......................... II-6
Index to Exhibits......................................... II-9
</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.
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------------- -------- --------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 7) SEE NOTE 7)
<S> <C> <C> <C> <C>
Revenue......................................... $147,970 $169,719 $295,516 $331,968
-------- -------- -------- --------
Salaries and wages.............................. 92,386 95,222 185,964 186,952
Other operating expenses........................ 37,781 39,889 78,023 79,224
Depreciation.................................... 7,050 6,840 14,035 12,780
Amortization.................................... 4,665 5,108 9,355 10,217
Interest expense, net........................... 6,056 2,630 12,171 4,735
Restructuring and other charges................. 2,000 16,889 2,000 16,831
-------- -------- -------- --------
Total expenses........................ 149,938 166,578 301,548 310,739
Income (loss) before income taxes and
extraordinary item............................ (1,968) 3,141 (6,032) 21,229
Income tax (benefit) expense.................... (1,720) 6,238 (3,945) 13,667
-------- -------- -------- --------
Income (loss) before extraordinary item......... (248) (3,097) (2,087) 7,562
Extraordinary income on sale of HRI, net of
tax........................................... 76,391 -- 76,391 --
-------- -------- -------- --------
Net income (loss)..................... 76,143 (3,097) 74,304 7,562
Pro forma income tax adjustments................ -- -- -- 354
-------- -------- -------- --------
Pro forma net income (loss)........... $ 76,143 $ (3,097) $ 74,304 $ 7,916
======== ======== ======== ========
Pro forma net income (loss) per common share:
Pro forma net income (loss) before
extraordinary item......................... $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI........... 1.01 -- 1.02 --
-------- -------- -------- --------
Pro forma net income (loss)................... $ 1.01 $ (0.04) $ 0.99 $ 0.11
======== ======== ======== ========
Weighted average shares outstanding............. 75,149 71,167 74,983 74,786
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 3,958 $ 7,631
Restricted cash........................................... 16,059 19,568
Accounts receivable, billed............................... 100,651 99,823
Accounts receivable, unbilled............................. 90,409 94,057
Deferred tax asset........................................ -- 36,177
Other..................................................... 12,086 12,129
-------- --------
Total current assets.............................. 223,163 269,385
Property and equipment...................................... 87,756 97,850
Deferred tax asset.......................................... 55,535 42,379
Intangible assets........................................... 379,895 389,033
Other....................................................... 19,188 16,977
-------- --------
$765,537 $815,624
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 11,880 $ 11,765
Accrued compensation...................................... 29,786 30,332
Accrued expenses.......................................... 76,752 95,680
Current portion of long-term debt......................... 150,224 55,975
Deferred tax liability.................................... 9,312 --
-------- --------
Total current liabilities......................... 277,954 193,752
Long-term debt.............................................. 8,993 215,752
Other obligations........................................... 8,215 13,830
-------- --------
Total liabilities................................. 295,162 423,334
-------- --------
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 72,503 in 1997
and 71,705 in 1996..................................... 725 717
Common stock, non voting, $0.01 par value, 600 authorized
in 1997 and 1996; none issued.......................... -- --
Paid-in capital........................................... 526,187 522,491
Accumulated deficit....................................... (56,537) (130,749)
-------- --------
470,375 392,459
Less treasury stock, at cost -- 16 shares in 1996......... -- 169
-------- --------
Total stockholders' equity........................ 470,375 392,290
-------- --------
$765,537 $815,624
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
-------- -------------
(AS RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 74,304 $ 7,562
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization.......................... 23,390 22,997
Gain on sale of HRI.................................... (76,391) --
(Gain) loss on sale of property and equipment.......... (34) 343
Deferred income taxes.................................. (3,078) 13,666
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash.......................... (10,449) (958)
Increase in accounts receivable, billed.............. (3,148) (27,513)
Decrease (increase) in accounts receivable,
unbilled............................................ 3,647 (17,842)
Increase (decrease) in accounts payable.............. 828 (16,190)
Increase in accrued compensation..................... 1,602 1,472
Decrease in accrued expenses......................... (13,248) (6,173)
Other, net........................................... (3,024) 1,172
-------- -------
Net cash used for operating activities............ (5,601) (21,464)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (5,768) (12,737)
Purchases of property and equipment....................... (7,692) (34,541)
Proceeds from sale of HRI, net............................ 126,375 --
Proceeds from sale of property and equipment.............. 3,644 18
Software development costs................................ (2,877) (26,382)
-------- -------
Net cash provided by (used for) investing
activities...................................... 113,682 (73,642)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 3,651 9,673
Proceeds from borrowings.................................. 42,492 96,749
Principal payments of long-term debt...................... (154,889) (25,612)
Other..................................................... (3,008) 3,813
-------- -------
Net cash (used for) provided by financing
activities...................................... (111,754) 84,623
-------- -------
CASH:
Net change................................................ (3,673) (10,483)
Balance at beginning of period............................ 7,631 18,979
-------- -------
Balance at end of period.................................. $ 3,958 $ 8,496
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest............................................... $ 7,128 $ 7,005
Income taxes........................................... 1,125 5,684
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... -- 2,700
Additions to capital lease obligations................. -- 12,620
Common stock issued upon conversion of subordinated
debentures............................................ -- 63,375
</TABLE>
See notes to consolidated financial statements.
3
<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. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K filed
March 31, 1997 ("Form 10-K").
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. On
March 31, 1997, the Company's independent auditors noted in a modifying fourth
paragraph to their unqualified independent report on the Company's financial
statements included in the Form 10-K that, because the Company's plans to divest
of certain assets to generate funds to meet scheduled 1997 amortization
requirements did not then include binding contracts to dispose of these assets,
and because no other contractual arrangements were in place to refinance or
raise additional funds to otherwise satisfy such required debt reduction,
substantial doubt was raised about the Company's ability to continue as a going
concern. As previously discussed in the Company's Form 10-K, the Company and its
current lenders contemplated that the contractual amortization of loan
commitments under the Second Amended and Restated Loan Facility (the "Second
Amended Facility") would be accomplished through asset divestitures or a
refinancing since operating cash flow was never intended to be utilized for this
purpose and would be insufficient to meet these obligations. On May 28, 1997,
Medaphis reduced the Company's loan commitment under the Second Amended Facility
to $170 million, which more than satisfied the required loan commitment
reduction for July 31, 1997.
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 and increased
the revolving line of credit from $250 million to $285 million. 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
accompanying June 30, 1997 balance sheet. The Second Amended Facility may be
extended or otherwise amended pursuant to the agreement. Borrowings under the
Second Amended Facility are secured by substantially all of the Company's assets
and are guaranteed by substantially all of the Company's subsidiaries. The
Second Amended Facility effectively refinanced the loans outstanding under the
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. The Second Amended Facility
required mandatory loan commitment reductions to $200 million and $150 million
on July 31, 1997 and January 31,
4
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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
Healthcare Recoveries, Inc. ("HRI") and to evaluate alternatives for its
client/server integration businesses (the "BSG Group"). 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 $115 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 $170 million, which more than satisfied the required
reduction for July 31, 1997. At June 30, 1997, the Company had $137 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 voting common stock (the "Common
Stock") of the Company 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. The Company has not allocated any value to these warrants
because the warrants only vest if amounts are outstanding or commitments are not
terminated under the Second Amended Facility on December 31, 1997. Management
believes the Company will 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.
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. 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. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance 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, solely for 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.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
5
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
"Consolidated Complaint"). On April 11, 1996, certain of the named plaintiffs to
the Consolidated Complaint voluntarily dismissed with prejudice all of their
claims. As a result of these dismissals, the Consolidated Complaint no longer
contains any claims based on the Securities Act of 1933, as amended (the "1933
Act"), and the Company's underwriters and outside directors are no longer named
as defendants. The plaintiffs and the defendants have reached an agreement 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
would also include the related putative class action lawsuit currently pending
in the Superior Court of Cobb County, Georgia, described more fully below. The
court conditionally has certified a class for settlement purposes and has
scheduled a hearing for October 6, 1997 to determine whether to approve the
settlement and enter final judgment dismissing the action with prejudice. The
Company has reached agreement with one of its directors and officers' liability
insurance carriers to fund $3.7 million of the 1995 Class Action Settlement. The
Company accrued approximately $1.2 million in the quarter ending December 31,
1996 to fund the anticipated balance of the 1995 Class Action Settlement and to
pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages and costs. To date, defendants have not been served with
this complaint. Pursuant to the consummation of the 1995 Class Action
Settlement, the claims in this state action also will be settled. Pursuant to
the settlement agreement, plaintiffs have filed a motion to dismiss this action
without prejudice.
As originally disclosed in the 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 calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual 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, 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. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for 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
6
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 January 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"). 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 (payable
by the Company's 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 to 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 against the Company, subject to a 5.0 million share basket below which
there will be no dilution adjustments. 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 treatment of class members
in connection with the proposed settlement will not jeopardize
pooling-of-interests accounting treatment on previous acquisitions, the
execution of mutually acceptable settlement papers and the approval of the
settlement by the court. While the Company is presently unable to determine
when, or if, the contingencies in the Memorandum of Understanding may be
resolved and a charge recorded, management presently anticipates that the
Memorandum of Understanding should not have a material adverse effect on: (i)
the Company's current efforts to refinance the Second Amended Facility; or (ii)
the Company's operating cash flow or liquidity position, provided that any such
charge, if and when recorded, does not then violate the covenants of the Second
Amended Facility or any then applicable debt facility or such covenant
violations, if any, are waived.
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 certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in 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
7
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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. The demurrer was denied on February 5, 1997.
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 officers
of Medaphis. These newly added defendants have not yet 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). 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
new parties, including former officers of Medaphis. Defendants have not yet
responded to 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 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
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
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
8
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring charges......................... $ -- $ 4,250 $ -- $ 6,349
Legal costs................................... 2,000 -- 2,000 --
Pooling charges............................... -- 12,364 -- 10,207
Other......................................... -- 275 -- 275
------ ------- ------ -------
$2,000 $16,889 $2,000 $16,831
====== ======= ====== =======
</TABLE>
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for the administrative fees, costs and expenses it has incurred and plans to
incur in connection with the federal inquiry of the billing procedures at GFS.
