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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-47409
PROSPECTUS
JUNE 26, 1998
<TABLE>
<S> <C> <C>
$175,000,000
MEDAPHIS CORPORATION
OFFER TO EXCHANGE ITS
[MEDAPHIS LOGO] SERIES B 9 1/2% SENIOR NOTES DUE 2005
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES A 9 1/2% SENIOR NOTES DUE 2005
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JULY 27, 1998, UNLESS EXTENDED
------------------------
Medaphis Corporation, a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, the "Prospectus") and
in the accompanying Letter of Transmittal (which together constitute the
"Exchange Offer"), to exchange up to $175,000,000 aggregate principal amount of
its Series B 9 1/2% Senior Notes due 2005 (the "New Notes") for a like principal
amount of its outstanding Series A 9 1/2% Senior Notes due 2005 (the "Old
Notes", and together with the Old Notes, the "Notes"), of which $175,000,000
aggregate principal amount are outstanding.
The New Notes are being offered in order to satisfy certain obligations of
the Company under the Registration Rights Agreement, dated as of February 20,
1998 (the "Registration Rights Agreement"), among the Company and the Donaldson,
Lufkin & Jenrette Securities Corporation. The terms of the New Notes are
identical in all material respects to the respective terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and (ii) holders of
the New Notes will generally not be entitled to certain rights, including the
payment of Liquidated Damages (as defined), pursuant to the Registration Rights
Agreement. In the event that the Exchange Offer is consummated, any Old Notes
which remain outstanding after consummation of the Exchange Offer and the New
Notes issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture (as defined herein).
The New Notes will bear interest at the rate of 9 1/2% per annum, payable
semi-annually on February 15 and August 15 of each year, commencing on August
15, 1998. The New Notes will mature on February 15, 2005. The New Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at the redemption prices set forth herein, plus accrued
and unpaid interest to the redemption date. In addition, at any time on or prior
to February 15, 2001, the Company may redeem up to 35% of the original principal
amount of Notes at a redemption price equal to 109.5% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings (as
defined); provided that at least $100.0 million aggregate principal amount of
Notes remain outstanding immediately following any such redemption. Upon a
Change of Control (as defined), the Company will be required to offer to
purchase all outstanding Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the purchase date. See "Description of Notes -- Certain
Covenants -- Change of Control."
The New Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured senior
indebtedness of the Company. The Company is a holding company and, accordingly,
the Company's ability to pay dividends is dependent on distributions from its
subsidiaries. The New Notes will be fully and unconditionally guaranteed (the
"Subsidiary Guarantees") by all of the Company's present and future domestic
Restricted Subsidiaries (as defined) (the "Subsidiary Guarantors"). All of the
present Subsidiary Guarantors are direct or indirect wholly owned subsidiaries
of the Company. The Subsidiary Guarantees will be general unsecured obligations
of the Subsidiary Guarantors and will rank pari passu in right of payment with
all current and future unsecured senior indebtedness of the Subsidiary
Guarantors. However, the New Notes and the Subsidiary Guarantees will be
effectively subordinated to all existing and future secured indebtedness of the
Company and the Subsidiary Guarantors, including borrowings under the New Credit
Facility (as defined), which will be secured by a lien on substantially all of
the material assets of the Company and the Subsidiary Guarantors. As of February
27, 1998, the Company and the Subsidiary Guarantors had approximately $44
million of secured indebtedness outstanding and had approximately $45 million of
additional borrowing ability under the New Credit Facility. See "Description of
New Credit Facility." The Company may incur unlimited pari passu debt pursuant
to the Indenture provided it meets a fixed charge coverage ratio. See
"Description of Notes -- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Stock." Additional restrictions on the Company's
ability to incur debt are contained in the New Credit Facility. See "Description
of New Credit Facility."
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Notes on June 26, 1998.
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD NOTES IN
THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 26, 1998.
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The Company is making the Exchange Offer of the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter and there can be no
assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance of the
Commission, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any
holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing New Notes, or
any broker-dealer who purchased Old Notes from the Company to resell pursuant to
Rule 144A under the Securities Act ("Rule 144A") or any other available
exemption under the Securities Act, (a) will not be able to rely on the
interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Company may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) on behalf of whom such
holder holds the Notes to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Company believes that broker-dealers who acquired Old Notes for their
own accounts, as a result of market-making activities or other trading
activities ("Participating Broker-Dealers"), may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company
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has agreed that this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of such New Notes for a period ending 180 days after the Expiration Date (as
defined herein) (subject to extension under certain limited circumstances
described below) or, if earlier, when all such New Notes have been disposed of
by such Participating Broker-Dealer. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "The Exchange Offer -- Exchange Agent." Any Participating
Broker-Dealer who is an "affiliate" of the Company may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer -- Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Old Notes. The New Notes will be a new issue of
securities for which there currently is no market. Although Donaldson, Lufkin &
Jenrette Securities Corporation has informed the Company that it currently
intends to make a market in the New Notes, it is not obligated to do so, and any
such market making may be discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the New Notes. The Company currently does not intend to apply for listing of the
New Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to all of the existing restrictions upon transfer thereof and the
Company will not have any further obligation to such holders (other than under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors -- Consequences of a Failure to
Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
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Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on July 27, 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn at
any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. Old Notes may be tendered in whole or in part
in denominations of $1,000 and integral multiples thereof. The Company has
agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer -- Fees and Expenses." Holders of the Old Notes whose Old Notes are
accepted for exchange will not receive interest on such Old Notes and will be
deemed to have waived the right to receive any interest on such Old Notes
accrued from and after February 20, 1998. See "The Exchange Offer -- Interest on
New Notes."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
CARYN DICKERSON, VICE PRESIDENT AND TREASURER, MEDAPHIS CORPORATION, 2700
CUMBERLAND PARKWAY, SUITE 300, ATLANTA, GEORGIA 30339, TELEPHONE NUMBER (770)
444-5300. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY JULY 17, 1998.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS: THIS PROSPECTUS INCLUDES
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (SECTION 27A OF THE SECURITIES ACT AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT")). THE
COMPANY WISHES TO ENSURE THAT ALL SUCH FORWARD-LOOKING STATEMENTS ARE
ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS PURSUANT TO THE SAFE HARBOR
ESTABLISHED IN SUCH ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN
STATEMENTS UNDER "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "THE BUSINESS," MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS SENIOR
MANAGEMENT TEAM. 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, PROSPECTIVE PARTICIPANTS IN THE EXCHANGE
OFFER ARE URGED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS."
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE THIS "SAFE-HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS" TO REFLECT FUTURE DEVELOPMENTS.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. The following summary information is qualified in its entirety
by reference to, and should be read in conjunction with, the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus, including information under "Risk Factors." References
herein to the "Company" or "Medaphis" refer to Medaphis Corporation and its
consolidated subsidiaries unless otherwise noted. The Company's fiscal year is
the calendar year. Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. See "Disclosure Regarding
Forward-Looking Statements."
THE BUSINESS
Medaphis is a leader in delivering healthcare information products and
business management services, together with enabling technologies in selected
industries. Medaphis serves approximately 20,700 physicians and 2,700 hospitals
predominantly in North America. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively. The
Company's large client base and national presence further support the Company's
competitive position. Medaphis provides its services and products through its
Healthcare Services Group and Per-Se Technologies, its Information Technology
Group. The Company reported a net loss of $19.3 million for the year ended
December 31, 1997, including restructuring and other charges ($22.6 million) a
litigation settlement ($52.5 million) and an extraordinary gain on the sale of
HRI, net of tax ($76.4 million). The Company generated revenue during the year
ended December 31, 1997 of $557.9 million determined on a pro forma basis giving
effect to the disposition of Medaphis' non-core insurance subrogation
subsidiary, Healthcare Recoveries, Inc. ("HRI"), which was sold in May 1997.
HEALTHCARE SERVICES GROUP. The Healthcare Services Group provides a range
of business management services to physicians and hospitals, including clinical
data collection, data input, medical coding, billing, cash collections and
accounts receivable management. These services are designed to assist customers
with the business management functions associated with the delivery of
healthcare services, allowing physicians and hospital staff to focus on
providing quality patient care. These services also assist physicians and
hospitals by improving cash flows and by reducing administrative costs and
burdens. The Healthcare Services Group typically enters into contracts with
physician and hospital customers providing for payment to the Company of a
contingent management fee that generally is based upon a percentage of net
collections and is billable monthly upon collection or, where required, on a
fixed fee basis. The Healthcare Services Group consists of the following two
divisions:
PHYSICIAN SERVICES. Physician Services is a leading provider of
business management solutions and claims processing to physicians in the
United States, a market currently estimated to be approximately $10 billion
annually according to Volpe, Welty & Company. Of this market, management
estimates that approximately 24% is currently served by outsourcing
companies such as Medaphis. The Company has more than 17,250 physician
clients throughout 47 states. Physician Services offers clients both
revenue and cost management services. Revenue management services include
medical coding, electronic and manual claims submission, automated patient
billing, past due and delinquent accounts receivable collection, capitation
analysis (i.e., an analysis of the price per member paid to healthcare
providers by managed care health programs for a predetermined set of
healthcare services and procedures) and contract negotiation with payors,
including managed care organizations. Cost management services provide
comprehensive practice management, including front office administration,
employee benefit plan design and administration, cash flow forecasting and
budgeting and general consulting services.
HOSPITAL SERVICES. Hospital Services is a leading provider of
business management services to hospitals in the United States,
representing over 1,100 hospitals in a highly fragmented industry. Hospital
Services offers services primarily related to "late stage" (over 90 days)
receivables, including claims submission and automated patient billing.
Hospital Services also offers: (i) eligibility services, in which
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Hospital Services personnel assist patients in qualifying for reimbursement
under appropriate federal, state and local government healthcare programs
and (ii) facilities management contracts, in which Hospital Services
assumes responsibility for the customer's entire business office functions,
including patient admissions/registration, medical records and business
office activities.
PER-SE TECHNOLOGIES. Per-Se Technologies ("Per-Se") provides application
software and a broad range of information technology and consulting services to
healthcare and other service-oriented markets such as energy, communications and
financial services. Per-Se is an early entrant in the emerging market for
Delivery Chain Management ("DCM") solutions, which enable users to assess each
customer's unique needs and cost-effectively deliver products and services
individually tailored to meet them. Per-Se develops solutions using its Deliver
to Order(TM) methodology that enables customers to choose among packaged
application software, software supplied by other companies and modified by
Per-Se, enabling technology services, and outsourcing to balance their needs for
flexibility, time to deployment and cost.
In the third quarter of 1997 Medaphis combined the operations of Healthcare
Information Technologies ("HIT"), its software products division ("Product
Operations"), and the operations of BSG Corporation ("BSG"), its information
technology services division ("Services Operations"), under the Per-Se name.
This combination has helped the Company in its efforts to contain costs and
eliminate redundancies. Per-Se's management expects to benefit from the synergy
of combining HIT's leading information products in the high-growth healthcare
information systems market with BSG's ability to provide enabling technology
infrastructure and services. Per-Se is organized into Product Operations and
Services Operations.
PRODUCT OPERATIONS. Through its Product Operations, Per-Se provides
application software and systems integration services through over 1,800
hospital installations and to approximately 3,450 physicians. Per-Se offers
the following product lines: (i) an integrated enterprise-wide
patient-centered information system that coordinates quality integrated
care at nearly 200 acute-care and extended-care facilities representing
more than 30,000 beds, and for thousands of ambulatory clinics and
home-care providers; (ii) an advanced radiology information management
system for both single- and multi-site hospitals and imaging center
networks; and (iii) a suite of rules-based staff productivity, patient
scheduling and resource management software with over 1,900 global
installations. These products address both the business and the clinical
management needs of Per-Se's healthcare provider customers, and can
function in either a stand-alone provider setting or across an entire
healthcare delivery network. Per-Se also provides a variety of interfaces
to ensure that its products are compatible with other software products
used by healthcare providers. Per-Se Product Operations' revenue is derived
from software licenses, resale of hardware, installation and implementation
services, and continuing customer support and software maintenance
activities. Customer support and software maintenance fees generally renew
annually to provide a recurring base of revenue.