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Automation Atwork Companies............................... $ -- $ -- $ -- $ (408)
HRI....................................................... -- -- -- (765)
Consort Technologies, Inc................................. -- -- -- (526)
MMS....................................................... -- -- -- (658)
Intelligent Visual Computing, Inc. ("IVC")................ -- -- -- 200
Rapid Systems Solutions, Inc. ("Rapid Systems")........... -- 900 -- 900
BSG....................................................... -- 6,214 -- 6,214
HDS....................................................... -- 5,250 -- 5,250
------- ------- ------- -------
$ -- $12,364 $ -- $10,207
======= ======= ======= =======
</TABLE>
9
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
A description of the type and amount of exit costs paid in the six months
ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
RESERVE PAID RESERVE
BALANCE THROUGH BALANCE
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease termination costs.................................. $ 7,514 $2,635 $4,879
Severance................................................ 2,748 1,831 917
Other.................................................... 1,222 876 346
------- ------ ------
$11,484 $5,342 $6,142
======= ====== ======
</TABLE>
5. INCOME TAXES
In 1996, Medaphis acquired IVC, Rapid Systems and BSG in merger
transactions, which were accounted for as pooling-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 six months ended June 30, 1996.
6. LINES OF BUSINESS
The Company operates in three major lines of business: Services (providing
healthcare transaction processing services to physicians, hospitals and payors),
BSG Group (client/server information technology services), and HIT (healthcare
information technology and hardware sales). Total revenue includes only sales to
unaffiliated customers as reported in the Company's consolidated statements of
operations. Operating profit (loss) represents total revenue less operating
expenses excluding interest and restructuring and other charges. Corporate items
include general corporate expenses. Corporate assets consist primarily of cash,
deferred income taxes, deferred financing costs, fixed assets, miscellaneous
prepaids and receivables. Information concerning operations in these lines of
business is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Services.................................... $105,618 $105,919 $209,701 $211,553
BSG Group................................... 21,888 35,376 45,698 76,639
HIT......................................... 20,486 28,796 40,176 45,008
Corporate and eliminations.................. (22) (372) (59) (1,232)
-------- -------- -------- --------
$147,970 $169,719 $295,516 $331,968
======== ======== ======== ========
</TABLE>
10
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating profit (loss):
Services.................................... $ 11,513 $ 7,173 $ 18,915 $ 14,391
BSG Group................................... (765) 4,924 (491) 19,165
HIT......................................... 5,377 15,743 8,195 19,340
Corporate................................... (10,037) (5,180) (18,480) (10,101)
-------- -------- -------- --------
$ 6,088 $ 22,660 $ 8,139 $ 42,795
======== ======== ======== ========
Interest expense, net......................... 6,056 2,630 12,171 4,735
-------- -------- -------- --------
Restructuring and other charges:
Services.................................... 2,000 3,323 2,000 3,999
BSG Group................................... -- 8,316 -- 8,516
HIT......................................... -- 5,250 -- 4,316
Corporate................................... -- -- -- --
-------- -------- -------- --------
2,000 16,889 2,000 16,831
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... $ (1,968) $ 3,141 $ (6,032) $ 21,229
======== ======== ======== ========
Depreciation and amortization:
Services.................................... $ 8,956 $ 8,263 $ 17,548 $ 15,749
BSG Group................................... 1,129 1,956 2,174 3,700
HIT......................................... 1,259 1,358 2,969 2,844
Corporate................................... 371 371 699 704
-------- -------- -------- --------
$ 11,715 $ 11,948 $ 23,390 $ 22,997
======== ======== ======== ========
Capital expenditures:
Services.................................... $ 2,807 $ 8,430 $ 4,916 $ 23,004
BSG Group................................... 487 5,042 1,096 8,379
HIT......................................... 646 897 1,311 1,863
Corporate................................... 352 705 369 1,295
-------- -------- -------- --------
$ 4,292 $ 15,074 $ 7,692 $ 34,541
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Identifiable assets:
Services.................................................. $553,676 $594,738
BSG Group................................................. 40,520 51,972
HIT....................................................... 97,179 84,298
Corporate................................................. 74,162 84,616
-------- --------
$765,537 $815,624
======== ========
</TABLE>
11
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
7. RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE- AND
SIX-MONTH PERIODS ENDED JUNE 30, 1996
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 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. These errors and irregularities consisted primarily of the
following: (1) incorrect quarterly recording of revenues and the related costs
and expenses for certain contracts; (2) incorrect quarterly recording of certain
liabilities for employee bonuses and related expenses; (3) certain costs and
expenses of certain acquired companies, which were later determined not to be
properly recordable, were recognized by those companies in periods prior to
their acquisitions, resulting in an overstatement of the Company's earnings
subsequent to those acquisitions; and (4) incorrect depreciation of certain
assets related to the Company's comprehensive reengineering and consolidation
project.
The Company has determined that all appropriate adjustments have been made
to its interim financial statements. All adjustments were for inter-period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue........................................ $175,193 $169,719 $338,820 $331,968
Salaries and wages............................. 92,663 95,222 183,228 186,952
Other Operating expenses....................... 38,799 39,889 78,153 79,224
Depreciation................................... 5,324 6,840 10,275 12,780
Amortization................................... 4,826 5,108 9,735 10,217
Income before income taxes..................... 13,776 3,141 35,369 21,229
Net income (loss).............................. 3,337 (3,097) 16,062 7,562
Pro forma net income (loss).................... 3,337 (3,097) 16,416 7,916
Pro forma net income (loss) per common share... $ 0.04 $ (0.04) $ 0.22 $ 0.11
</TABLE>
12
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
8. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board 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 be adopted early. The following table presents basic
and diluted weighted average shares outstanding and a calculation of the pro
forma net income (loss) per share using the guidelines of SFAS No. 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding.............. 72,443 71,167 72,339 70,795
======= ======= ======= =======
Shares of common stock assumed issued upon exercise of
stock options using the treasury stock method as it
applies to the computation of diluted earnings per
share................................................ -- -- -- 3,991
------- ------- ------- -------
Diluted weighted average shares outstanding............ 72,443 71,167 72,339 74,786
======= ======= ======= =======
Pro forma net income (loss) before extraordinary
item................................................. $ (248) $(3,097) $(2,087) $ 7,916
Extraordinary income on sale of HRI.................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................ $76,143 $(3,097) $74,304 $ 7,916
======= ======= ======= =======
Basic earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI............... 1.05 -- 1.06 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.05 $ (0.04) $ 1.03 $ 0.11
======= ======= ======= =======
Diluted earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI............... 1.05 -- 1.06 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.05 $ (0.04) $ 1.03 $ 0.11
======= ======= ======= =======
</TABLE>
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company") provides business management
services and information products primarily to healthcare providers. Medaphis'
healthcare services are designed to assist its clients with the business
management functions associated with the delivery of healthcare services,
thereby permitting physicians and hospitals to focus on providing quality
medical services to their patients. Medaphis' healthcare information systems
include patient-centered clinical information management systems and
enterprise-wide patient and employee scheduling systems. These systems are
designed to improve efficiency and quality of care within hospitals and emerging
integrated healthcare delivery systems. Medaphis currently provides business
management systems and services to approximately 20,700 physicians and over
2,700 hospitals throughout the United States and systems integration and
services in the United States and abroad.
In February 1997, Medaphis announced the implementation of its 1997 fiscal
year business plan which is focused on Medaphis' core business and comprised of
the five following components: (1) exiting non-core businesses, such as
Healthcare Recoveries, Inc. ("HRI"), which Medaphis completed on May 28, 1997
through an initial public offering of 100% of HRI's stock; (2) achieving
improved predictability of results through enhanced management accountability
and controls; (3) reducing costs and increasing efficiencies; (4) emphasizing
customer service; and (5) implementing cross-selling initiatives.
Medaphis' business is impacted by, 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 of services purchased by government
agencies and others but not paid by them (i.e., "cost shifting"). The increasing
complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increased receivables and bad debt levels and higher business office costs.
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. Management believes that these
trends have and could continue to adversely affect the rate of the revenue
growth and profit margins of the Company's operations.
14
<PAGE> 17
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1997 1996 1997 1996
----- ----------- ----- -----------
<S> <C> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 100.0% 100.0%
Salaries and wages.............................. 62.4 56.1 62.9 56.3
Other operating expenses........................ 25.5 23.5 26.4 23.9
Depreciation.................................... 4.8 4.0 4.7 3.8
Amortization.................................... 3.2 3.0 3.2 3.1
Interest expense, net........................... 4.1 1.5 4.1 1.4
Restructuring and other charges................. 1.4 10.0 0.7 5.1
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item............................ (1.4) 1.9 (2.0) 6.4
Income tax (benefit) expense.................... (1.2) 3.7 (1.3) 4.1
----- ----- ----- -----
Income (loss) before extraordinary item......... (0.2) (1.8) (0.7) 2.3
Extraordinary income on sale of HRI, net of
tax........................................... 51.6 -- 25.9 --
----- ----- ----- -----
Net income (loss)............................... 51.4 (1.8) 25.2 2.3
Pro forma adjustments........................... -- -- -- 0.1
----- ----- ----- -----
Pro forma net income (loss)..................... 51.4% (1.8)% 25.2% 2.4%
===== ===== ===== =====
</TABLE>
Revenue. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- ------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Services........................ $105,618 $105,919 $209,701 $211,553
BSG Group....................... 21,888 35,376 45,698 76,639
HIT............................. 20,486 28,796 40,176 45,008
Corporate and eliminations...... (22) (372) (59) (1,232)
-------- -------- -------- --------
$147,970 $169,719 $295,516 $331,968
======== ======== ======== ========
</TABLE>
Services' revenue for both the three- and six-month periods ended June 30,
1997 has remained at relatively the same level from the comparable periods in
1996 due to the industry conditions and revenue pressures on the operations
described above. The 1997 Services amounts only include the results of HRI
through May 28, 1997, the date of the divestiture, thus negatively impacting the
1997 revenue amount by $3.4 million.
The 1996 client/server integration business (the "BSG Group") results
include the results of the Company's wholly owned operating subsidiary, Imonics
Corporation ("Imonics"), which was shut down at the end of 1996. Imonics
generated $5.8 million and $22.3 million of revenue during the three- and
six-month periods ended June 30, 1996, respectively. Excluding the Imonics
revenue, the BSG Group's revenue decreased 26.0% and 15.9% for the three- and
six-month periods ended June 30, 1997, as compared with the three- and six-month
periods ended June 30, 1996, respectively. Over the past year, the BSG Group has
experienced higher than normal attrition and turnover among its personnel. This
attrition and turnover has hindered the BSG Group's ability to sell new
client/server system integration services as well as its ability to provide
their services in the most cost efficient manner.
HIT's revenue decreased 28.9% and 10.7% for the three- and six-month
periods ended June 30, 1997, as compared with the three- and six-month periods
ended June 30, 1996, respectively. These decreases are primarily the result of
Health Data Sciences, Inc. ("HDS") recording $14.5 million of license fees in
the
15
<PAGE> 18
quarter ended June 30, 1996 from the sale of four large Ulticare licenses. The
decreases in the license fees generated by HDS were partially offset by stronger
sales of the Automation Atwork Companies' ("Atwork") information systems.
Salaries and Wages. Salaries and wages increased to 62.4% of revenue in
the second quarter of 1997 from 56.1% in the second quarter of 1996 and
increased to 62.9% of revenue in the six-month period ended June 30, 1997 from
56.3% in the same period of 1996. The increases in salaries and wages, as a
percentage of revenue, are primarily due to the decreases in the Company's
revenue. The Company has not reduced its employment levels to coincide with the
decrease in revenue growth because of a renewed emphasis on client service and
expected growth in its technology divisions.
Other Operating Expenses. Other operating expenses increased to 25.5% of
revenue in the second quarter of 1997 compared to 23.5% in the second quarter of
1996 and increased to 26.4% for the six-month period ended June 30, 1997 from
23.9% 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 decreases in the Company's revenue. These increases are also
attributable to professional fees the Company has incurred to assist with a
variety of operational and organizational projects undertaken by current
management. The Company anticipates it will continue to incur these professional
fees for the remainder of 1997, but at decreasing levels. Other operating
expenses are primarily comprised of postage, facility and equipment rental,
telecommunications, travel, outside consulting services and office supplies.
Depreciation. Depreciation expense was $7.1 million in the second quarter
of 1997 as compared with $6.8 million in the second quarter of 1996 and $14.0
million in the six-month period ended June 30, 1997 as compared with $12.8
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 $4.7 million in the second quarter of 1997 as compared with $5.1 million in
the second quarter of 1996 and $9.4 million in the six-month period ended June
30, 1997 as compared with $10.2 million in the same period of 1996. The
decreases are primarily due to the 1996 abandonment of the Company's internally
developed software associated with the Company's reengineering program and the
write-offs associated with the shut down of Imonics, which combined totaled
approximately $99 million.
Interest. Net interest expense was $6.1 million in the second quarter of
1997 as compared with $2.6 million in the second quarter of 1996 and $12.2
million in the six-month period ended June 30, 1997 as compared with $4.7
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, and
its working capital needs in both 1996 and 1997, and increased interest rates.
Management expects to receive approximately $11 million in annualized interest
expense savings as a result of the pay down of 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 and Restated Loan Facility (the "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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring charges........................... $ -- $ 4,250 $ -- $ 6,349
Legal costs..................................... 2,000 -- 2,000 --
Pooling charges................................. -- 12,364 -- 10,207
Other........................................... -- 275 -- 275
------ ------- ------ -------
$2,000 $16,889 $2,000 $16,831
====== ======= ====== =======
</TABLE>
16
<PAGE> 19
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for administrative fees, costs and expenses it has incurred and plans to incur
in connection with the federal inquiry of the billing procedures at the
Company's wholly owned operating subsidiary, Gottlieb's Financial Services.
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Atwork........................................... $ -- $ -- $ -- $ (408)
HRI.............................................. -- -- -- (765)
Consort Technologies, Inc........................ -- -- -- (526)
Medical Management Sciences, Inc................. -- -- -- (658)
Intelligent Visual Computing, Inc................ -- -- -- 200
Rapid Systems Solutions, Inc..................... -- 900 -- 900
BSG Corporation.................................. -- 6,214 -- 6,214
HDS.............................................. -- 5,250 -- 5,250
------ ------- ------ -------
$ -- $12,364 $ -- $10,207
====== ======= ====== =======
</TABLE>
Income Taxes. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions. 1996 pro forma adjustments for income taxes have been
provided 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 $115 million. 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 and increased
the revolving line of credit from $250 million to $285 million. The Second
Amended Facility matures on June 30, 1998 and may be extended or otherwise
amended pursuant to the agreement. Borrowings under the Second Amended Facility
are secured by substantially all of the Company's assets and are guaranteed by
substantially all of the Company's subsidiaries. The Second Amended Facility
effectively refinanced the loans outstanding under the 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. The Second Amended Facility 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 flows from
operations to meet the required debt reduction and, therefore, management had
adopted a plan to divest HRI and it was seeking alternatives for the BSG Group.
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 $115
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 $170 million, which more than satisfied the required
reduction for July 31,
17
<PAGE> 20
1997. At June 30, 1997, the Company had $137 million in borrowings outstanding
under the Second Amended Facility that bore interest at 9.5%.
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 June 30, 1997 balance sheet. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $82 million of working capital,
which included $4.0 million of cash at June 30, 1997. Also at June 30, 1997, the
Company had approximately $33 million available under the Second Amended
Facility, which management believes is adequate to fund its current operating
cash requirements. The Company used $5.6 million of cash for operating
activities during the six months ended June 30, 1997 as compared with $21.5
million during the six months ended June 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
dates. The Company has not allocated any value to these warrants because the
warrants only vest if amounts are outstanding or commitments are not terminated
under the Second Amended Facility on December 31, 1997. Although 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, it is the Company's present
expectation to refinance the Second Amended Facility on or prior to December 31,
1997 in order to provide longer term liquidity on more customary market terms
and conditions and to assure that these warrants will not vest. If the Company
is unsuccessful in refinancing the Second Amended Facility, the Company will
attempt to generate the cash needed to reduce the borrowings under the Second
Amended Facility to zero by December 31, 1997 through the sale of one or more of
its assets.
If the Company is unable to obtain alternative debt financing or generate
sufficient net proceeds through the sale of one of its assets by January 31,
1998 or to otherwise satisfy the commitment reduction required by January 31,
1998 through various management cash control initiatives, the Company's lenders
can cause the borrowings under the Second Amended Facility to become immediately
due and payable.
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. A consolidated class action
compliant was filed on November 22, 1996 and was amended on February 3, 1997. On
August 14, 1997, the parties entered into a memorandum of understanding (the
"Memorandum of Understanding") to settle this action on a class-wide basis for
$20 million in cash (payable by the Company's 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 contains other material provisions as well as conditions
including, but not limited to, consent 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 jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court.
While the Company is presently unable to determine when, or if, the
contingencies in the Memorandum of Understanding may be resolved and a charge
recorded, management presently anticipates that the proposed Memorandum of
Understanding should not have a material adverse effect on: (i) the Company's
current efforts to refinance the Second Amended Facility; or (ii) the Company's
operating cash flow or liquidity position, provided that any such charge, if and
when recorded, does not then violate the covenants of the Second Amended
Facility or any then applicable debt facility or such covenant violation, if
any, or waived.
OTHER MATTERS
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,
18
<PAGE> 21
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: (1) incorrect quarterly
recording of revenues and the related costs and expenses for certain contracts;
(2) incorrect quarterly recording of certain liabilities for employee bonuses
and related expenses; (3) certain costs and expenses of certain acquired
companies, which were later determined not to be properly recordable, were
recognized by those companies in periods prior to their acquisitions, resulting
in an overstatement of the Company's earnings subsequent to those acquisitions;
and (4) incorrect depreciation of certain assets related to the Company's
comprehensive reengineering and consolidation project.
The Company has determined that all appropriate adjustments have been made
to its interim financial statements. All adjustments were for inter-period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------------------- ---------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.......................................... $175,193 $169,719 $338,820 $331,968
Salaries and wages............................... 92,663 95,222 183,228 186,952
Other Operating expenses......................... 38,799 39,889 78,153 79,224
Depreciation..................................... 5,324 6,840 10,275 12,780
Amortization..................................... 4,826 5,108 9,735 10,217
Income before income taxes....................... 13,776 3,141 35,369 21,229
Net income (loss)................................ 3,337 (3,097) 16,062 7,562
Pro forma net income (loss)...................... 3,337 (3,097) 16,416 7,916
Pro forma net income (loss) per common share..... $ 0.04 $ (0.04) $ 0.22 $ 0.11
</TABLE>
19
<PAGE> 22
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. 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. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance 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, solely for 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.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of voting common stock (the "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 April 11, 1996, certain of
the named plaintiffs to the Consolidated Complaint voluntarily dismissed with
prejudice all of their claims. As a result of these dismissals, the Consolidated
Complaint no longer contains any claims based on the Securities Act of 1933, as
amended (the "1933 Act"), and the Company's underwriters and outside directors
are no longer named as defendants. The plaintiffs and the defendants have
reached an agreement 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 would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The court conditionally has certified a class for
settlement purposes and has scheduled a hearing for October 6, 1997 to determine
whether to approve the settlement and enter final judgment dismissing the action
with prejudice. The Company has reached agreement with one of its directors and
officers' liability insurance carriers to fund $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ending December 31, 1996 to fund the anticipated balance of the 1995 Class
Action Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages
II-1
<PAGE> 23
and costs. To date, defendants have not been served with this complaint.
Pursuant to the consummation of the 1995 Class Action Settlement, the claims in
this state action also will be settled. Pursuant to the settlement agreement,
plaintiffs have filed a motion to dismiss this action without prejudice.