SERVICES OPERATIONS. Through its Services Operations, Per-Se provides
full-service systems integration, information technology consulting and
tailored software development to more than 100 customers, primarily in
service-oriented markets such as healthcare, energy, communications and
financial services. Per-Se provides its expertise in information technology
and business services to organizations seeking to create competitive
advantages through the strategic use of advanced technologies. These
technologies enable customers to streamline business processes and improve
access to information within their organizations, as well as to create
strategic advantages by extending business processes and information to
customers, suppliers and other organizations through networked systems.
HEALTHCARE INDUSTRY OVERVIEW
The healthcare industry is undergoing major changes, as pressures to cut
costs and increase quality and productivity are inspiring healthcare providers
to seek ways to manage their practices more effectively. Management believes
that, in general, the healthcare industry is in a state similar to that of the
financial services industry in the early 1980s. The same type of computerized
technology that fueled the substantial growth and change in that industry is
just beginning to be deployed in the healthcare industry.
According to the Gartner Group, since 1986, healthcare expenditures have
doubled to more than $1.0 trillion, representing approximately 14% of the 1996
U.S. Gross Domestic Product. At the same time, the
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healthcare delivery system is experiencing a shift from a highly fragmented
group of independent healthcare providers to integrated healthcare networks that
combine all of the services, products and equipment necessary to address
people's healthcare needs. In the face of escalating costs and increasingly
complex care delivery systems, healthcare providers are seeking to manage costs,
increase productivity and enhance the quality of patient care through improved
access to clinical and financial information. This creates an opportunity for
companies such as Medaphis that provide comprehensive cost-effective management
services and information systems.
Additionally, the federal government's focus on eliminating healthcare
fraud and abuse presents high growth opportunities for companies such as
Medaphis that provide sophisticated technology products and services to help
healthcare service providers comply with complex healthcare laws and
reimbursement procedures.
In light of these trends, healthcare industry analysts expect expenditures
on products and services that support healthcare information systems to continue
to increase over the next several years.
TURNAROUND; NEW MANAGEMENT
The Company suffered several setbacks in recent years, including: (i)
government investigations into (a) the billing and collection practices in two
offices of Medaphis Physician Services Corporation ("MPSC") (as further
described below) and (b) the billing procedures and computerized coding system
used in Gottlieb's Financial Services ("GFS") to process claims, which may lead
to claims of errors in billing; (ii) the failure of prior managements'
acquisition strategy to integrate businesses acquired; (iii) several
restatements of various financial statements of the Company, including
restatements of the Company's fiscal 1994, 1995, 1996 and interim 1997 financial
statements; (iv) the shut down of the operations of one of the companies
acquired; (v) the abandonment of an extensive reengineering program that failed
to realize the improvement in customer service and reduction of costs that were
expected; (vi) a steep drop in the price of its common stock; and (vii) the
filing of various lawsuits and claims made against the Company, including
multiple putative shareholder class action lawsuits alleging violations of the
federal securities law.
In response to certain of these setbacks, assembly of a new management team
began in the fourth quarter of 1996, headed by David E. McDowell (former
President and Chief Operating Officer of McKesson Corporation). The new
management team combines healthcare industry talent with information technology
expertise from other industries that have already undergone the transition to
effective use of information technology. The Company believes that the combined
strengths of this team position Medaphis to take advantage of growth
opportunities in the healthcare marketplace.
In addition, in February 1997, new management announced its 1997 operating
plan, refocusing the Company on its core businesses of delivering healthcare
information products and business management services, together with enabling
technologies in selected industries. The major components of the plan included:
(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 businesses; (iv)
achieving excellence in customer service; and (v) implementing cross-selling
initiatives. The Company made significant progress in accomplishing the 1997
operating plan, including the divestiture of HRI in May 1997 for net proceeds of
approximately $117.0 million, the combination of the operations of HIT and BSG
under the Per-Se name, the improvement of financial controls and imposition of
cost-containment measures throughout the Company, and the formulation of a new
customer-focused strategy centered on a "markets of one" approach to solutions
meeting the distinct needs of each customer.
RECENT DEVELOPMENTS
The Company has previously disclosed an investigation being conducted by
the United States Attorney's Office for the Central District of California
concerning the billing and collection practices in two offices of the Company's
wholly owned subsidiary, MPSC, which offices are located in Calabasas and
Cypress, California (the "Designated Offices") (the "California Investigation").
Medaphis first became aware of the California
3
<PAGE> 8
Investigation on June 13, 1995, and the Company subsequently has made periodic
disclosures concerning the status of the California Investigation.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex. rel. Relator I and Relator II v. Compmed Corporation,
Medaphis Corporation, Does 1 to 200, Inclusive, Civil Action No. 94-8158 LGB
(kx). On February 11, 1998, the United States provided Medaphis with a copy of
the Complaint, Substitution of Attorney, and Order which prohibited the Company
from making any use of the Complaint, including any public disclosure, other
than for the purposes of settlement negotiations, without further order of the
Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosure did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Realtors and
which contains allegations raised by them, the action is to recover civil
penalties on behalf of the United States and the State of California arising out
of alleged false claims presented by the defendants on behalf of their clients
for payment under various state and federal insurance programs. As previously
disclosed, no charges or claims by the government have been made. The Complaint
includes causes of action under the federal False Claims Act, 31 U.S.C. sec.
3729 et seq., and the California False Claims Act, Cal. Gov't Code sec. 12650 et
seq. The Complaint also includes causes of action relating to Medaphis's
termination of Realtor II, including a count under the state and federal
whistleblower protection statutes. The Complaint alleges overpayments of
approximately $20,500,000 together with treble damages and additional penalties
based on statutory civil penalties. The Complaint alleges that at least 50,000
separate false claims were filed under federal programs and at least 8,000
separate false claims were filed under state programs. The Complaint also
alleges unspecified compensatory, general and punitive damages on behalf of
Relator II on his or her employment claims. The allegations in the Complaint are
limited to the office of Compmed (acquired by Medaphis) in Culver City,
California. Medaphis believes that this Complaint relates to and concerns the
California Investigation.
Medaphis is engaged in discussions with the United States and California,
and intends to pursue settlement discussions with the United States, the State
of California, and the Relators. There can be no assurance that the Complaint
will be resolved promptly or that the Complaint will not have a material adverse
effect upon the Company.
In 1993, the Company acquired GFS, an emergency room physician billing
company, which had developed a computerized coding system. In 1994, the Company
acquired and merged into GFS another emergency room physician billing company,
Physician Billing, Inc., located in Grand Rapids, Michigan, which was then
migrated to the GFS coding system.
The GFS coding system was developed in-house at GFS in the 1980s using the
COBOL computer language. The program and its source code were not extensively
documented. In addition, the program was originally written to conform with
then-existing government billing regulations, which have since been changed. At
the time of these changes, and thereafter, the Company undertook some revisions
to the coding system. In March 1997, Medaphis learned that GFS was the target of
a government investigation. Although the precise scope and subject matter of the
government investigation are not known to the Company,
4
<PAGE> 9
Medaphis believes that the investigation -- which is being participated in by
several agencies having administrative, civil and/or criminal
authority -- involves GFS billing procedures and the coding system used in both
Grand Rapids and Jacksonville. See "The Business -- Legal Proceedings". Promptly
after the Company became aware of the GFS Investigation, the Company expanded
its compliance efforts with respect to the GFS coding system and undertook a
substantial process review using both internal resources and outside
consultants.
The Company decided in April 1998 to transition GFS from the computerized
coding system to manual coding. The decision to terminate use of the coding
system was based on several factors. These included the high cost of continuing
management, compliance and quality assurance oversight and the failure to meet
the Company's current efficiency and productivity targets. In addition, the
system will not comply with anticipated revisions to government billing
regulations, and is not "Year 2000" compliant. During the transition period,
which should be completed by fall of 1998, GFS will continue to utilize the
coding system in conjunction with an increasing volume of manual coding and the
Company will continue to support GFS with its compliance and quality assurance
programs in support of both the coding system and manual coding.
BUSINESS STRATEGY
Medaphis' primary business objective is to expand its market position in
delivering cost-effective, high-quality healthcare information products and
business management services, together with enabling technologies in selected
industries, thereby realizing the growth potential of the Company.
In 1998, Medaphis plans to capitalize on the progress made in 1997 by
continuing to attract talented people, strengthening its infrastructure,
streamlining operations for efficiency and investing in product and service
development, training, sales, marketing and other programs designed to fuel
growth.
To reach its objectives, Medaphis intends to execute strategies that
include:
- CAPITALIZE ON INDUSTRY TRENDS. The healthcare industry is rapidly
transitioning to consolidated care delivery systems, capitation and
managed care. Many physicians who previously practiced independently or in
small group practices now practice as part of larger groups or integrated
delivery networks that unite physicians with different practice
specialities to cover a broad range or even the entire spectrum of
healthcare needs. The Company's services and products can assist
healthcare providers in pricing services and negotiating agreements in a
marketplace increasingly moving toward capitation and managed care.
Although historically a large portion of Medaphis' Healthcare Services
revenue has come from billing and receivables management services,
Medaphis intends to respond to the changing nature of the healthcare
industry by developing higher value-added services and products that
enable customers to operate more effectively in increasingly complex
environments. The Company plans to grow revenue derived from offerings
such as: information management and consulting services for mergers and
group formations; activity-based costing systems; capitation management
and analysis; outcomes reporting; medical guidelines management; patient
eligibility services; and facilities management.
- LEAD INDUSTRY IN DELIVERING INTEGRATED SOLUTIONS. Medaphis intends to
capitalize on its experience as a software provider and systems integrator
to deliver workable integrated solutions that combine new technologies
with customers' existing information systems. There are substantial
opportunities for the expansion of information technology systems within
the healthcare market, which management believes has adopted such
technology at a slower rate than have some other industries. Management
anticipates that current healthcare industry trends will continue, and
that expenditures for information technology and services will increase as
a percentage of total healthcare expenditures. Medaphis has the healthcare
information products, personnel, services and systems in place to deliver
integrated solutions that capitalize on this growth opportunity.
- DIFFERENTIATE FROM COMPETITORS BY BECOMING KNOWN FOR CREATING
"INDIVIDUALLY DELIVERED" SOLUTIONS. Medaphis plans to deliver personalized
value, attract new customers and strengthen customer loyalty by focusing
on a "markets of one" approach to business that enables its customers to
combine
5
<PAGE> 10
Medaphis' array of packaged applications, tailored third-party solutions,
component frameworks and information technology services to craft
solutions suited to their unique needs.
- LEAD THE COMPLIANCE INITIATIVE IN THE HEALTHCARE MARKET. The healthcare
industry is subject to extensive and complex federal and state government
regulations. These regulations, along with the federal government's close
monitoring of healthcare costs and stricter regulatory controls over the
industry, are driving the demand for better systems to monitor and ensure
compliance with healthcare laws and regulations. Management believes the
Company's size, customer base and access to payor data enable it to
assemble and analyze data and trends more effectively and to invest in
compliance initiatives. Through continued investments in technology and
training, Medaphis intends to strengthen further its position in
developing and improving compliance systems that enable customers to
operate in accordance with continually changing healthcare regulations.
For example, in December of 1997 Physician Services teamed with the Graham
Company, a Philadelphia-based insurance broker, to develop an exclusive
insurance product in conjunction with an underwriter for Physician
Services' customers that will pay for losses (civil fines and penalties
and multiple damages) incurred by a physician for any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement,
omission or act in billing his or her professional services.
- EXECUTE PROGRAMS THAT EXPAND EXISTING CUSTOMER RELATIONSHIPS. Medaphis
plans to sell products and services from each of its operations to
existing customers across all operations. In addition, Medaphis will
leverage advanced technology knowledge and capabilities derived from
solutions Per-Se creates for services industries such as communications,
energy and financial services that have adopted technology solutions more
quickly than healthcare. Medaphis believes cross-development initiatives
will enable it to deliver leading-edge, yet proven, technology solutions
to the healthcare market.
- MAKE STRATEGIC ACQUISITIONS, PARTNERSHIPS AND ALLIANCES. Medaphis
intends to enhance internal growth by making, when and if appropriate, a
limited number of strategic acquisitions, as well as by formulating
alliances and partnerships, that extend the skills, processes,
capabilities, products, systems or geographic coverage already in place
within the Company.
REFINANCING
In conjunction with the offering of the Old Notes, the Company entered into
the New Credit Facility (as defined). The Company used the net proceeds of such
offering, together with available cash and the initial borrowing under the New
Credit Facility, to refinance the Company's $210 million principal amount of
Senior Secured Increasing Rate Notes due April 1, 1999 (the "Bridge Notes"),
$185 million of which were purchased by an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation on December 23, 1997 and the remainder of which
were purchased by such affiliate on January 22, 1998. Approximately $157.5
million of the proceeds from the sale of the Bridge Notes was used by the
Company on December 23, 1997 to repay and refinance in full the Company's then
existing credit facility which was scheduled to mature on June 30, 1998 and
which would have required the issuance by the Company to the lenders thereunder
of warrants for 1% of the voting common stock of the Company if such credit
facility had not been repaid in full prior to December 31, 1997. Management
believes the refinancing has provided the Company with the financial flexibility
to support its turnaround plan and facilitate its future growth strategies.
GENERAL INFORMATION
Medaphis Corporation is a Delaware corporation formed in 1985 and operates
through a number of wholly-owned subsidiaries. The Company's principal executive
offices are located at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia
30339, and its telephone number is (770) 444-5300.
6
<PAGE> 11
THE EXCHANGE OFFER
The Exchange Offer............ Up to $175,000,000 aggregate principal amount
of New Notes are being offered in exchange for
a like aggregate principal amount of Old Notes.
Old Notes may be tendered for exchange in whole
or in part in denominations of $1,000 or any
integral multiple thereof. The Company is
making the Exchange Offer in order to satisfy
its obligations under the Registration Rights
Agreement relating to the Old Notes. For a
description of the procedures for tendering Old
Notes, see "The Exchange Offer -- Procedures
for Tendering Old Notes."
Expiration Date............... 5:00 p.m., New York City time, on July 27,
1998, unless the Exchange Offer is extended by
the Company (in which case the Expiration Date
will be the latest date and time to which the
Exchange Offer is extended). See "The Exchange
Offer -- Terms of the Exchange Offer."
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
conditions, which may be waived by the Company
in its sole discretion. The Exchange Offer is
not conditioned upon any minimum principal
amount of Old Notes being tendered. See "The
Exchange Offer -- Conditions to the Exchange
Offer."
Offer......................... The Company reserves the right in its sole and
absolute discretion, subject to applicable law,
at any time and from time to time, (i) to delay
the acceptance of the Old Notes for exchange,
(ii) to terminate the Exchange Offer if certain
specified conditions have not been satisfied,
(iii) to extend the Expiration Date of the
Exchange Offer and retain all Old Notes
tendered pursuant to the Exchange Offer,
subject, however, to the right of holders of
Old Notes to withdraw their tendered Old Notes,
or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any
respect. See "The Exchange Offer -- Terms of
the Exchange Offer."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time on or prior to the Expiration Date by
delivering a written notice of such withdrawal
to the Exchange Agent in conformity with
certain procedures set forth below under "The
Exchange Offer -- Withdrawal Rights."
Procedures for Tendering Old
Notes......................... Brokers, dealers, commercial banks, trust
companies and other nominees who hold Old Notes
through DTC (as defined herein) may effect
tenders by book-entry transfer in accordance
with DTC's Automated Tender Offer Program
("ATOP"). Holders of such Old Notes registered
in the name of a broker, dealer, commercial
bank, trust company or other nominee are urged
to contact such person promptly if they wish to
tender Old Notes. In order for Old Notes to be
tendered by a means other than by book-entry
transfer, a Letter of Transmittal must be
completed and signed in accordance with the
instructions contained herein. The Letter of
Transmittal and any other documents required by
the Letter of Transmittal must be delivered to
the Exchange Agent by mail, facsimile, hand
delivery or overnight carrier and either such
Old Notes must be delivered to the Exchange
Agent or specified
7
<PAGE> 12
procedures for guaranteed delivery must be
complied with. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Letters of Transmittal and certificates
representing Old Notes should not be sent to
the Company. Such documents should only be sent
to the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
Resales of New Notes.......... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the
Commission as set forth in certain interpretive
letters addressed to third parties in other
transactions. The Company has not sought its
own interpretive letter and there can be no
assurance that the staff of the Division of
Corporation Finance of the Commission would
make a similar determination with respect to
the Exchange Offer as it has in such
interpretive letters to third parties. Based on
these interpretations by the staff of the
Division of Corporation Finance of the
Commission, and subject to the two immediately
following sentences, the Company believes that
New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by
a holder thereof (other than a holder who is a
broker-dealer) without further compliance with
the registration and prospectus delivery
requirements of the Securities Act, provided
that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder is not participating, and has
no arrangement or understanding with any person
to participate, in a distribution (within the
meaning of the Securities Act) of such New
Notes. However, any holder of Old Notes who is
an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the
purpose of distributing the New Notes, or any
broker-dealer who purchased the Old Notes from
the Company to resell pursuant to Rule 144A or
any other available exemption under the
Securities Act, (a) will not be able to rely on
the interpretations of the staff of the
Division of Corporation Finance of the
Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted
or entitled to tender such Old Notes in the
Exchange Offer and (c) must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any sale or other transfer of
such Old Notes unless such sale is made
pursuant to an exemption from such
requirements. In addition, as described below,
if any broker-dealer holds Old Notes acquired
for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New Notes, then
such broker-dealer must deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange
Old Notes for New Notes in the Exchange Offer
will be required to represent that (i) it is
not an "affiliate" of the Company, (ii) any New
Notes to be received by it are being acquired
in the ordinary course of its business, (iii)
it has no arrangement or understanding with any
person to participate in a distribution (within
the meaning of the
8
<PAGE> 13
Securities Act) of such New Notes, and (iv) if
such holder is not a broker-dealer, such holder
is not engaged in, and does not intend to
engage in, a distribution (within the meaning
of the Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for
its own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such New Notes.
The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. Based on the position taken
by the staff of the Division of Corporation
Finance of the Commission in the interpretive
letters referred to above, the Company believes
that Participating Broker-Dealers who acquired
Old Notes for their own accounts as a result of
market-making activities or other trading
activities may fulfill their prospectus
delivery requirements with respect to the New
Notes received upon exchange of such Old Notes
(other than Old Notes which represent an unsold
allotment from the original sale of the Old
Notes) with a prospectus meeting the
requirements of the Securities Act, which may
be the prospectus prepared for an exchange
offer so long as it contains a description of
the plan of distribution with respect to the
resale of such New Notes. Accordingly, this
Prospectus, as it may be amended or
supplemented from time to time, may be used by
a Participating Broker-Dealer in connection
with resales of New Notes received in exchange
for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer
for its own account as a result of
market-making or other trading activities.
Subject to certain provisions set forth in the
Registration Rights Agreement and to the
limitations described below under "The Exchange
Offer -- Resales of New Notes," the Company has
agreed that this Prospectus, as it may be
amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in
connection with resales of such New Notes for a
period ending 180 days after the Expiration
Date (subject to extension under certain
limited circumstances) or, if earlier, when all
such New Notes have been disposed of by such
Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer
who is an "affiliate" of the Company may not
rely on such interpretive letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. See
"The Exchange Offer -- Resales of New Notes."
Exchange Agent................ The exchange agent with respect to the Exchange
Offer is State Street Bank and Trust Company
(the "Exchange Agent"). The addresses, and
telephone and facsimile numbers, of the
Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent" and in the Letter of
Transmittal.
Use of Proceeds............... The Company will not receive any cash proceeds
from the issuance of the New Notes offered
hereby. See "Use of Proceeds."
9
<PAGE> 14
Certain Federal Income Tax
Considerations................ Holders of Old Notes should review the
information set forth under "Certain Federal
Income Tax Consequences" prior to tendering Old
Notes in the Exchange Offer.
THE OFFERING
Securities Offered............ $175 million aggregate principal amount of
Series B 9 1/2% Senior Notes due 2005.
Maturity Date................. February 15, 2005.
Interest Rate; Payment
Dates......................... The New Notes will bear interest at the rate of
9 1/2% per annum from the date of issuance,
payable semi-annually on February 15 and August
15 of each year, commencing August 15, 1998.
Subsidiary Guarantees......... Payment of principal of, premium, if any, and
interest on the New Notes will be fully and
unconditionally guaranteed, on a senior
unsecured basis, jointly and severally (the
"Subsidiary Guarantees") by all of the
Company's present and future domestic
Restricted Subsidiaries (the "Subsidiary
Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented
as all subsidiaries, except for certain
inconsequential foreign subsidiaries, have
provided guarantees and the Parent does not
have any significant operations or assets,
separate from its investment in subsidiaries.
Any non-guarantor subsidiaries are
inconsequential individually and in the
aggregate to the consolidated financial
statements.
Ranking....................... The New Notes will be general unsecured
obligations of the Company and will rank pari
passu in right of payment with all current and
future unsecured senior indebtedness of the
Company. The Subsidiary Guarantees will be
general unsecured obligations of the Subsidiary
Guarantors and will rank pari passu in right of
payment with all current and future unsecured
senior indebtedness of the Subsidiary
Guarantors. However, the New Notes and the
Subsidiary Guarantees will be effectively
subordinated to all current and future secured
indebtedness of the Company and the Subsidiary
Guarantors, including borrowings under the new
credit agreement entered into in connection
with the offering of the Old Notes (the "New
Credit Facility"), which is secured by a lien
on substantially all the material assets of the
Company and the Subsidiary Guarantors. As of
April 30, 1998, the Company and the Subsidiary
Guarantors had approximately $43 million of
secured indebtedness outstanding and
approximately $37 million of additional
borrowing ability under the New Credit
Facility, all of which would be effectively
senior to the New Notes and the Subsidiary
Guarantees. See "Description of New Credit
Facility" and "Description of
Notes -- General."
Optional Redemption........... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after February 15, 2002, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
redemption date. In addition, at any time on or
prior to February 15, 2001, the Company may
redeem up to 35% of
10
<PAGE> 15
the aggregate principal amount of the Notes
originally outstanding at a redemption price
equal to 109.5% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption
date, with the net proceeds of one or more
Equity Offerings (as defined), provided that at
least $100.0 million of the aggregate principal
amount of the Notes originally outstanding
remain outstanding immediately following any
such redemption. See "Description of
Notes -- Optional Redemption."
Change of Control............. Upon a Change of Control, the Company will be
required to offer to purchase all outstanding
Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the purchase date.
It is unlikely the Company will have sufficient
funds to repurchase the Notes upon a Change of
Control. See "Description of Notes -- Certain
Covenants -- Change of Control."