As originally disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, filed March 31, 1997, 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 calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual 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, 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. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for 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 January 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"). 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 (payable
by the Company's 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 to plaintiffs with respect to certain future
issuances of shares of
II-2
<PAGE> 24
Medaphis Common Stock or warrants or rights to acquire Medaphis Common Stock to
settle existing civil litigation and claims currently pending against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. 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 treatment of class members in connection
with the proposed settlement will not jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court. While the
Company is presently unable to determine when, or if, the contingencies in the
Memorandum of Understanding may be resolved and a charge recorded, management
presently anticipates that the Memorandum of Understanding should not have a
material adverse effect on: (i) the Company's current efforts to refinance the
Second Amended Facility; or (ii) the Company's operating cash flow or liquidity
position, provided that any such charge, if and when recorded, does not then
violate the covenants of the Second Amended Facility or any then applicable debt
facility or such covenant violations, if any, are waived.
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 certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in 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. The demurrer was denied on February 5, 1997. 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 officers of Medaphis. These newly added
defendants have not yet 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). 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
new parties, including former officers of Medaphis. Defendants have not yet
responded to 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
II-3
<PAGE> 25
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 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
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
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.
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 2. CHANGES IN SECURITIES.
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq National Market
rules), 20 million shares of one or more series of preferred stock (the
"Preferred Stock"), with such terms and for such consideration as the Board of
Directors may determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Company's Common Stock and non-voting common
stock (the "Non-voting Common Stock") with respect to dividends and liquidation
rights. Depending on the voting rights applicable to each series of Preferred
Stock, the issuance of shares of Preferred Stock could dilute the voting power
of the holders of the Common Stock.
II-4
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 19, 1997. The
following directors were elected at such meeting:
<TABLE>
<CAPTION>
NOMINEE BOARD TERM VOTES FOR VOTES AGAINST VOTES WITHHELD
------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Robert C. Bellas, Jr..................... Through 1997 51,433,791 -- 1,220,856
David R. Holbrooke, M.D.................. Through 1997 51,459,845 -- 1,194,802
David E. McDowell........................ Through 1997 51,459,567 -- 1,195,080
John C. Pope............................. Through 1997 51,406,073 -- 1,248,574
Dennis A. Pryor.......................... Through 1997 51,477,267 -- 1,177,380
</TABLE>
No other matters were voted upon at the Annual Meeting of Stockholders on
May 19, 1997; however, the meeting was adjourned until 10:00 a.m. on June 17,
1997, at which time the stockholders approved an amendment of the Company's
Amended and Restated Certificate of Incorporation to provide that the aggregate
number of shares of all classes of stock which the Company has authority to
issue is 220,600,000, consisting of 200,000,000 shares of Common Stock, 600,000
shares of Non-voting Common Stock, and 20,000,000 shares of Preferred Stock,
which Preferred Stock may be issued by the Board of Directors at any time with
such rights, designations and preferences as the Board of Directors may
determine. Votes cast were 38,838,042 for, 3,432,391 against and 243,064
withheld.
ITEM 5. OTHER INFORMATION.
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which have an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of the Company were adjusted as part of such
option restrike, but no adjustments were made to any options held by directors
or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased attrition among its key employees and
that adjustment of the exercise price of the outstanding options would
significantly help to mitigate such risk.
On May 19, 1997, in accordance with the Company's Amended and Restated
By-laws, the Board of Directors took action to expand the size of the Board to
six members and to fill the vacancy created thereby through the appointment of
C. Christopher Trower. Mr. Trower is a former partner of the Atlanta law firm,
Sutherland, Asbill & Brennan. Mr. Trower has wide-ranging experience with both
public and private companies in corporate, partnership, and tax matters,
including acquisitions/divestitures, securities offerings, and tax planning and
tax disputes.
II-5
<PAGE> 27
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).
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to the
Registrant's 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 the
Registrant's 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 the Registration Statement on Form S-8, File
No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant.
3.6 -- Amended and Restated By-Laws of Registrant.
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480).
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480).
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.5 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File No. 333-2506).
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996 (incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480).
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996.
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996.
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
</TABLE>
II-6
<PAGE> 28
- ---------------
* Previously filed with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
(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 June 30, 1997:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -----------
<S> <C> <C> <C>
Amendment of 1996 Year end press release, second
amended and restated loan agreement........... Yes(1) December 31, 1996 April 28, 1997
Press release of SEC effectiveness on IPO of
Healthcare Recoveries, Inc.................... No May 21, 1997 May 22, 1997
</TABLE>
- ---------------
(1) Consolidated statement of operations for the three months and year ended
December 31, 1996, condensed consolidated balance sheets as of December 31,
1996 and 1995 and supplemented consolidated segment data for the quarterly
periods ended March 31, June 30, September 30 and December 31, 1996 and
1995.
II-7
<PAGE> 29
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: August 14, 1997
II-8
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <C> <S> <C>
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)................................
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480)
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216)...................................................
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 of
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1993)................................
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's 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 the Registration Statement on Form S-8, File
No. 333-03213)..............................................
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant..............................
3.6 -- Amended and Restated By-Laws of Registrant..................
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480).........................................
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480)......................
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)...............................
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)...............................
10.5 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File No. 333-2506)......
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996(incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480)................
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996...........
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996.....................
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..................................................
</TABLE>
- ---------------
* Previously filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
II-9
<PAGE> 1
EXHIBIT 3.5
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "MEDAPHIS CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-NINTH
DAY OF JULY, A.D. 1997, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 8581042
DATE: 07-29-97
<PAGE> 2
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF MEDAPHIS CORPORATION
Medaphis Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The amendment (the "Amendment") is as set forth below:
a. The first sentence of Article Fourth of the Corporation's
Amended and Restated Certificate of Incorporation is deleted and
replaced with the following:
"The aggregate number of shares of all classes of stock which
the Corporation shall have authority to issue is 220,600,000,
consisting of 200,000,000 shares of Common Stock, $.01 par value
(herein called "Common Stock"), 600,000 shares of Non-Voting Common
Stock, $.01 par value (herein called "Non-Voting Common Stock"), and
20,000,000 shares of Preferred Stock, no par value (herein called
"Preferred Stock")."
b. Article Fourth of the Corporation's Amended and Restated
Certificate of Incorporation is further amended by inserting the
following new Section II at the end of Article Fourth of the
Corporation's Amended and Restated Certificate of Incorporation:
"II.
PREFERRED STOCK
1. Issuance. The Preferred Stock may be issued, from
time to time, in one or more series, each of such series to have
such voting powers, full or limited or no voting powers, and such
designations, preferences, and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions
with respect thereto as are stated and expressed herein, in any
amendment or amendments to the Amended and Restated Certificate of
Incorporation, or in any resolution or resolutions establishing such
series as are adopted by the Board of Directors as hereinafter
provided, and as are acknowledged, filed and recorded in accordance
with the laws of the State of Delaware and as are not inconsistent
with this Article Fourth or any other provision of this Amended and
Restated Certificate of Incorporation.
2. Rights, Designations and Preferences. Authority is
hereby expressly granted to the Board of Directors, subject to the
provisions of this Article Fourth, to authorize the issuance of one or
more series of Preferred Stock with such voting powers, full or
limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof as the Board of
<PAGE> 3
Directors may determine, including without limitation the foregoing,
to fix by resolution or resolutions providing for the issuance of each
such series:
(a) The distinctive designation of such
series and the number of shares which shall
constitute such series;
(b) The amount of the consideration to be
received for the shares of such series which shall be
capital;
(c) The cumulative or noncumulative nature of
the dividend to be paid;
(d) The dividend rate or rates to which such
shares shall be entitled and the restrictions,
limitations, and conditions upon the payment of such
dividends, the date or dates from which such
dividends, if declared, shall be payable;
(e) Whether or not the shares of such series
shall be redeemable; the limitations and restrictions
with respect to such redemptions (including whether
or not the shares of such series shall be redeemable
at the option of either the holder or the Corporation
or upon the happening of a specified event); the
manner of selecting shares of such series for
redemption if less than all the shares are to be
redeemed; the amount, if any, in addition to any
accrued dividends thereon which the holder of shares
of such series shall be entitled to receive upon the
redemption thereof, which amount may vary at
different redemption dates, may be subject to
adjustment and may be different with respect to
shares redeemed through the operation of any
purchase, retirement or sinking fund and with respect
to shares otherwise redeemed; and whether or not the
shares of such series, if redeemable, shall be
redeemable for cash, property or rights, including
securities of any other corporation;
(f) The amount which the holders of shares of
such series may be entitled to receive in addition to
any accumulated dividends upon the voluntary or
involuntary liquidation or dissolution of the
Corporation, which amount may vary depending upon
whether such liquidation or dissolution is voluntary
or involuntary and, if voluntary, may vary at
different dates; provided, however, that the merger
or consolidation of the Corporation or a sale, lease
or conveyance of all or part of the assets of the
Corporation shall not be deemed a liquidation or
dissolution;
(g) Whether or not the shares of such series
shall be subject to the operation of a purchase,
retirement, or sinking fund, and if so, whether such
purchase, retirement or sinking fund shall be
cumulative or noncumulative, and the extent to and
the manner in which such funds shall be applied to
the purchase or redemption of the shares of such
series for retirement or to other corporate purposes
and the terms and provisions relative to the
operation of said fund or funds;
2
<PAGE> 4
(h) Whether or not the shares of such series
shall be convertible into, or exchangeable for,
shares of stock of any other class or classes, or of
any other series of the same class, and if so
convertible or exchangeable, the price or prices or
the rate or rates of conversion or exchange and the
method, if any, of adjusting the same;
(i) The voting rights, if any, of such
series, but not to exceed one vote per share, and
whether such voting rights shall be contingent upon
the happening of a specified event and whether such
voting rights shall cease upon the happening of a
specified event; and
(j) Any other preferences and relative,
participating, optional, or other special rights, and
qualifications, limitations or restrictions thereof
not inconsistent with this Article Fourth or any
other provision of this Amended and Restated
Certificate of Incorporation.
3. Additional Authority of Board of Directors. The
Board of Directors also shall have authority to change the
designation of shares, or the relative rights, preferences and
limitations of the shares, of any theretofore established
series of Preferred Stock, no share of which has been issued,
and further, the Board shall have authority to increase or
decrease the number of shares of any series previously
determined by it (provided, however, that the number of shares
of any series shall not be decreased to a number less than
that of the shares of that series then outstanding).