Certain Covenants............. The indenture governing the Notes (the
"Indenture") contains covenants that, among
other things, limit the ability of the Company
and its Restricted Subsidiaries: (i) to pay
dividends and make other Restricted Payments
(as defined); (ii) to incur additional
indebtedness; (iii) to incur liens; (iv) to
enter into transactions with affiliates; (v) to
engage in sale-leaseback transactions; (vi) to
enter into agreements restricting the ability
of Restricted Subsidiaries to pay dividends and
make distributions; (vii) to merge or
consolidate with any other entity; and (viii)
to transfer or sell assets. In addition, under
certain circumstances, the Company will be
required to offer to purchase outstanding Notes
at a price equal to 100% of the principal
amount of such Notes, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of purchase with the net proceeds of
certain Asset Sales (as defined). These
covenants are subject to a number of important
exceptions. See "Description of
Notes -- Certain Covenants."
Use of Proceeds............... The Company will not receive any cash proceeds
in the Exchange Offer. The Company used the net
proceeds of the offering of the Old Notes,
together with available cash and the initial
borrowing under the New Credit Facility, to
refinance the Bridge Notes. See "Use of
Proceeds."
For more complete information regarding the New Notes, including
definitions of certain capitalized terms used above, see "Description of Notes."
RISK FACTORS
Holders should consider carefully the information set forth under the
caption "Risk Factors," and all other information set forth in this Prospectus
in deciding whether to tender in the Exchange Offer. Material risks relating to
the Company include the Company's leverage and ability to service debt,
litigation and government investigations, the dependence on the success of the
Company's turnaround and accounting issues. The material risks relating to the
Exchange Offer are the consequences of a failure to tender including potentially
limited liquidity and restrictions on sale due to lack of registration under
both federal and state securities laws.
11
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth (i) summary consolidated financial
information for Medaphis for and as of each of the three fiscal years in the
period ended December 31, 1997 and for the three months ended March 31, 1997 and
1998 and as of March 31, 1998; and (ii) summary unaudited pro forma statement of
operations for the year ended December 31, 1997, giving effect to the
divestiture of HRI. The unaudited pro forma statement of operations does not
give any effect to the offering of the Old Notes, the initial borrowing under
the New Credit Facility or the application of the net proceeds therefrom due to
the immaterial difference in the weighted average interest rate. The summary
consolidated financial data of Medaphis for each of the three fiscal years in
the period ended December 31, 1997 has been derived from the audited
consolidated financial statements of Medaphis, which are incorporated herein by
reference. The Company's summary consolidated financial data for the three
months ended March 31, 1997 and 1998 and as of March 31, 1998 have been derived
from the unaudited consolidated financial statements for the quarterly period
ended March 31, 1998, which are incorporated herein by reference. The pro forma
information is provided for informational purposes only and is not necessarily
indicative of actual results that would have been achieved had the offering of
the Old Notes, the initial borrowing under the New Credit Facility and the
application of the net proceeds therefrom, and the divestiture of HRI been
consummated as of January 1, 1997, or of future results. The summary unaudited
pro forma statement of operations is derived from the Unaudited Pro Forma
Consolidated Financial Statement appearing elsewhere herein.
The information set forth below should be read in conjunction with (i) the
Consolidated Financial Statements of the Company and the related notes thereto,
which are incorporated herein by reference; (ii) the Unaudited Pro Forma
Consolidated Financial Statement and notes thereto, which is included elsewhere
herein; and (iii) Management's Discussion and Analysis of Financial Condition
and Results of Operations, which is included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA(1) THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31,
---------------------------------------- DECEMBER 31, -------------------
1995 1996 1997 1997 1997 1998
------------- ------------- -------- ------------- -------- --------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $538,012 $ 596,714 $572,625 $ 557,905 $147,546 $140,340
Salaries and wages............. 314,790 398,573 377,363 370,625 93,578 88,198
Other operating expenses....... 134,055 163,677 153,372 149,476 40,242 39,339
Depreciation................... 14,187 28,276 29,355 28,954 6,985 8,304
Amortization................... 18,048 25,713 24,137 24,137 6,114 6,118
Interest expense, net.......... 9,761 11,585 23,260 18,822 6,115 6,375
Litigation settlement.......... -- -- 52,500 52,500 -- --
Restructuring and other
charges...................... 48,750 180,316 22,640 22,640 -- 561
Loss before extraordinary item
and cumulative effect of
accounting change............ $ (2,650) $(137,337) $(93,229) $ (92,591) $ (3,064) $ (5,150)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------- AS OF
1995 1996 1997 MARCH 31, 1998
------------- ------------- -------- --------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 90,043 $ 56,492 $ 93,497 $ 98,686
Intangible assets............................... 611,544 539,151 515,939 511,019
Total assets.................................... 935,790 936,854 874,027 880,309
Total debt...................................... 161,246 271,727 200,941 223,907
Convertible subordinated debentures............. 63,375 -- -- --
Stockholders' equity............................ $554,074 $ 508,525 $501,781 $494,758
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
PRO FORMA(1) THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31,
---------------------------------------- DECEMBER 31, ------------------
1995 1996 1997 1997 1997 1998
------------- ------------- -------- ------------- ------- --------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by (used
for) operating activities... $ 19,852 $ (7,863) $(10,207) $ -- $ 5,877 $ (8,533)
Net cash (used for) provided
by investing activities..... (162,158) (107,281) 97,432 -- (1,923) (17,360)
Net cash provided by (used
for) financing activities... 144,335 103,796 (77,062) -- (1,411) 15,244
OTHER FINANCIAL DATA:
EBITDA(2)..................... $ 89,167 $ 34,464 $ 41,890 $ 37,804(3) $13,726 $ 12,803
Capital expenditures.......... 51,120 51,135 19,971 19,863 3,400 15,638
</TABLE>
- ---------------
(1) The Unaudited Pro Forma Consolidated Statement of Operations Data for the
year ended December 31, 1997, gives effect to the divestiture of HRI as if
it had occurred on January 1, 1997.
(2) EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, litigation settlement, restructuring and other
charges, extraordinary item and cumulative effect of accounting change. The
following is a calculation of EBITDA for the year ended December 31, 1997:
<TABLE>
<CAPTION>
(000'S)
--------
<S> <C>
Net loss.................................................... $(19,303)
Interest expense............................................ 23,260
Income taxes................................................ (16,773)
Depreciation................................................ 29,355
Amortization................................................ 24,137
Litigation settlement....................................... 52,500
Restructuring and other charges............................. 22,640
Extraordinary item.......................................... (76,391)
Cumulative effect of accounting change...................... 2,465
--------
$ 41,890
========
</TABLE>
See Note 4 to the notes to the Consolidated Financial Statements of
Medaphis Corporation and subsidiaries where restructuring and other charges
are discussed in more detail. EBITDA is not a measure of performance under
GAAP. While EBITDA should not be considered as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, or as a measure of
profitability or liquidity, management believes that EBITDA is an
appropriate measurement to use in evaluating the Company's operating
performance as well as an approximation of the Company's liquidity.
Moreover, substantially all of the Company's financing agreements contain
covenants in which EBITDA, as defined therein, is used as a measure of
financial performance. The method of calculating EBITDA set forth above may
be different from calculations of EBITDA employed by other companies and,
accordingly, may not be directly comparable to such other calculations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of other measures of performance determined in
accordance with GAAP.
(3) EBITDA includes approximately $18.0 million of other charges which reduced
revenue in the quarter ended September 30, 1997 consisting of the following:
<TABLE>
<CAPTION>
(000'S)
-------
<S> <C>
Adjustment to the methodology of calculating accounts
receivable, unbilled...................................... $12,132
Adjustment to unbilled receivables related to one of the
Company's software products............................... 3,000
Miscellaneous unusual bad debt reserves..................... 2,823
-------
$17,955
=======
</TABLE>
Such charges will be added back to the Company's consolidated net income
for 1997 for purposes of calculating the fixed charge coverage incurrence
test contained in the Indenture. See "Description of Notes."
13
<PAGE> 18
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following risk factors before deciding
to participate in the Exchange Offer. The information contained in this
Prospectus contains statements that are forward-looking in nature and,
accordingly, are subject to a number of risks and uncertainties. A number of
factors, including, but not limited to, those discussed below and those
contained in "Disclosure Regarding Forward-Looking Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Business," could cause actual results to differ materially from those
anticipated by such forward-looking statements. In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and data that may be incorrect or imprecise. Accordingly, any forward-looking
statements included or incorporated by reference herein do not purport to be
predictions of future events or circumstances and may not be realized.
Forward-looking statements can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "plans," "may,"
"will," "should," "seeks," "pro forma" or "anticipates," or the negative
thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. At March 31, 1998 the Company's ratio of total debt to
total assets was 1:4. As of April 30, 1998, the Company had approximately $43
million of secured indebtedness outstanding and had approximately $37 million of
additional borrowing availability under the New Credit Facility. See
"Capitalization." In addition, the Indenture, the New Credit Facility and the
Company's other debt instruments will allow the Company to incur additional
indebtedness under certain circumstances. The Company's ability to make payments
on the Notes and to satisfy its other debt obligations will depend on its future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond the
Company's control.
The Company believes, based on circumstances as of the date of this
Prospectus, that its cash flow, together with available borrowings under the New
Credit Facility, will be sufficient to permit the Company to meet its operating
expenses and to service its debt requirements as they become due for the
foreseeable future, however, there can be no assurance that such results will be
achieved. The Company's belief is based upon certain assumptions, including,
among other things, that the Company will succeed in implementing its business
strategy and that there will be no material adverse developments in the
business, liquidity or capital requirements of the Company. If the Company is
unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or other general corporate purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations may be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations; (iii) the New
Credit Facility contains financial and other restrictive covenants, including
without limitation those restricting the incurrence of additional indebtedness,
the creation of liens, the payment of dividends, sales of assets, capital
expenditures, and prepayment of the Notes and those requiring maintenance of
minimum net worth, minimum EBITDA and minimum interest coverage and limiting
leverage; (iv) certain of the Company's borrowings are and will continue to be
at variable rates of interest which expose the Company to the risk of increases
in interest rates; and (v) the Company may be more leveraged than certain of its
competitors, which may place the Company at a relative competitive disadvantage
and make the Company more vulnerable to changes in its industry and changing
economic conditions. As a result of the Company's level of indebtedness,
14
<PAGE> 19
its financial capacity to respond to market conditions, extraordinary capital
needs and other factors may be limited. As of March 31, 1998 the Company was in
compliance with the following financial covenants:
<TABLE>
<CAPTION>
COVENANT COMPANY
------------ ------------
<S> <C> <C>
Minimum EBITDA.......................................... $ 10,000,000 $ 12,538,000
Minimum Interest Coverage Ratio......................... 2.0:1.0 3.1:1.0
Minimum Net Worth....................................... $465,000,000 $494,758,000
Maximum Capital Expenditures............................ $ 42,000,000 $ 16,942,000
</TABLE>
LITIGATION AND GOVERNMENT INVESTIGATIONS
Medaphis is the subject of ongoing investigations by various state and
federal agencies involving, among other things, billing and collection practices
and potential allegations of fraud with respect to California Investigation and
the GFS Investigation (as defined) and potential insider trading and certain
accounting matters. Such actions could expose the Company and its subsidiaries
to significant liabilities and penalties. Medaphis is also involved in
substantial litigation which exposes the Company to material loss contingencies,
including numerous federal securities class action lawsuits brought by
shareholders and claims brought by former shareholders of entities acquired by
the Company. The Company is also subject to certain qui tam litigation which the
Company believes resulted in certain of the investigations by the above
mentioned agencies. Medaphis has also received certain written demands that have
not yet resulted in legal action and may receive demands with respect to actions
recently taken, including modifications made to the computerized coding system
used by its subsidiary, Gottlieb's Financial Services, Inc. ("GFS"), and the
decision to transition from such coding system to manual coding. See
"Management's Discussion and Analysis of Results of Operations -- Liquidity and
Capital Resources," "The Business -- Legal Proceedings" and the Legal Matters
note to the Company's Consolidated Financial Statements.