4. Series. All shares of any one series of Preferred
Stock shall be identical with each other in all respects,
except that shares of any one series issued at different times
may differ as to the dates from which dividends thereon shall
be cumulative; and all series shall rank equally and be
identical in all respects, except as permitted by the
provisions of this Section II of this Article Fourth.
5. Issued and Reacquired Shares. Shares of Preferred
Stock which have been issued and reacquired in any manner by
the Corporation (excluding, until the Corporation elects to
retire them, shares which the Corporation elects to hold as
treasury shares) shall, upon compliance with any applicable
provisions of the General Corporation Law of the State of
Delaware, have the status of authorized and unissued shares of
Preferred Stock and may be reissued as a part of the series of
which they were originally a part (provided the terms of such
series do not prohibit such reissue) or as part of a new
series of Preferred Stock to be established as provided in
this Section II of this Article Fourth or as part of any other
series of Preferred Stock the terms of which do not prohibit
such reissue.
6. Voting Rights. (a) So long as any of the
Preferred Stock is outstanding, the holders of the outstanding
shares of Preferred Stock, if any, shall be entitled to vote
as a class upon any proposed amendment to the Amended and
Restated Certificate of Incorporation, whether or not entitled
to vote thereon by the provisions of this Article Fourth and
the resolutions
3
<PAGE> 5
adopted by the Board of Directors hereunder, if the amendment
would increase or decrease the aggregate number of authorized
shares of Preferred Stock, increase or decrease the par value
of such shares, or alter or change the powers, preferences, or
special rights of the shares of Preferred Stock so as to
affect them adversely. If any proposed amendment to the
Amended and Restated Certificate of Incorporation would alter
or change the powers, preferences or special rights of one or
more series of the Preferred Stock so as to affect them
adversely, but shall not so affect the entire class of
Preferred Stock, then only the shares of the one or more
series so affected by the amendment shall be entitled to vote
thereon and such voting shall be accomplished as if such one
or more series constituted a separate class of Preferred
Stock.
(b) Any amendment with respect to which the vote
required by this paragraph 6 shall be given may be made
effective by the filing of an appropriate certificate of
amendment of the Corporation's Amended and Restated
Certificate of Incorporation without obtaining the vote of the
holders of the Common Stock of the Corporation, and the
holders of the Common Stock shall have no right to vote
thereon, unless the action to be taken would adversely affect
the preferences, rights, or powers of such class of Common
Stock or the holders thereof; and provided further that any
vote required concerning a given series of the Preferred Stock
may be given and made effective by filing an appropriate
amendment of the Corporation's Amended and Restated
Certificate of Incorporation without obtaining a vote of the
holders of any other series of Preferred Stock or of the
holders of the Common Stock of the Corporation and the holders
of such shares shall have no right to vote thereon, unless the
action to be taken would adversely affect the preferences,
rights, or powers of such other series of Preferred Stock or
the Common Stock, as the case may be.
7. Dividends; Rank. For the purpose of this Section
II of this Article Fourth and of any resolution or resolutions
adopted by the Board of Directors establishing any series of
Preferred Stock and acknowledged, filed and recorded in
accordance with the laws of the State of Delaware (unless
otherwise provided in any such amendment or certificate):
(a) The amount of dividends "accumulated" on
any share of Preferred Stock or any series as at any
dividend date shall be deemed to be the amount of any
unpaid dividends accumulated thereon to and including
such dividend date, whether or not earned or
declared, and the amount of dividends "accumulated"
on any share of Preferred Stock or any series as at
any date other than a dividend date shall be
calculated as the amount of any unpaid dividends
accumulated thereon to and including the last
preceding dividend date, whether or not earned or
declared, plus any amount equivalent to the pro rata
portion of a dividend at the annual dividend rate
fixed for the shares of such series for the period
after such last preceding dividend date to and
including the date as of which the calculation is
made.
4
<PAGE> 6
(b) Any class or classes of stock of the
Corporation shall be deemed to rank:
(i) prior to the Preferred Stock either
as to dividends or upon liquidation if the
holders of such class or classes shall be
entitled to the receipt of dividends or of
amounts distributable upon liquidation or
dissolution, as the case may be, in
preference or priority to the holders of the
Preferred Stock;
(ii) on a parity with the Preferred
Stock either as to dividends or upon
liquidation whether or not the dividend
rates, dividend payment dates, or redemption
or liquidation prices per share thereof be
different from those of the Preferred Stock,
if the holders of such class or classes of
stock shall be entitled to the receipt of
dividends or of amounts distributable upon
liquidation or dissolution, as the case may
be, in proportion to their respective
dividend rates or liquidation prices, without
preferences or priority one over the other
with respect to the holders of the Preferred
Stock; and
(iii) junior to the Preferred Stock
either as to dividends or upon liquidation if
the rights of the holders of such class or
classes shall be subject or subordinate to
the rights of the holders of the Preferred
Stock in respect of the receipt of dividends
or of amounts distributable upon liquidation
or dissolution, as the case may be.
8. Priority Over Common Stock. So long as
the shares of Preferred Stock shall be outstanding,
the Common Stock shall be deemed to rank junior to
the Preferred Stock as to dividends and upon
liquidation."
2. The Amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
3. The undersigned officer of the Corporation hereby acknowledges
that the foregoing is the act and deed of the Corporation and that the facts
stated herein are true.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be affixed to this Certificate and has caused this Certificate to be signed
this 9th day of July, 1997.
By: /s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
5
<PAGE> 1
EXHIBIT 3.6
================================================================================
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
----------------------------
Incorporated under the Laws of the
State of Delaware
----------------------------
Adopted as of June 30, 1991 and
Amended as of December 21, 1992
Amended and Restated as of March 24, 1997
Further Amended as of May 19, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Notice of Stockholder Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Notice of Stockholder Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7. List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 10. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 11. Inspectors of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 12. Action without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2. Election and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3. Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4. Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5. Organization Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 7. Special Meetings; Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 8. Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 9. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 10. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 11. Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 12. Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 13. Telephonic Participation in Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 14. Committees of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 1. Principal Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. Election and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3. Other Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 7. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 8. Vice Chairmen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 9. Chief Executive Officer
Section 10. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 11. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 12. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 13. Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V SHARES AND THEIR TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 1. Certificate for Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2. Stock Certificate Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3. Stock Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5. Registrations of Transfers of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates . . . . . . . . . . . . . . . . . . . . . 10
Section 8. Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VI MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. Voting of Stocks Owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4. Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
(a Delaware corporation)
----------------------------
ARTICLE ARTICLE I
OFFICES
The registered office of the Corporation in the State of Delaware
shall be located in the City of Wilmington, County of New Castle. The
Corporation may establish or discontinue, from time to time, such other offices
within or without the State of Delaware as may be deemed proper for the conduct
of the Corporation's business.
ARTICLE ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of stockholders shall
be held at such place or places, within or without the State of Delaware, as
may from time to time be fixed by the Board of Directors, or as shall be
specified in the respective notices, or waivers of notice, thereof.
Section 2. Annual Meeting. The annual meeting of stockholders for
the election of Directors and the transaction of other business shall be held
on such date and at such time and place as may be designated by the Board of
Directors. At each annual meeting, the stockholders entitled to vote shall
elect a Board of Directors and may transact such other proper business as may
come before the meeting.
Section 3. Special Meetings. A special meeting of the
stockholders, or of any class thereof entitled to vote, for any purpose or
purposes, may be called at any time by the Chairman of the Board, if any, or
the Chief Executive Officer or by order of the Board of Directors and shall be
called by the Chief Executive Officer or the Secretary upon the written request
of stockholders holding of record at least 50% of the outstanding shares of
stock of the Corporation entitled to vote at such meeting. Such written
request shall state the purpose or purposes for which such meeting is to be
called.
<PAGE> 5
Section 4. Notice of Meetings. Except as otherwise provided by
law, written notice of each meeting of stockholders, whether annual or special,
stating the place, date and hour of the meeting shall be given not less than
ten days nor more than sixty days before the date on which the meeting is to be
held to each stockholder of record entitled to vote thereat by delivering a
notice thereof to him personally or by mailing such notice in a postage prepaid
envelope directed to him at his address as it appears on the records of the
Corporation, unless he shall have filed with the Secretary of the Corporation a
written request that notices intended for him be directed to another address,
in which case such notice shall be directed to him at the address designated in
such request. Notice shall not be required to be given to any stockholder who
shall waive such notice in writing, whether prior to or after such meeting, or
who shall attend such meeting in person or by proxy unless such attendance is
for the express purpose of objecting, at the beginning of such meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Every notice of a special meeting of the stockholders shall also
state the purpose or purposes for which it is called.
Section 5. Notice of Stockholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in this Section 5 shall
be eligible for election as Directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
stockholders by or at the direction of the Board of Directors or by any
stockholder of the Corporation entitled to vote for the election of Directors
at the meeting who complies with the notice procedures set forth in this
Section 5. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a Director, (A)
the name, age, business address and residence address of such person, (B) the
principal occupation or employment of such person, (C) the class and number of
shares of the Corporation which are beneficially owned by such person, and (D)
any other information relating to such person that is required to be disclosed
in solicitation of proxies for election of Directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a Director if
elected), and (ii) as to the stockholder giving the notice (A) the name and
address, as they appear on the Corporation's books, of such stockholder and (B)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a Director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. The Chairman
of the meeting shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the procedures
-2-
<PAGE> 6
prescribed by the By-laws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
Section 6. Notice of Stockholder Business. At an annual meeting of
the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (i) specified in the notice of the meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(ii) otherwise properly brought before the meeting by or at the direction of
the Board of Directors, or (iii) otherwise properly brought before the meeting
by a stockholder. For business to be properly brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,
(ii) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (iii) the class and number of shares of
the Corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in the By-laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 6.
The Chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Section 6, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 7. List of Stockholders. It shall be the duty of the
Secretary or other officer of the Corporation who shall have charge of the
stock ledger to prepare and make, at least ten days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in his name. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. The list shall be
kept and produced at the time and place of the meeting during the whole time
thereof and subject to the inspection of any stockholder who may be present.