There can be no assurance that the Company will be able to defend these
lawsuits successfully or that additional lawsuits or governmental investigations
will not be commenced against the Company, nor can there be any assurance that
the ongoing governmental investigations will not result in significant fines,
damages or other penalties. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations and
the resolution thereof will not have a disruptive effect upon the operations of
the business, consume the time and attention of the senior management of the
Company or have a material adverse effect upon the Company. In the event of an
adverse outcome to pending litigation, there can be no assurance that insurance
coverage, if any, would be available for or would fully cover any monetary
damages assessed against the Company. Adverse developments or an adverse outcome
in one or more of the lawsuits, written demands or investigations could have a
material adverse effect on the Company or its ability to repay the Notes.
The Company is unable to estimate the possible range of loss, if any, with
respect to its material litigation, and accordingly has not accrued any
liability with respect to such litigation.
DEPENDENCE ON TURNAROUND; FUTURE OPERATING RESULTS; MANAGEMENT
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the billing and collection practices in two
offices of MPSC (the "California Investigation"), and (b) the billing procedures
and computerized coding system used in GFS to process claims, which may lead to
claims of errors in billing (the "GFS Investigation"); (ii) the failure of prior
managements' acquisition strategy to integrate companies acquired; (iii) several
restatements of various financial statements of the Company, including
restatements of the Company's fiscal 1994, 1995, 1996 and interim 1997 financial
statements; (iv) the shutdown of the operations of one of the businesses
acquired; (v) the abandonment of an extensive reengineering program that failed
to realize the improvement in customer service and reduction of costs that were
expected; (vi) a steep drop in the price of its common stock; and (vii) the
filing of various lawsuits and claims made against the Company, including
multiple putative shareholder class action lawsuits alleging violations of the
federal securities laws. Consequently, the Company has been operating in what is
commonly described as a "turnaround" situation. In addition to the risks
generally associated with any entity in a
15
<PAGE> 20
turnaround situation, the Company faces certain challenges more specific to its
operations, including: (i) integrating prior acquisitions into its ongoing
operations; (ii) shifting its strategic focus from acquiring compatible
businesses to running its existing businesses efficiently and profitably; (iii)
successfully completing the combination of the operations of BSG and HIT under
the Per-Se name; (iv) managing existing customers' perceptions of the Company's
continued viability and refocusing on the high levels of customer service
required to develop new customers and retain existing customers; (v) improving
employee retention in light of stock price volatility and continuing government
investigations and civil litigation; (vi) reducing costs and increasing
efficiencies; and (vii) reevaluating the efficiency of its operations.
There can be no assurance that the Company will successfully meet these or
other operating challenges or that the Company's operating plans ultimately will
be successful. Any such failure could have a material adverse effect on the
Company's ability to repay the Notes.
The Company's success in general, and the successful implementation of its
operating plans in particular, is dependent upon, among other things, the
continued contributions of the Company's senior management. There can be no
assurance that the Company's management will be successful and the loss of
services of those members could have a material adverse effect on the Company's
businesses.
PRIOR PERIOD LOSSES
The Company has had net losses in each of 1995, 1996, 1997 and the first
quarter of 1998. Such losses have resulted in substantial part from
restructuring and other charges and litigation settlements and to a lesser
extent from amortization relating to acquisitions. There can be no assurance
when or if the Company will generate net income in the future.
INTANGIBLE ASSETS
As of December 31, 1997, the Company's balance sheet included approximately
$516 million of unamortized intangible assets, which is greater than 59% and
103% of the Company's total assets and stockholders' equity, respectively. The
current amortization rate on the unamortized intangible assets is in excess of
$20 million per year.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of net identifiable assets. GAAP requires goodwill and other
intangibles to be amortized over the period benefited, which management has
determined to be no less than 40 years.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant restructuring charges within the Physician Services segment and
(iii) absence of revenue growth within the Physician Services segment.
Therefore, in accordance with applicable accounting rules, management prepared a
40 year undiscounted cash flow analysis to determine if these intangible assets
were still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all instances, management
believes the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: revenue growth was forecasted at an average
rate of 3.4% and the EBITDA margin was forecasted at approximately
16
<PAGE> 21
3.5 percentage points above the current level. Such analysis indicated that no
impairment of these intangible assets had occurred. However, the Company
recognizes that modest adjustments to the assumptions could have a material
impact on the analysis and related conclusions. For example, if the Physician
Services segment is unable to improve its EBITDA margin, revenue growth of at
least 4.1% would be required to allow for recoverability of these assets over
the 40 year life. If the projected undiscounted cash flows used in the Company's
recoverability analysis decreased to one dollar below the carrying value of the
intangible assets, the Company would be required to record a non-cash impairment
charge that may exceed $300 million to reduce the Physician Services segment's
intangible assets to their fair value, as determined by discounting the future
cash flows of this segment. Management still believes the current intangible
asset balance is recoverable.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in determining that the
amortization period of goodwill is appropriate and that goodwill is not
impaired. Management concluded that, based on the assumptions used, the
anticipated future cash flows associated with the goodwill recognized in the
acquisitions will continue indefinitely, and, based on such assumptions, there
is no persuasive evidence that any material portion will dissipate over a period
shorter than 40 years.
RESTATEMENT OF FINANCIAL STATEMENTS; ACCOUNTING ISSUES
In October 1996, the Company restated its financial results for the year
and three months ended December 31, 1995. This restatement related primarily to
a side letter relating to a license agreement entered into by Imonics in
December 1995, which created a contingency upon license fees payable under the
agreement. The contingency occurred, entitling the purchaser to a refund and
cancellation of the contract. The license fee revenue payable under the
agreement and recognized by the Company during the fourth quarter of 1995,
together with amounts previously deemed immaterial, resulted in an aggregate
reduction to net income for the quarter and year ended December 31, 1995 of $5.1
million.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, the Board of Directors
determined that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the issuance of Deloitte & Touche's audit report dated March 31,
1997 on the Company's financial statements for the year ended December 31, 1996,
the Company recorded all adjustments to its interim financial statements deemed
appropriate for such errors and irregularities and consequently restated such
interim financial statements. All adjustments were for interim period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
The reports of Deloitte & Touche on the Company's financial statements for
the fiscal year ended December 31, 1996, dated March 31, 1997, included an
unqualified opinion with an explanatory paragraph that stated Deloitte &
Touche's conclusion that uncertainty then existed regarding the ability of the
Company to continue as a going concern due to a mandatory commitment reduction
in the Company's existing credit facility that was required by July 31, 1997.
However, the Company satisfied such commitment reduction on May 28, 1997 by
applying the proceeds of the sale of HRI.
On June 30, 1997, following a competitive review and request for proposal
process in which Deloitte & Touche, the Company's then-present auditors, and a
number of other nationally recognized accounting firms participated, the Company
notified Deloitte & Touche that it had been dismissed as the Company's principal
accountants and that the Company intended to engage new principal accountants.
This action was recom-
17
<PAGE> 22
mended by the Audit Committee of the Company's Board of Directors, and the Board
approved such change on June 27, 1997. On July 9, 1997, the Company engaged
Price Waterhouse LLP ("Price Waterhouse") as the Company's new principal
accountants.
During the third quarter of 1997, in connection with a refinancing effort
of the Company's then credit agreement, management evaluated certain revenue
practices at Health Data Sciences Corporation ("HDS"), a wholly-owned subsidiary
of the Company acquired in a merger transaction in June 1996 accounted for as a
pooling-of-interests. These practices related principally to revenue recognized
in fiscal years 1994, 1995 and 1996. As disclosed by the Company in its Form
10-Q for its fiscal quarter ending September 30, 1997, management determined
that certain revenue of HDS was improperly recognized and, accordingly,
determined to restate its financial statements for its 1994, 1995 and 1996
fiscal years and the first two fiscal quarters of its 1997 fiscal year. The
effect of such restatements on the Company's net income (loss) for the years
ended December 31, 1994, 1995 and 1996 was ($5.8) million, $(1.1) million and
$(7.3) million, respectively. The cumulative reduction in assets caused by such
restatement was $20.5 million.
As a result of the HDS-related restatement, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, 1995 and
1996 fiscal years. Consequently, the Company engaged Price Waterhouse to
re-audit the Company's 1995 and 1996 fiscal years and audit the Company's
nine-month period ending September 30, 1997. As indicated in a Current Report on
Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"), the
Company determined to further restate the results of such periods to account for
the December 1995 acquisition by the Company of Medical Management Sciences,
Inc. ("MMS") on a purchase accounting basis (the "MMS Restatement"). Such
acquisition had previously been accounted for as a pooling-of-interests.
Financial statements for the Company's 1995, 1996 and 1997 fiscal years
reflecting the HDS and MMS-related restatements were filed by the Company in its
1997 10-K filed on February 2, 1998. Such financial statements were audited by
Price Waterhouse, which issued an unqualified audit opinion not subject to any
modifying paragraphs.
The Company received a subpoena from the Commission in connection with an
ongoing Commission investigation on January 2, 1998. The subpoena seeks
information in connection with the November 19 and December 23, 1997
restatements and certain charges taken by the Company in the third quarter of
1997. There can be no assurances that the results of such inquiry will not have
a material adverse effect on the Company or that further restatements of the
Company's financial statements will not be required.
There can be no assurance that there will not be additional adjustments to
or reserves taken in the Company's financial statements in respect of the
pending or future lawsuits and government investigations. See "-- Litigation and
Government Investigations" and "The Business -- Legal Proceedings."
EVOLVING INDUSTRY STANDARDS; RAPID TECHNOLOGICAL CHANGES
The markets for Medaphis' software products and services are characterized
by rapidly changing technology, evolving industry standards and frequent new
product introductions. Medaphis' success in its business will depend in part
upon its continued ability to enhance its existing products and services, to
introduce new products and services quickly and cost-effectively to meet
evolving customer needs, to achieve market acceptance for new product and
service offerings and to respond to emerging industry standards and other
technological changes. There can be no assurance that Medaphis will be able to
respond effectively to technological changes or new industry standards.
Moreover, there can be no assurance that competitors of Medaphis will not
develop competitive products, or that any such competitive products will not
have an adverse effect upon Medaphis' operating results.
The Company intends further to refine, enhance and develop certain of the
Company's existing software and billing systems and to change all of the
Company's billing and accounts receivable management services operations over to
the Company's most proven software systems and technology to reduce the number
of systems and technologies that must be maintained and supported. Among the
systems that the Company has determined no longer to support is GFS's coding
system for emergency room billing. See "Management's
18
<PAGE> 23
Discussion and Analysis of Results of Operations -- Liquidity and Capital
Resources." 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 successful in
refining, enhancing and developing its software and billing systems going
forward, that the costs associated with refining, enhancing and developing such
software and systems will not increase significantly in future periods, that the
Company will be able successfully to 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.
CLIENT/SERVER INFORMATION TECHNOLOGY PRODUCTS
Medaphis' client/server information technology business involves, among
other things, projects designed to reengineer significant customer 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
customer, jeopardize the Company's ability to collect for services already
performed on the project and otherwise adversely affect its results of
operations.
POTENTIAL "YEAR 2000" PROBLEMS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than making all the systems
Year 2000 compliant. GFS's computerized coding system is one of the legacy
systems from which the Company has determined to transition. See "Management's
Discussion and Analysis of Results of Operations -- Liquidity and Capital
Resources." The Company believes that it is on target to have completed these
system migration efforts with respect to its Physician Services and Hospital
Services businesses in the first quarter of 1999. Per-Se Technologies' products
are scheduled to be Year 2000 compliant by the releases due out in the third
quarter of 1998. The estimated cost of the Company's Year 2000 compliance
efforts is $10 million to $15 million over 1998 and 1999, the majority of which
represents redirection of internal resources. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its computer
systems or those of its customers, vendors or resellers in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to identify and
address such problems, or the expenses or liabilities to which the Company may
become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenue. In addition, failure of the Company to identify and remedy
Year 2000 problems could put the Company at a competitive disadvantage relative
to companies that have corrected such problems.