The original or duplicate ledger shall be the only evidence as to who are the
stockholders entitled to examine such list or the books of the Corporation or
to vote in person or by proxy at such meeting.
-3-
<PAGE> 7
Section 8. Quorum. At each meeting of the stockholders, the
holders of record of a majority of the issued and outstanding stock of the
Corporation entitled to vote at such meeting, present in person or by proxy,
shall constitute a quorum for the transaction of business, except as otherwise
provided by law, the Certificate of Incorporation or these By-laws. In the
absence of a quorum, any officer entitled to preside at, or act as Secretary
of, such meeting shall have the power to adjourn the meeting from time to time
until a quorum shall be constituted.
Section 9. Voting. Every stockholder of record who is entitled to
vote shall, at every meeting of the stockholders, be entitled to one vote for
each share of stock held by him on the record date; except, however, that
shares of its own stock belonging to the Corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held by the Corporation, shall neither be entitled to
vote nor counted for quorum purposes. Nothing in this Section shall be
construed as limiting the right of the Corporation to vote its own stock held
by it in a fiduciary capacity. At all meetings of the stockholders, a quorum
being present, all matters shall be decided by majority vote of the shares of
stock entitled to vote held by stockholders present in person or by proxy,
except as otherwise required by law or the Certificate of Incorporation.
Unless demanded by a stockholder of the Corporation present in person or by
proxy at any meeting of the stockholders and entitled to vote thereat or so
directed by the chairman of the meeting or required by law, the vote thereat on
any question need not be by written ballot. On a vote by written ballot, each
ballot shall be signed by the stockholder voting, or in his name by his proxy,
if there be such proxy, and shall state the number of shares voted by him and
the number of votes to which each share is entitled.
Section 10. Proxies. Each stockholder entitled to vote at a
meeting of stockholders or to express consent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. A proxy acting for any stockholder shall be duly appointed by an
instrument in writing subscribed by such stockholder. No proxy shall be valid
after the expiration of three years from the date thereof unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A stockholder
may revoke any proxy which is not irrevocable by attending the meeting and
voting in person or by filing an instrument in writing revoking the proxy or
another duly executed proxy bearing a later date with the Secretary of the
Corporation.
Section 11. Inspectors of Elections. The Board of Directors, in
advance of any stockholder meeting, shall appoint an inspector of elections to
act at such meeting, and any adjournment thereof, and make a written report
thereof. In case any person appointed fails to appear or act, the vacancy may
be filled by an alternate appointed by the Board in advance of the meeting or
at the meeting by the person presiding thereat. The inspector, before entering
upon discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his ability.
-4-
<PAGE> 8
Section 12. Action without a Meeting. Any action required to be
taken at any annual or special meeting of stockholders or any action which may
be taken at any annual or special meeting of stockholders may be taken without
a meeting, without prior notice and without a vote, if a consent in writing
setting forth the action so taken shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by law or in the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed under the direction of the Board of Directors.
Section 2. Election and Term. Except as otherwise provided by law,
Directors shall be elected at the annual meeting of stockholders and shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified, or until they sooner die, resign or are removed. At
each annual meeting of stockholders, at which a quorum is present, the persons
receiving a plurality of the votes cast shall be the Directors. Acceptance of
the office of Director may be expressed orally or in writing, and attendance at
the organization meeting shall constitute such acceptance.
Section 3. Number. The number of Directors shall be such number as
shall be determined from time to time by the Board of Directors, but shall not
be less than three nor more than ten.
Section 4. Quorum and Manner of Acting. Unless otherwise provided
by law, the presence of 50% of the whole Board of Directors shall be necessary
to constitute a quorum for the transaction of business. In the absence of a
quorum, a majority of the Directors present may adjourn the meeting from time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given. At all meetings of Directors, a quorum being present, all
matters shall be decided by the affirmative vote of a majority of the Directors
present, except as otherwise required by law, the Certificate of Incorporation
or these By-laws. The Board of Directors may hold its meetings at such place
or places within or without the State of Delaware as the Board of Directors may
from time to time determine or as shall be specified in the respective notices,
or waivers of notice, thereof.
Section 5. Organization Meeting. Immediately after each annual
meeting of stockholders for the election of Directors, the Board of Directors
shall meet at the place of the annual meeting of stockholders for the purpose
of organization, the election of officers and the transaction of other
business. Notice of such meeting need not be given. If such meeting is held at
any other time or
-5-
<PAGE> 9
place, notice thereof must be given as hereinafter provided for special
meetings of the Board of Directors, subject to the execution of a waiver of the
notice thereof signed by, or the attendance at such meeting of, all Directors
who may not have received such notice.
Section 6. Regular Meetings. Regular meetings of the Board of
Directors may be held at such time and place, within or without the State of
Delaware, as shall from time to time be determined by the Board of Directors.
After there has been such determination, and notice thereof has been once given
to each member of the Board of Directors as hereinafter provided for special
meetings, regular meetings may be held without further notice being given.
Section 7. Special Meetings; Notice. Special meetings of the Board
of Directors shall be held whenever called by the Chairman of the Board, if
any, the Chief Executive Officer or by a majority of the Directors. Notice of
each such meeting shall be mailed to each Director, addressed to him at his
residence or usual place of business, at least five days before the date on
which the meeting is to be held, or shall be sent to him at such place by
facsimile, telegraph or cable, or be delivered personally or by telephone, not
later than the day before the day on which such meeting is to be held. Each
such notice shall state the time and place of the meeting and, as may be
required, the purposes thereof. Notice of any meeting of the Board of
Directors need not be given to any Director if he shall sign a written waiver
thereof either before or after the time stated therein for such meeting, or if
he shall be present at the meeting. Unless limited by law, the Certificate of
Incorporation, these By-laws or the terms of the notice thereof, any and all
business may be transacted at any meeting without the notice thereof having
specifically identified the matters to be acted upon.
Section 8. Removal of Directors. Any Director or the entire Board
of Directors may be removed, with or without cause, at any time, by action of
the holders of record of a majority of the issued and outstanding stock of the
Corporation entitled to vote thereon (i) present in person or by proxy at a
meeting of such stockholders or (ii) by a consent in writing in the manner
contemplated in Section 12 of Article II, and the vacancy or vacancies in the
Board of Directors caused by any such removal may be filled by action of such a
majority at such meeting or at any subsequent meeting or by consent.
Section 9. Resignations. Any Director of the Corporation may
resign at any time by giving written notice to the Chairman of the Board, if
any, the Chief Executive Officer or the Secretary of the Corporation. The
resignation of any Director shall take effect upon receipt of notice thereof or
at such later time as shall be specified in such notice; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 10. Vacancies. Any vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of the remaining
Directors though less than a quorum of the Board of Directors, or by the sole
remaining Director, as the case may be, or if the vacancy is not so filled, or
if no Director remains, by the affirmative vote of a majority of the
stockholders entitled to vote
-6-
<PAGE> 10
thereon. A Director elected to fill a vacancy shall serve the unexpired term
of his predecessor in office, or, if such vacancy occurs by reason of an
amendment to these By-laws increasing the number of Directors, until the next
election of Directors by the stockholders, and until his successor has been
elected and qualified, or until he sooner dies, resigns or is removed.
Section 11. Compensation of Directors. Directors, as such, shall
not receive any stated salary for their services, but, by resolution of the
Board, a specific sum fixed by the Board plus expenses may be allowed for
attendance at each regular or special meeting of the Board; provided, however,
that nothing herein contained shall be construed to preclude any Director from
serving the Corporation or any parent or subsidiary corporation thereof in any
other capacity and receiving compensation therefore.
Section 12. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent thereto is signed by all members of the
Board, and such written consent is filed with the minutes or proceedings of the
Board.
Section 13. Telephonic Participation in Meetings. Members of the
Board of Directors may participate in a meeting of the Board by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at such meeting.
Section 14. Committees of the Board of Directors. The Board of
Directors, by resolution adopted by a majority of the full Board of Directors,
may designate from among its members an executive committee and one or more
other committees, each consisting of one or more directors. Except as
prohibited by law, each committee shall have the authority set forth in the
resolution of the Board of Directors establishing such committee. Unless the
Board of Directors otherwise provides, each committee designated by the Board
of Directors may make, alter and repeal rules for the conduct of its business.
In the absence of such rules each committee shall conduct its business in the
same manner as the Board of Directors conducts its business pursuant to Article
III of these By-laws.
ARTICLE ARTICLE IV
OFFICERS
Section 1. Principal Officers. The Board of Directors shall elect
a Chief Executive Officer, a Secretary and a Treasurer, and may in addition
elect a Chairman of the Board, one or more Vice Chairmen of the Board, one or
more Vice-Presidents and such other officers as it deems fit; the Chief
Executive Officer, the Secretary, the Treasurer, the Chairman of the Board, if
any, the Vice Chairmen of the Board, if any, and the Vice Presidents, if any,
being the principal officers of the Corporation. One person may hold, and
perform the duties of, any two or more of said offices.
-7-
<PAGE> 11
Section 2. Election and Term of Office. The principal officers of
the Corporation shall be elected annually by the Board of Directors at the
organization meeting thereof. Each such officer shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal.
Section 3. Other Officers. In addition, the Board may elect, or
the Chairman of the Board, if any, or the Chief Executive Officer may appoint,
such other officers as they deem fit. Any such other officers chosen by the
Board of Directors shall be subordinate officers and shall hold office for such
period, have such authority and perform such duties as the Board of Directors,
the Chairman of the Board, if any, or the Chief Executive Officer may from time
to time determine.
Section 4. Removal. Any officer may be removed, either with or
without cause, at any time, by resolution adopted by the Board of Directors at
any regular meeting of the Board, or at any special meeting of the Board called
for that purpose, at which a quorum is present.
Section 5. Resignations. Any officer may resign at any time by
giving written notice to the Chairman of the Board, if any, the Chief Executive
Officer, the Secretary or the Board of Directors. Any such resignation shall
take effect upon receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 6. Vacancies. A vacancy in any office may be filled for
the unexpired portion of the term in the manner prescribed in these By-laws for
election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board of
Directors if elected, shall preside, if present, at all meetings of the Board
of Directors, and shall have general supervision, direction and control of the
business of the Corporation, and shall have and perform such other duties as
from time to time may be assigned by the Board of Directors.