COMPETITION; INDUSTRY AND MARKET CHANGES
The business of providing management services and information technology to
physicians and hospitals is highly competitive. Medaphis competes with certain
national and regional physician and hospital reimbursement organizations and
collection businesses (including local independent operating companies), certain
national information and data processing organizations and certain physician
groups and hospitals that provide
19
<PAGE> 24
their own business management services. Potential industry and market changes
that could adversely affect the billing and collection aspects of Medaphis'
business include (i) a significant increase in managed care providers relative
to conventional fee-for-service providers, potentially resulting in substantial
changes in the medical reimbursement process, or the Company's failure to
respond to such changes and (ii) new alliances between healthcare providers and
third-party payors in which healthcare providers are employed by such
third-party payors. The business of providing application software, information
technology and consulting services is also highly competitive and Medaphis faces
competition from certain national and regional companies in connection with its
technology operations. 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 future
competitors will not have a material adverse effect upon Medaphis.
The Company's business is affected 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 paid the prices established
by providers while other healthcare payors, notably government agencies and
managed care companies, have paid 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 for 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 accounts receivable 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 the 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 affecting 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 adversely affected and could continue to
adversely affect the revenues and profit margins of the Company's operations.
GOVERNMENTAL INVESTIGATORY RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities,
and particularly on possibly fraudulent billing practices. This heightened
scrutiny has resulted in a number of high profile civil and criminal
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) (codified
in scattered titles of the United States Code, including 18, 26, 29 and 42
U.S.C.), which includes an expansion of provisions relating to fraud and abuse,
creates additional criminal offenses relating to healthcare benefit programs,
provides for forfeitures and asset-freezing orders in connection with such
healthcare offenses and contains provisions for instituting greater coordination
of federal, state and local enforcement agency resources and actions.
In recent years, the focus of healthcare legislation has been on budgetary
and related funding mechanism issues. Both the Congress and the Clinton
Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change funding mechanisms and other
aspects of both programs. In late 1995, Congress passed legislation that would
substantially reduce projected expenditure increases and would make significant
changes in the Medicare and Medicaid programs. The Balanced Budget Act of 1997
instituted substantial reductions in Medicare program expenditures. Medaphis
anticipates that future legislation may 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
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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, including certain employer initiatives such as creating purchasing
cooperatives and contracting for healthcare services for employees through
managed care companies (including health maintenance organizations), and certain
provider initiatives such as risk-sharing among healthcare providers and managed
care companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services through integrated delivery systems may result in a decrease in
demand for Medaphis billing and collection services for particular physician
practices.
EXISTING GOVERNMENT REGULATION
Existing government regulation can adversely affect Medaphis' business
through, among other things, its potential to reduce the amount of reimbursement
received by Medaphis' clients for healthcare services. Medaphis' medical billing
and collection activities are also governed by numerous federal and state civil
and criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs. See "The Business -- Legal Proceedings."
Submission of claims for services or procedures that are not provided as
claimed, or which otherwise violate the regulations, 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. Under applicable law, successful plaintiffs can
receive up to 25-30% of the total recovery from the defendant. Such qui tam
actions or "whistle-blower" lawsuits have increased significantly in recent
years and have increased the risk that a company engaged in the healthcare
industry, such as Medaphis and many of its customers, may become the subject of
a federal or state investigation, 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. Some state laws also provide for false claims actions, including
actions initiated by a qui tam plaintiff. Medaphis is currently the subject of
several federal investigations and recently became aware that it was a defendant
in a qui tam litigation. There can be no assurance that Medaphis will not be the
subject of additional 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. Any such proceeding or
investigation could have a material adverse effect upon the Company. See "The
Business -- Legal Proceedings."
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. Various
states have also promulgated laws and regulations that govern credit collection
practices. AssetCare, Inc. a subsidiary of the Company, is registered as a debt
collector in 26 states; however, there can be no assurance that the Company and
its subsidiaries (other than AssetCare), will not be subjected to regulation as
a "debt collector" under the Federal Fair Debt Act or as a "collection agency"
under certain state collection agency laws and regulations. In the event that
the Company or a subsidiary of the Company other than AssetCare is subjected to
such regulation, its impact on the Company cannot be predicted.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Such regulation could have an adverse
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effect on the operations of hospitals in general, and consequently reduce the
amount of the Company's revenue related to its hospital clients.
There can be no assurance that current or future government regulations or
healthcare reform measures will not have a material adverse effect upon
Medaphis' business.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the Notes contains certain covenants directly or
indirectly limiting, subject to certain important exceptions, the incurrence of
additional indebtedness (in part through fixed charge coverage test measured on
a pro forma basis at the time of any proposed incurrence of indebtedness), the
payment of dividends, the redemption of capital stock, the making of certain
investments, the issuance of capital stock of subsidiaries, the creation of
liens, the declaration and payment of dividends and other distributions to
equityholders, dividend and other payment restrictions affecting the Company's
subsidiaries, the issuance of guarantees, transactions with affiliates, asset
sales and certain mergers and consolidations. A breach of any of these covenants
could result in a default under the Indenture. In addition, the New Credit
Facility and the instruments governing the Company's other indebtedness contain
other, more restrictive covenants, including restrictions on the Company's
ability to prepay the Notes and will require the Company to satisfy certain
financial tests. See "New Credit Facility." The Company's ability to comply with
such covenants and to satisfy such financial tests may be affected by events
beyond its control. A breach of any of these covenants could result in a default
under the applicable indebtedness. In the event of a default under the New
Credit Facility, the lenders thereunder could elect to declare all amounts
borrowed, together with accrued interest, to be immediately due and payable, and
could terminate all commitments thereunder. In addition, a default under the New
Credit Facility or the instruments governing the Company's other indebtedness
could constitute a cross-default under the Indenture and any instruments
governing the Company's other indebtedness, and a default under the Indenture
could constitute a cross-default under the New Credit Facility and any
instrument governing the Company's other indebtedness. The occurrence of a
default under any indebtedness of the Company could therefore have a material
adverse effect on the Company. See "Description of Notes -- Certain Covenants"
and "Description of New Credit Facility."
HOLDING COMPANY STRUCTURE; EFFECTS OF LIENS ON ASSETS
Substantially all of the Company's consolidated operating income will be
generated by its subsidiaries. As a result, Medaphis will depend on the earnings
and cash flow of, and dividends and distributions or advances from, its
Restricted Subsidiaries (as defined) to provide the funds necessary to meet its
debt service obligations, including the payment of principal of and interest on
the Notes. There can be no assurance that the Company's subsidiaries will
generate sufficient cash flow to dividend, distribute or advance funds to the
Company. Should the Company fail to satisfy any payment obligation under the
Notes, the holders thereof would have a direct claim therefor against the
Subsidiary Guarantors pursuant to the Subsidiary Guarantees. However,
substantially all of the material assets of the Company and the Subsidiary
Guarantors are pledged to secure the obligations of the Company and such
subsidiaries under the New Credit Facility and other assets of the Company and
the Subsidiary Guarantors may secure other secured obligations as well. The
Indenture will limit, but not prohibit, the ability of the Company and its
Restricted Subsidiaries to incur additional secured indebtedness. In the event
of a default under the New Credit Facility (or any other secured indebtedness),
the lenders thereunder would be entitled to a claim on the assets securing such
indebtedness which is prior to any claim of the holders of the Notes.
Accordingly, there may be insufficient assets remaining after payment of secured
claims against the Company and the Subsidiary Guarantors (including claims of
lenders under the New Credit Facility) to pay amounts due on the Notes. See
"-- Substantial Leverage; Ability to Service Debt."
POTENTIAL FAILURE TO MAKE PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company must offer to
purchase the Notes at a purchase price of 101% of the principal amount of the
Notes, together with accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase. In such circumstances, the Company may be required to
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obtain any requisite consent from its lenders, including under the New Credit
Facility, to permit the repurchase of the Notes. If the Company is unable to
repay all of such indebtedness or is unable to obtain the necessary consents,
the Company may be unable to offer to repurchase the Notes, which would
constitute an Event of Default under the Indenture. It is unlikely that the
Company will have sufficient funds available at the time of any Change of
Control to make any debt payment (including repurchase of the Notes) as
described above or that the Company would be able to refinance its outstanding
indebtedness in order to permit it to repurchase the Notes or, if such
refinancing were to occur, that such refinancing would be on terms favorable to
the Company. See "Description of Notes -- Certain Covenants -- Change of
Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the New Credit Facility or other secured or unsecured
senior indebtedness of the Company. Such events may permit the holders under
such debt instruments to refuse to advance additional funds, reduce the
borrowing base thereunder or accelerate the maturity of the debt, and, if the
debt is not paid, to enforce security interests in, or commence litigation that
could ultimately result in a sale of, substantially all the assets of the
Company, thereby limiting the Company's ability to raise cash to repurchase the
Notes and afford the benefit of the Change of Control provisions to the holder
of the Notes. See "-- Holding Company Structure; Effects of Liens on Assets."
FRAUDULENT CONVEYANCE
The obligations of the Company under the Notes, and the application of the
net proceeds therefrom, may be subject to review under various laws for the
protection of creditors, including federal and state fraudulent conveyance and
fraudulent transfer laws, if a bankruptcy case or other lawsuit (including in
circumstances where bankruptcy is not involved) is commenced by or on behalf of
any creditor of the Company or a representative of any of the Company's
creditors. If a court in such case or lawsuit were to find that, at the time the
Company issued the Notes or at the time of the closing of the New Credit
Facility and related transactions, the Company (i) intended to hinder, delay or
defraud any existing or future creditor or (ii) did not receive fair
consideration or reasonably equivalent value for issuing the Notes or in
connection with related transactions, and the Company either (A) was insolvent
or rendered insolvent by reason thereof, (B) was engaged or was about to engage
in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (C) intended to or believed that it
would incur debts beyond its ability to pay such debts as they matured or became
due, such court could void the Company's obligations under the Notes,
subordinate the Notes to other indebtedness of the Company, direct that holders
of the Notes return any amounts paid thereunder to the Company or to a fund for
the benefit of its creditors or take other action detrimental to the holders of
the Notes, all of which may result in the holders of the Notes receiving no
payment or less than the principal amount on the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
will be considered insolvent at a particular time if the sum of its debts,
including contingent liabilities, at that time is greater than the then-fair
value of its assets or if the fair saleable value of the assets at that time is
less than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. There can be no assurance,
however, as to what standard a court would apply to evaluate the parties' intent
or to determine whether the Company was insolvent at the time of, or rendered
insolvent upon consummation of, the issuance of the Notes and the closing under
the New Credit Facility or that, regardless of the standard, a court would not
determine that the Company was insolvent at the time of, or rendered insolvent
upon consummation of, the issuance of the Notes and the closing under the New
Credit Facility.
The Company's obligations under the Notes are guaranteed by the Subsidiary
Guarantors, and the Subsidiary Guarantees also may be subject to review under
various laws for the protection of creditors, including federal and state
fraudulent conveyance and fraudulent transfer laws, if a bankruptcy case or a
lawsuit (including in circumstances where bankruptcy is not involved) is
commenced by or on behalf of any creditor of a Subsidiary Guarantor or a
representative of any such creditors. In such a case, the analysis set forth
above would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for
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the benefit of the Subsidiary Guarantors), the obligations of the Subsidiary
Guarantors thereunder were incurred for less than reasonably equivalent value or
fair consideration. A court could void a Subsidiary Guarantor's obligation under
its Subsidiary Guarantee, subordinate the Subsidiary Guarantee to the other
indebtedness of a Subsidiary Guarantor, direct that holders of the Notes return
any amounts paid under a Subsidiary Guarantee to the relevant Subsidiary
Guarantor or to a fund for the benefit of its creditors, or take other action
detrimental to the holders of the Notes.
ABSENCE OF PUBLIC MARKET FOR NOTES
The Old Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the New Notes may be resold or otherwise transferred by the
holders (who are not affiliates of the Company) without compliance with the
registration requirements under the Securities Act, they will be new securities
for which there is currently no established trading market. The Company does not
intend to apply for listing of the New Notes on a national securities exchange
or for quotation of the New Notes on an automated dealer quotation system.
Although Donaldson, Lufkin & Jenrette Securities Corporation, the initial
purchaser in the offering of the Old Notes, has informed the Company that it
currently intends to make a market in the New Notes, it is not obligated to do
so, and any such market-making, if initiated, may be discontinued at any time
without notice. The liquidity of any market for the New Notes will depend upon
the number of holders of the Notes, the interest of securities dealers in making
a market in the New Notes and other factors. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes. If
an active trading market for the New Notes does not develop, the market price
and liquidity of the New Notes may be adversely affected. If the New Notes are
traded, they may trade at a discount from their face value, depending upon
prevailing interest rates, the market for similar securities, the performance of
the Company and certain other factors. The liquidity of, and trading markets
for, the New Notes may also be adversely affected by general declines in the
market for non-investment grade debt. Such declines may adversely affect the
liquidity of, and trading markets for, the New Notes independent of the
financial performance of, or prospects for, the Company.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with provisions of Rule 144 under the Securities Act.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the New Notes. There can be no assurance that the market, if any, for
the New Notes will not be subject to similar disruptions. Any such disruptions
may have an adverse effect on the holders of the New Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company does not intend
to register under the Securities Act any Old Notes which remain outstanding
after consummation of the Exchange Offer (subject to such limited exceptions, if
applicable). To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
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The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
Indenture.
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer -- Conditions
to the Exchange Offer," delivery of New Notes in exchange for Old Notes tendered
and accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for Old Notes or a
book-entry confirmation of a book-entry transfer of Old Notes into the Exchange
Agent's account at DTC, including an Agent's Message (as defined under "The
Exchange Offer -- Acceptance for Exchange and Issuance of New Notes") if the
tendering holder does not deliver a Letter of Transmittal, (ii) a completed and
signed Letter of Transmittal (or facsimile thereof), with any required signature
guarantees or, in the case of a book-entry transfer, an Agent's Message in lieu
of the Letter of Transmittal, and (iii) any other documents required by the
Letter of Transmittal. Therefore, holders of Old Notes desiring to tender such
Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. The Company is not under a duty to give notification of defects
or irregularities with respect to the tenders of Old Notes for exchange.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with Donaldson, Lufkin & Jenrette Securities
Corporation, pursuant to which the Company agreed to file and to use its
commercially reasonable efforts to cause to become effective with the Commission
a registration statement with respect to the exchange of the Old Notes for notes
with terms identical in all material respects to the terms of the Old Notes. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company under the Registration Rights Agreement. The form and terms of the
New Notes are the same as the form and terms of the Old Notes except that the
New Notes have been registered under the Securities Act and will not provide for
any increase in the interest rate thereon. In that regard, the Old Notes
provide, among other things, that, if a registration statement relating to the
Exchange Offer has not been filed by April 21, 1998 and declared effective by
June 22, 1998, Liquidated Damages will be payable on the Old Notes. Upon
consummation of the Exchange Offer, holders of Old Notes will not be entitled to
any Liquidated Damages thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors -- Consequences of a Failure to Exchange Old Notes" and "Description of
Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose Old Notes
are held of record by The Depository Trust Company ("DTC") who desires to
deliver such Old Notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $175,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $175,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in denominations of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $175,000,000
aggregate principal amount of the Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors -- Consequences
of a Failure to Exchange Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
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Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER BASED ON
SUCH HOLDERS OWN FINANCIAL POSITIONS AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on July 27,
1998 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its reasonable judgment, that any of the
events or conditions referred to under "-- Conditions to the Exchange Offer"
have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered pursuant
to the Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their tendered Old Notes as described under "-- Withdrawal Rights," and
(iv) to waive any condition or otherwise amend the terms of the Exchange Offer
in any respect. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, or if the Company waives a material
condition of the Exchange Offer, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
holders of the Old Notes, and the Company will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "-- Withdrawal Rights") promptly after the Expiration Date.
Subject to the conditions set forth under "-- Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder does not
deliver a Letter of Transmittal, (ii) a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, or,
in the case of a book-entry transfer, an Agent's Message in lieu of the Letter
of Transmittal, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders
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at the same time, and will depend upon when certificates for Old Notes,
book-entry confirmations with respect to Old Notes and other required documents
are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"-- Procedures for Tendering Old Notes -- Book-Entry Transfer." The term
"Agent's Message" means a message transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Company may enforce such Letter
of Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering holders. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever,
acceptance for exchange or the exchange of any Old Notes tendered pursuant to
the Exchange Offer is delayed (whether before or after the Company's acceptance
for exchange of Old Notes) or the Company extends the Exchange Offer or is
unable to accept for exchange or exchange Old Notes tendered pursuant to the
Exchange Offer, then, without prejudice to the Company's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Company and
subject to Rule 14e-1(c) under the Exchange Act, retain tendered Old Notes and
such Old Notes may not be withdrawn except to the extent tendering holders are
entitled to withdrawal rights as described under "-- Withdrawal Rights."
Pursuant to the Letter of Transmittal, or the Agent's Message, as the case
may be, a holder of Old Notes will warrant and agree in the Letter of
Transmittal or pursuant to the Agent's Message that it has full power and
authority to tender, exchange, sell, assign and transfer Old Notes, that the
Company will acquire good, marketable and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
the Old Notes tendered for exchange are not subject to any adverse claims or
proxies. The holder also will warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Company or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
Valid Tender
Except as set forth below, in order for Old Notes to be validly tendered by
book-entry transfer, an Agent's Message or a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
in either case any other documents required by the Letter of Transmittal, must
be delivered to the Exchange Agent by mail, facsimile, hand delivery or
overnight carrier at one of the Exchange Agent's addresses set forth under "--
Exchange Agent" on or prior to the Expiration Date and either (i) such Old Notes
must be tendered pursuant to the procedures for book-entry transfer set forth
below or (ii) the guaranteed delivery procedures set forth below must be
complied with.
Except as set forth below, in order for Old Notes to be validly tendered by
a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile, hand delivery or overnight carrier at one
of the Exchange Agent's addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date and either (i) such Old Notes must be delivered to
the Exchange Agent on or prior to the Expiration Date or (ii) guaranteed
delivery procedures set forth below must be complied with.
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If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent and DTC have confirmed that any Direct Participant (as
defined in "Description of Notes -- Book-Entry, Delivery and Form") in DTC's
book-entry transfer facility system may utilize DTC's ATOP procedures to tender
Old Notes. The Exchange Agent will establish an account with respect to the Old
Notes at DTC for purposes of the Exchange Offer within two business days after
the date of this Prospectus. Any Direct Participant may make a book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's Message
or a completed and signed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other documents required by the Letter of
Transmittal must in any case be delivered to and received by the Exchange Agent
at one of its addresses set forth under "-- Exchange Agent" on or prior to the
Expiration Date, or the guaranteed delivery procedure set forth below must be
complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees
Certificates for the Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate
for the Old Notes is registered in a name other than that of the person
surrendering the certificate or (b) such holder completes the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" in the Letter
of Transmittal. In the case of (a) or (b) above, such certificates for Old Notes
must be duly endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein): (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association (an "Eligible Institution"), unless surrendered
on behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
Guaranteed Delivery
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
the certificates for such Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent on or prior to the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, such Old Notes may nevertheless be tendered, provided that all
of the following guaranteed delivery procedures are complied with:
(a) such tenders are made by or through an Eligible Institution;
29
<PAGE> 34
(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is received by
the Exchange Agent, as provided below, on or prior to the Expiration Date; and
(c) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other documents required by the Letter
of Transmittal, are received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of New Notes might not be made to all tendering holders at the same time, and
will depend upon when Old Notes, book-entry confirmations with respect to Old
Notes and other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
Determination of Validity
All questions as to the form of documents, validity, eligibility (including
time of receipt) and acceptance for exchange of any tendered Old Notes will be
determined by the Company, in its sole discretion, whose determination shall be
final and binding on all parties. The Company reserves the absolute right, in
its sole and absolute discretion, to reject any and all tenders determined by it
not to be in proper form or the acceptance of which, or exchange for, may, in
the opinion of counsel to the Company, be unlawful. The Company also reserves
the absolute right, subject to applicable law, to waive any of the conditions of
the Exchange Offer as set forth under "-- Conditions to the Exchange Offer" or
any condition or irregularity in any tender of Old Notes of any particular
holder whether or not similar conditions or irregularities are waived in the
case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in tenders or incur any liability for
failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
30
<PAGE> 35
RESALES OF NEW NOTES
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the staff of the Division
of Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the Division of
Corporation Finance of the Commission, and subject to the two immediately
following sentences, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act, (a) will not be able to rely on the interpretations of the
staff of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Company may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act) on
behalf of whom such holder holds the Notes to be exchanged in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Company believes that
Participating Broker-Dealers who acquired Old Notes for their own accounts as a
result of market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting the
requirements of the Securities Act, which may be the prospectus prepared for an
exchange offer so long as it contains a description of the plan of distribution
with respect to the resale of such New Notes. Accordingly, this Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company has
agreed that this Prospectus, as it may be amended or
31
<PAGE> 36
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes for a period ending 180 days after the
Expiration Date (subject to extension under certain limited circumstances
described below) or, if earlier, when all such New Notes have been disposed of
by such Participating Broker-Dealer. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "-- Exchange Agent." Any Participating Broker-Dealer who
is an "affiliate" of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "-- Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "-- Procedures
for Tendering Old Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Old Notes, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of
tenders of Old Notes may not be rescinded. Old Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "-- Procedures for
Tendering Old Notes."
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<PAGE> 37
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliate or assign of the Company, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Old Notes which have been tendered but which are
withdrawn will be returned to the holder thereof promptly after withdrawal.
INTEREST ON NEW NOTES
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after February 20,
1998. Accordingly, such holders of Old Notes as of the record date for the
payment of interest on August 15, 1998 will be entitled to receive interest on
the New Notes issued in exchange therefor accrued from and after February 20,
1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exists
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such New Notes; or
(b) any law, statute, rule or regulation shall have been adopted or enacted
which, in the judgment of the Company, would reasonably be expected to impair
its ability to proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose or any governmental approval has not been obtained,
which approval the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgement that any of the
foregoing events or conditions has occurred or exists or has not been satisfied,
it may, subject to applicable law, terminate the Exchange Offer (whether or not
any Old Notes have theretofore been accepted for exchange) or may waive any such
condition or otherwise amend the terms of the Exchange Offer in any respect. If
such waiver or amendment constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver or amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes and will extend the Exchange Offer to the extent required by Rule
14e-1 under the Exchange Act.