Section 8. Vice Chairmen. Each Vice Chairman shall have the
general powers and duties as shall be delegated to him by the Chairman of the
Board of Directors or as shall be established by resolution of the Board of
Directors.
Section 9. Chief Executive Officer. The Chief Executive Officer
shall have the general powers and duties of supervision and management usually
vested in the office of chief executive officer of a corporation. He shall
preside at all meetings of the stockholders, if present thereat, and in the
absence or non-election of the Chairman of the Board of Directors, at all
meetings of the Board of Directors, and shall have general supervision,
direction and control of the business of the Corporation. Except as the Board
of Directors shall authorize the execution thereof in some other manner, he
shall execute bonds, mortgages, and other contracts on behalf of the
Corporation, and
-8-
<PAGE> 12
shall cause the seal to be affixed to any instrument requiring it and when so
affixed the seal shall be attested by the signature of the Secretary or the
Treasurer.
Section 10. Vice Presidents. Each Vice President shall have such
powers and shall perform such duties as shall be assigned to him by the Board
of Directors or the Chief Executive Officer.
Section 11. Treasurer. The Treasurer shall have charge and
custody of, and be responsible for, all funds and securities of the
Corporation. He shall exhibit at all reasonable times his books of account and
records to any of the Directors of the Corporation upon application during
business hours at the office of the Corporation where such books and records
shall be kept; when requested by the Board of Directors, he shall render a
statement of the condition of the finances of the Corporation at any meeting of
the Board or at the annual meeting of stockholders; he shall receive, and give
receipt for, moneys due and payable to the Corporation from any source
whatsoever; in general, he shall perform all the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
by the Chairman of the Board of Directors, the Chief Executive Officer or the
Board of Directors. The Treasurer shall give such bond, if any, for the
faithful discharge of his duties as the Board of Directors may require.
Section 12. Secretary. The Secretary, if present, shall act as
secretary at all meetings of the Board of Directors and of the stockholders and
keep the minutes thereof in a book or books to be provided for that purpose; he
shall see that all notices required to be given by the Corporation are duly
given and served; he shall have charge of the stock records of the Corporation;
he shall see that all reports, statements and other documents required by law
are properly kept and filed; and in general he shall perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him by the Chairman of the Board of Directors, the Chief
Executive Officer or the Board of Directors.
Section 13. Salaries. The salaries of the principal officers shall
be fixed from time to time by the Board of Directors or an authorized committee
thereof, and the salaries of any other officers may be fixed by the Chairman of
the Board of Directors or the Chief Executive Officer.
ARTICLE ARTICLE V
SHARES AND THEIR TRANSFER
Section 1. Certificate for Stock. Every stockholder of the
Corporation shall be entitled to a certificate or certificates, to be in such
form as the Board of Directors shall prescribe, certifying the number of shares
of the capital stock of the Corporation owned by him. No certificate shall be
issued for partly paid shares.
-9-
<PAGE> 13
Section 2. Stock Certificate Signature. The certificates for such
stock shall be numbered in the order in which they shall be issued and shall be
signed by the Chairman of the Board, if any, or the Chief Executive Officer and
the Secretary or Treasurer of the Corporation and its seal shall be affixed
thereto. If such certificate is countersigned (i) by a transfer agent other
than the Corporation or its employee, or (ii) by a registrar other than the
Corporation or its employee, the signatures of such officers of the Corporation
may be facsimiles. In case any officer of the Corporation who has signed, or
whose facsimile signature has been placed upon, any such certificate shall have
ceased to be such officer before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer at the date
of issue.
Section 3. Stock Ledger. A record shall be kept by the Secretary
or by any other officer, employee or agent designated by the Board of
Directors, of the name of each person, firm or corporation holding capital
stock of the Corporation, the number of shares represented by, and the
respective dates of, each certificate for such capital stock, and in case of
cancellation of any such certificate, the respective dates of cancellation.
Section 4. Cancellation. Every certificate surrendered to the
Corporation for exchange or registration of transfer shall be cancelled, and no
new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so cancelled,
except, subject to Section 7 of this Article V, in cases provided for by
applicable law.
Section 5. Registrations of Transfers of Stock. Registrations of
transfers of shares of the capital stock of the Corporation shall be made on
the books of the Corporation on surrender of the certificate or certificates
for such shares properly endorsed and the payment of all taxes thereon. The
person in whose name shares of stock stand on the books of the Corporation
shall be deemed the owner thereof for all purposes as regards the Corporation;
provided, however, that whenever any transfer of shares shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to do
so.
Section 6. Regulations. The Board of Directors may make such rules
and regulations as it may deem expedient, not inconsistent with the Certificate
of Incorporation or these By-laws, concerning the issue, transfer and
registration of certificates for shares of the stock of the Corporation. It
may appoint, or authorize any principal officer or officers to appoint, one or
more transfer clerks or one or more transfer agents and one or more registrars,
and may require all certificates of stock to bear the signature or signatures
of any of them.
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates.
Before any certificates for stock of the Corporation shall be issued in
exchange for certificates which shall become mutilated or shall be lost, stolen
or destroyed, proper evidence of such loss, theft, mutilation or destruction
shall be procured for the Board of Directors, if it so requires.
-10-
<PAGE> 14
Section 8. Record Dates. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a date as a record date for any such determination of stockholders. Such
record date shall not more than sixty (60) days and, in the case of a meeting
of stockholders, not less than ten (10) days prior to the date on which the
particular action, requiring such determination of stockholders, is to be
taken.
ARTICLE ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Corporate Seal. The Board of Directors shall provide a
corporate seal, which shall be in the form of a circle and shall bear the name
of the Corporation and words and figures showing that it was incorporated in
the State of Delaware in the year 1985. The Secretary shall be the custodian
of the seal. The Board of Directors may authorize a duplicate seal to be kept
and used by any other officer.
Section 2. Voting of Stocks Owned by the Corporation. The Board of
Directors may authorize any person on behalf of the Corporation to attend, vote
and grant proxies to be used at any meeting of stockholders of any corporation
(except the Corporation) in which the Corporation may hold stock. Nothing in
this Section shall be construed as limiting the right of the Corporation to
vote its own stock held by it in a fiduciary capacity.
Section 3. Dividends. Subject to the provisions of the Certificate
of Incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the Corporation available
for dividends such sum or sums as the Directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Board of Directors shall deem conducive to the interests of the Corporation.
Section 4. Indemnification and Insurance.
(a) Right to Indemnification. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by the Delaware General
Corporation Law as it presently exists or may hereafter be amended, any person
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person for
whom he is the legal
-11-
<PAGE> 15
representative, is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person. The Corporation
shall be required to indemnify a person in connection with a proceeding
initiated by such person only if the proceeding was authorized by the Board of
Directors of the Corporation. The right provided in this Section 4(a) is a
contract right.
(b) Prepayment of Expenses. The Corporation shall pay the
expenses incurred by an officer or director in defending or investigating any
proceeding in advance of its final disposition; provided, however, that, if
required by the Delaware General Corporation Law, the payment of expenses
incurred by a director or officer in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the director or
officer to repay all amounts advanced if it should ultimately be determined
that the director or officer is not entitled to be indemnified under this
Section or otherwise. The right provided in this Section 4(b) is a contract
right.
(c) Claims. If a claim for indemnification or payment of expenses
under this Section is not paid in full within sixty days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any
such action, the Corporation shall have the burden of proving that the claimant
was not entitled to the requested indemnification or payment of expenses under
applicable law.
(d) Non-Exclusivity of Rights. The rights conferred on any person
by this Section shall not be exclusive of any other rights which such person
may have or hereafter acquire under any statute, provision of the Certificate
of Incorporation, these Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
(e) Other Indemnification. The Corporation's obligation, if any,
to indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or non-profit entity shall be reduced by any amount such
person may collect as indemnification from such other corporation, partnership,
joint venture, trust, enterprise or non-profit enterprise.
(f) Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the Delaware General Corporation
Law.
-12-
<PAGE> 16
(g) Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Section shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
ARTICLE ARTICLE VII
AMENDMENTS
These By-laws of the Corporation may be altered, amended or repealed
by the Board of Directors at any regular or special meeting of the Board of
Directors or by the affirmative vote of the holders of record of a majority of
the issued and outstanding stock of the Corporation entitled to vote thereon
(i) present in person or by proxy at a meeting of holders of such stock or (ii)
by a consent in writing in the manner contemplated in Section 12 of Article II,
provided, however, that notice of the proposed alteration, amendment or repeal
is contained in the notice of such meeting. By-laws, whether made or altered
by the stockholders or by the Board of Directors, shall be subject to
alteration or repeal by the stockholders as in this Article VII above provided.
-13-
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
DESCRIPTION 1997 1996 1997 1996
- ----------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding during the period..... 72,443 71,167 72,339 70,795
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method............................................ 2,706 -- 2,644 3,991
------- ------- ------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period............... 75,149 71,167 74,983 74,786
======= ======= ======= =======
Pro forma net income (loss) before extraordinary item..... $ (248) $(3,097) $(2,087) $ 7,916
Extraordinary income on sale of HRI....................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................... $76,143 $(3,097) $74,304 $ 7,916
======= ======= ======= =======
Pro forma net income (loss) per common share:
Pro forma net income (loss) before extraordinary
item............................................... $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI.................. 1.01 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss).......................... $ 1.01 $ (0.04) $ 0.99 $ 0.11
======= ======= ======= =======
FULLY DILUTED
Weighted average shares outstanding during the period..... 72,443 71,167 72,339 70,795
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method............................................ 3,612 -- 2,869 3,993
------- ------- ------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period............... 76,055 71,167 75,208 74,788
======= ======= ======= =======
Pro forma net income (loss) before extraordinary item..... $ (248) $(3,097) $(2,087) $ 7,916
Extraordinary income on sale of HRI....................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................... $76,143 $(3,097) $74,304 $ 7,916
======= ======= ======= =======
Pro forma net income (loss) per common share:
Pro forma net income (loss) before extraordinary
item............................................... $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI.................. 1.00 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss).......................... $ 1.00 $ (0.04) $ 0.99 $ 0.11
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,958
<SECURITIES> 0
<RECEIVABLES> 191,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 223,163
<PP&E> 87,756
<DEPRECIATION> 0
<TOTAL-ASSETS> 765,537
<CURRENT-LIABILITIES> 277,954
<BONDS> 0
0
0
<COMMON> 725
<OTHER-SE> 469,650
<TOTAL-LIABILITY-AND-EQUITY> 765,537
<SALES> 295,516
<TOTAL-REVENUES> 295,516
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 289,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,171
<INCOME-PRETAX> (6,032)
<INCOME-TAX> (3,945)
<INCOME-CONTINUING> (2,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,391
<CHANGES> 0
<NET-INCOME> 74,304
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</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. While Medaphis has in the past expanded its
operations through acquisitions and internal growth, the 1997 business plan of
the Company does not provide for further acquisitions and, in any event, any
such acquisitions would require the unanimous consent of the Company's existing
lenders. While the Company has and continues to implement management initiatives
designed to enhance and improve its business and operations, there can be no
assurance that Medaphis will be able to achieve or sustain profitability or
revenue growth on an annual or quarterly basis in the future, that fluctuations
in quarter-to-quarter or year-to-year operating results will not occur or that
any such quarter-to-quarter or year-to-year fluctuations will not be material.
Future operating results of Medaphis will be dependent upon, among other things,
(i) successful integration of certain recently acquired businesses, (ii)
improvement in operations of the Company's operating subsidiaries, (iii)
successful implementation of various management initiatives designed to reduce
costs and increase efficiencies within the Company's core business and (iv)
successful growth in sales of the Company's business management services and
information products.
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
<PAGE> 2
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 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 six months ended June 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 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 businesses, (ii) achieving improved predictability of business results
through enhanced management accountability and controls, (iii) reducing costs
and increasing efficiencies in the core business, (iv) achieving
2
<PAGE> 3
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.
EXISTING SYSTEMS AND TECHNOLOGY. The Company intends to further refine,
enhance and develop certain of the Company's existing software and billing
systems and to migrate over time the Company's billing and accounts receivable
management services operations to the Company's most proven software systems and
technology, so as to reduce the number of systems and technology that must be
maintained and supported. Moreover, management intends to continue to implement
"best practices" and other established process improvements in its operations
going forward. There can be no assurance that the Company will be able to
successfully refine, enhance and develop its software and billing systems going
forward, that the costs associated with maintaining, enhancing and developing
such software and systems will not increase significantly in future periods,
that the Company will be able to successfully migrate the Company's billing and
accounts receivable management services operations to the Company's most proven
software systems and technology or that the Company's existing software and
technology will not become obsolete as a result of ongoing technological
developments in the marketplace.
CASH FLOW FROM OPERATIONS; SECOND AMENDED FACILITY. During the six months
ended June 30, 1997, the Company generated approximately $5.6 million in cash
from operating activities. At June 30, 1997, approximately $137 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 June 30, 1997 balance
sheet. The Company's previous senior credit facility was amended and restated on
February 4, 1997 to, among other things, increase the loan commitments from $250
million to $285 million and extend the maturity through June 30, 1998. The
Second Amended Facility is secured by substantially all of the Company's assets
and is guaranteed by substantially all of the Company's subsidiaries. The loan
commitment under the Second Amended Facility was reduced to $170 million on May
28, 1997 as a result of the successful sale of Healthcare Recoveries, Inc., and
is required to be reduced to $150 million on January 31, 1998. Certain of the
other material terms of the Second Amended Facility include adjustment of the
interest rates, fees and charges and other compensation to be paid to the
lenders by the Company, including the vesting of certain warrant arrangements
for 1% of the voting Common Stock (the "Common Stock") of the Company on each of
January 1, 1998 and April 1, 1998; modification of the financial reporting
requirement to the lenders; restrictions on new acquisitions and certain
litigation settlement payments; and establishment of a maximum permitted capital
expenditures covenant for the fiscal quarter ending March 31, 1997 and
additional financial covenants for fiscal quarters ending on and after June 30,
1997. This summary of certain terms of the 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").
While management presently anticipates that the liquidity provided in the
Second Amended Facility (together with anticipated results from operations based
on the 1997 business plan) will be sufficient to fund the Company's anticipated
operating and capital expenditure requirements during 1997, there can be no
assurance that there will not be material deviations in actual operations from
the 1997 business plan which would make it necessary for the Company to seek
either further modifications to the Second Amended Facility or other sources of
liquidity. While the Second Amended Facility incorporates an extension of
maturity through June 30, 1998, the Company will be required to renegotiate the
Second Amended Facility prior to maturity, obtain alternative financing or
generate sufficient proceeds from a sale of assets in order to provide adequate
liquidity for the Company's 1998 business plan. There can be no assurance that
the Company's lenders will agree to further modifications of the Second Amended
Facility or that the Company will obtain alternative financing or generate
sufficient proceeds from a sale of assets. Finally, the Company may also be
required to consider other alternative financing arrangements and/or equity
transactions, which could prove costly and/or involve further dilution to the
Company's stockholders. There can be no assurance
3
<PAGE> 4
that any such alternative financing arrangements and/or equity transactions will
be available to the Company on acceptable terms or at all.
PENDING FEDERAL INVESTIGATION; PUTATIVE CLASS ACTION LAWSUITS. 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. 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. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance 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, solely for 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.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On April 11, 1996, certain of the named plaintiffs to
the Consolidated Complaint voluntarily dismissed with prejudice all of their
claims. As a result of these dismissals, the Consolidated Complaint no longer
contains any claims based on the Securities Act of 1933, as amended (the "1933
Act"), and the Company's underwriters and outside directors are no longer named
as defendants. The plaintiffs and the defendants have reached an agreement 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
would also include the related putative class action lawsuit currently pending
in the Superior Court of Cobb County, Georgia, described more fully below. The
court conditionally has certified a class for settlement purposes and has
scheduled a hearing for October 6, 1997 to determine whether to approve the
settlement and enter final judgment dismissing the action with prejudice. The
Company has reached agreement with one of its directors and officers' liability
insurance carriers to fund $3.7 million of the 1995 Class Action Settlement. The
Company accrued approximately $1.2 million in the quarter ending December 31,
1996 to fund the anticipated balance of the 1995 Class Action Settlement and to
pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages and costs. To date, defendants have not been served with
this complaint. Pursuant to the consummation of the
4
<PAGE> 5
1995 Class Action Settlement, the claims in this state action also will be
settled. Pursuant to the settlement agreement, plaintiffs have filed a motion to
dismiss this action without prejudice.
As originally disclosed in the 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 calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual 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, 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. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for 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 January 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"). 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 (payable
by the Company's 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 to 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 against the Company, subject to a 5.0 million share basket below which
5
<PAGE> 6
there will be no dilution adjustments. 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 treatment of class members
in connection with the proposed settlement will not jeopardize
pooling-of-interests accounting treatment on previous acquisitions, the
execution of mutually acceptable settlement papers and the approval of the
settlement by the court. While the Company is presently unable to determine
when, or if, the contingencies in the Memorandum of Understanding may be
resolved and a charge recorded, management presently anticipates that the
Memorandum of Understanding should not have a material adverse effect on: (i)
the Company's current efforts to refinance the Second Amended Facility; or (ii)
the Company's operating cash flow or liquidity position, provided that any such
charge, if and when recorded, does not then violate the covenants of the Second
Amended Facility or any then applicable debt facility or such covenant
violations, if any, are waived.
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 certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in 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. The demurrer was denied on February 5, 1997. 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 officers of Medaphis. These newly added
defendants have not yet 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). 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
new parties, including former officers of Medaphis. Defendants have not yet
responded to 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
6
<PAGE> 7
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 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
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
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.
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
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
7
<PAGE> 8
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 the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program (Medicare), have projected that the
Medicare "trust fund" is likely to become insolvent by the year 2002 if the
current growth rate of approximately 10% per annum in Medicare expenditures
continues. Similarly, federal and state expenditures under the Medicaid program
are projected to increase significantly during the same seven-year period. In
response to these projected expenditure increases, and as part of an effort to
balance the federal budget, both the Congress and the Clinton Administration
have made proposals to reduce the rate of increase in projected Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of both
programs. In late 1995, Congress passed legislation that would substantially
reduce projected expenditure increases substantially and would make significant
changes in the Medicare and the Medicaid programs. The Clinton Administration
has proposed alternate measures to reduce, to a lesser extent, projected
increases in Medicare and Medicaid expenditures. Neither proposal became law
prior to Congress' 1996 adjournment. Medaphis anticipates that both the Clinton
Administration and the Republican majorities in Congress will introduce
legislation in 1997 designed to reduce projected increases in Medicare and
Medicaid expenditures and to make other changes in the Medicare and Medicaid
programs. Medaphis anticipates that such proposed legislation would, if adopted,
change aspects of the present methods of paying physicians under such programs
and provide incentives for Medicare and Medicaid beneficiaries to enroll in
health maintenance organizations and other managed care plans. Medaphis cannot
predict the effect of any such legislation, if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is 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
8
<PAGE> 9
among healthcare providers and managed care companies through capitated
contracts and integration among hospitals and physicians into comprehensive
delivery systems. Consolidation of management and billing services by integrated
delivery systems may result in a decrease in demand for Medaphis' billing and
collection services for particular physician practices, but this decrease may be
offset by an increase in demand for Medaphis' consulting and comprehensive
business management services (including billing and collection services) for the
new provider systems.
CLIENT/SERVER INFORMATION TECHNOLOGY PROJECTS. Medaphis' client/server
information technology business involves, among other things, projects designed
to reengineer significant client operations through the strategic use of
imaging, client/server and other advanced technologies. Failure to meet
expectations with respect to a major project could damage the Company's
reputation and standing in the client/server information technology marketplace,
affect its ability to attract new client/server information technology business,
result in the payment of damages to the client and jeopardize the Company's
ability to collect for services already performed on the project.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the 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.
9