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<PAGE> 38
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department, 4th Floor
P.O. Box 778 Two International Place
Boston, MA 02102-0078 Boston, MA 02110
</TABLE>
Confirm By Telephone:
Kellie Mullen
(617) 664-5587
Facsimile Transmissions:
(Eligible Institutions Only)
(617) 664-5290
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other nominees
soliciting acceptances of the Exchange Offer.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes certain United States Federal income
tax considerations associated with the exchange of Old Notes for New Notes and
the ownership and disposition of New Notes. This summary applies only to
beneficial owners of Old Notes who acquired such Old Notes at the initial
offering from Donaldson, Lufkin & Jenrette Securities Corporation for the
original offering price therefor and who acquire New Notes pursuant to the
Exchange Offer. This summary is based upon existing United States Federal income
tax law, which is subject to change, possibly with retroactive effect. This
summary does not discuss all aspects of United States Federal income taxation
that may be relevant to particular holders in the context of their specific
investment circumstances or certain types of holders subject to special
treatment
34
<PAGE> 39
under such laws (including, for example, financial institutions, insurance
companies, broker-dealers, persons having a functional currency other than the
United States dollar, United States expatriates, tax-exempt organizations and
holders (whether actual or constructive) of 10% or more of the total combined
voting power of all classes of stock of the Company). In addition, this summary
does not discuss any foreign, state or local tax considerations and assumes that
holders of the New Notes will hold the New Notes as "capital assets" (generally,
property held for investment). Prospective holders of New Notes should consult
their tax advisors regarding the United States Federal, state, local, and
foreign income and other tax considerations of the exchange of Old Notes for New
Notes and the ownership and disposition of the New Notes.
For purposes of this summary, a "United States holder" is an individual who
is a citizen or resident of the United States, a corporation or partnership
created or organized under the laws of the United States or any state or
political subdivision thereof, or a person or other entity who is otherwise
subject to United States Federal income taxation on a net income basis in
respect of income derived from the New Notes.
Exchange Offer
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an exchange or other taxable event for United States Federal
income tax purposes because, under United States Treasury regulations, the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. As a result, the holders of Old Notes will not recognize taxable gain or
loss upon the exchange of such Old Notes for the New Notes, and any such holder
will have the same tax basis and holding period in the New Notes as it had in
the Old Notes immediately before the exchange.
United States Holders
Interest payable on the New Notes will be includible in the income of a
United States holder at the time accrued or received in accordance with such
holder's regular method of accounting for United States Federal income tax
purposes.
A United States holder will recognize a capital gain or loss upon the sale
or other disposition of a New Note in an amount equal to the difference between
the amount realized from such disposition (exclusive of any amount paid for
accrued interest not previously included in income, which amount will be taxable
as ordinary income) and the holder's adjusted tax basis in the New Note. Such
capital gain or loss will be long-term capital gain or loss if the holder has
held the New Note for more than one year at the time of disposition. In certain
circumstances, holders of New Notes that are individuals may be entitled to
preferential treatment for net long-term capital gains, including, as a result
of recently enacted legislation, in the case of a capital asset held for more
than 18 months at the time of the disposition.
Non-United States Holders
An investment in the New Notes by a non-United States holder generally will
not give rise to any United States Federal income tax consequences, unless the
interest received or any gain recognized on the sale or other disposition of the
New Notes by such holder is treated as effectively connected with the conduct by
such holder of trade or business in the United States, or, in the case of gains
derived by an individual, such individual is present in the United States for
183 days or more and certain other requirements are met.
In order to avoid back-up withholding of 31% on payments of interest and
principal made by United States payors, a non-United States holder of the New
Notes must generally complete, and provide the payor with, an Internal Revenue
Service Form W-8 ("Certificate of Foreign Status"), or other documentary
evidence, certifying that such holder is an exempt foreign person.
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<PAGE> 40
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes in exchange for
the Old Notes as described in the Prospectus, the Company will receive Old Notes
in like principal amount. The Old Notes surrendered in exchange for the New
Notes will be retired and cancelled.
The gross proceeds from the offering of the Old Notes ($175.0 million),
together with available cash ($16.4 million) and the initial borrowing under the
New Credit Facility ($30.0 million), were used to pay the fees and expenses
associated therewith ($7.9 million) and to refinance the Company's $210 million
outstanding principal amount of Bridge Notes plus $3.5 million of accrued
interest. Approximately $157.5 million of the proceeds from the sale of the
Bridge Notes was used by the Company on December 23, 1997 to repay and refinance
in full the Company's then existing credit facility which was scheduled to
mature on June 30, 1998 and which would have required the issuance by the
Company to the lenders thereunder of warrants for 1% of the voting common stock
of the Company if such credit agreement had not been repaid in full prior to
December 31, 1997. In addition, on January 22, 1998, the remaining $25 million
of Bridge Notes was purchased and approximately $10 million of the proceeds
therefrom was used to purchase certain real property then under lease to the
Company.
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<PAGE> 41
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997 and as adjusted to give effect to the offering
of the Old Notes, the initial borrowing under the New Credit Facility and the
application of the net proceeds therefrom and available cash as if they had
occurred on such date. This table should be read in conjunction with "Unaudited
Pro Forma Consolidated Financial Statements," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus and the
Consolidated Financial Statements of the Company and the related notes thereto,
which are incorporated herein by reference.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 17,794 $ 3,000
LONG-TERM DEBT (INCLUDING CURRENT PORTION):
Bridge Notes(1)........................................... $185,000 $ --
Other Debt................................................ 15,941 15,941
New Credit Facility(2).................................... -- 6,456
The Notes offered hereby.................................. -- 175,000
-------- --------
Total long-term debt, including current portion... $200,941 $197,397
======== ========
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20,000,000 shares
authorized; none outstanding........................... -- --
Common stock, voting, $0.01 par value, 200,000,000
authorized; 73,204,000 issued and outstanding.......... $ 732 $ 732
Common stock, non-voting, $0.01 par value, 600,000 shares
authorized; none outstanding........................... -- --
Additional paid-in capital................................ 678,998 678,998
Accumulated deficit....................................... (177,949) (182,825)(3)
-------- --------
Total stockholders' equity........................ $501,781 $496,905
-------- --------
TOTAL CAPITALIZATION................................. $702,722 $694,302
======== ========
</TABLE>
- ---------------
(1) Represents outstanding principal of the Bridge Notes as of December 31,
1997. At the time of repayment, there was $210 million in principal
outstanding under the Bridge Notes.
(2) The actual amount of the initial borrowing under the New Credit Facility was
$30,000,000.
(3) The change in accumulated deficit and total stockholders' equity results
from the write-off of $4.9 million, net of tax of $3.2 million, of
previously deferred financing fees relating to the Company's Bridge Notes.
37
<PAGE> 42
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1997 and the three months ended March 31, 1997 and 1998 and as of
March 31, 1998. The financial statements of the Company for each of the three
fiscal years in the period ended December 31, 1997 are incorporated herein by
reference. The selected consolidated financial information of Medaphis for and
as of each of the three fiscal years in the period ended December 31, 1997 has
been derived from the audited consolidated financial statements of Medaphis,
which give retroactive effect to the mergers with the Automation Atwork
Companies ("Atwork"), HRI, BSG Government, BSG and HDS, all of which have been
accounted for using the pooling-of-interests method of accounting. The selected
consolidated financial data of Medaphis for and as of the two fiscal years in
the period ended December 31, 1994 have been derived from the unaudited
consolidated financial statements of Medaphis, which give retroactive effect to
the mergers with Atwork, HRI, BSG Government, BSG and HDS. The Company's
selected consolidated financial data for the three months ended March 31, 1997
and 1998 and as of March 31, 1998 have been derived from the unaudited
consolidated financial statements for the quarterly period ended March 31, 1998,
which are incorporated herein by reference. The Company's consolidated financial
statements as of and for each of the two fiscal years in the period ended
December 31, 1994 are unaudited because the Company's predecessor accountants
withdrew its audit opinions covering these periods. See Note 2 to the Notes to
Consolidated Financial Statements, incorporated herein by reference. Management
believes that the unaudited consolidated financial statements referred to above
include all adjustments (consisting only of normal recurring adjustments) that
are necessary for a fair presentation of the financial position and results of
operations for such periods.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus and the Consolidated Financial Statements
of the Company and the related notes thereto incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- --------- -------- --------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................... $250,094 $369,483 $ 538,012 $ 596,714 $ 572,625 $147,546 $140,340
Salaries and wages.......... 151,913 216,950 314,790 398,573 377,363 93,578 88,198
Other operating expenses.... 65,258 88,655 134,055 163,677 153,372 40,242 39,339
Depreciation................ 6,967 9,065 14,187 28,276 29,355 6,985 8,304
Amortization................ 6,926 10,310 18,048 25,713 24,137 6,114 6,118
Interest expense, net....... 6,202 5,591 9,761 11,585 23,260 6,115 6,375
Litigation settlement....... -- -- -- -- 52,500 -- --
Restructuring and other
charges................... -- -- 48,750 180,316 22,640 -- 561
Income (loss) before
extraordinary item and
cumulative effect of
accounting change......... 5,984 25,682 (2,650) (137,337) (93,229) (3,064) (5,150)
Net income (loss)........... 5,984 25,682 (2,650) (137,337) (19,303)(2) (3,064) (10,707)
Pro forma net income
(loss)(1)................. $ 6,001 $ 24,251 $ (4,780) $(136,358) $ (19,303) $ (3,064) $(10,707)
Weighted average shares
outstanding............... 39,179 46,128 52,591 71,225 72,679 72,235 73,479
PER SHARE DATA:(1)
Pro forma basic income
(loss) before
extraordinary item and
cumulative effect of
accounting change......... $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (1.28) $ (0.04) $ (0.07)
Pro forma basic net income
(loss).................... $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (0.26) $ (0.04) $ (0.15)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------- ---------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.................... $ 48,757 $ 65,549 $ 90,043 $ 56,492 $ 93,497 $ 98,686
Intangible assets.................. 181,000 376,827 611,544 539,151 515,939 511,019
Total assets....................... 334,361 597,487 935,790 936,854 874,027 880,309
Total debt......................... 76,308 218,374 161,246 271,727 200,941 223,907
Convertible subordinated
debentures....................... 63,375 63,375 63,375 -- -- --
Stockholders' equity............... $166,706 $236,003 $554,074 $508,525 $501,781 $494,758
</TABLE>
38
<PAGE> 43
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- --------- -------- --------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by
(used for) operating
activities.......... $ -- $ -- $ 19,852 $ (7,863) $ (10,207) $ 5,877 $ (8,533)
Net cash (used for)
provided by
investing
activities.......... -- -- (162,158) (107,281) 97,432 (1,923) (17,360)
Net cash provided by
(used for) financing
activities.......... -- -- 144,335 103,796 (77,062) (1,411) 15,224
OTHER FINANCIAL DATA:
EBITDA(3)............. $ -- $ -- $ 89,167 $ 34,464 $ 41,890 $ 13,726 $ 12,803
Capital
expenditures........ -- -- 51,120 51,135 19,971 3,400 15,638
Ratio of earnings to
fixed charges....... 2.37 4.97 --(4) --(4) --(4) --(4) --(4)
</TABLE>
- ---------------
(1) In 1995 and 1996, Company acquired Atwork, Consort, IVC, BSG Government and
BSG in merger transactions accounted for as poolings-of-interests. Prior to
the mergers, Atwork, Consort, IVC, BSG Government and a company acquired by
BSG prior to the Company's merger with BSG had elected "S" corporation
status for income tax purposes. As a result of the mergers (or, in the case
of the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Pro forma net income (loss) and
pro forma net income (loss) per common share are presented in the
consolidated statements of operations as if each of these entities had been
a "C" corporation during the periods presented.
(2) Reflects extraordinary income of $76.4 million relating to the sale of HRI
and a $2.5 million charge for the change in accounting for business process
reengineering costs in accordance with EITF 97-13 (as defined).
(3) EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, litigation settlement, restructuring and other
charges, extraordinary item and cumulative effect of an accounting change.
The following is a calculation of EBITDA for the year ended December 31,
1997:
<TABLE>
<CAPTION>
(000'S)
--------
<S> <C>
Net loss.................................................... $(19,303)
Interest expense............................................ 23,260
Income taxes................................................ (16,773)
Depreciation................................................ 29,355
Amortization................................................ 24,137
Litigation settlement....................................... 52,500
Restructuring and other charges............................. 22,640
Extraordinary item.......................................... (76,391)
Cumulative effect of accounting change...................... 2,465
--------
$ 41,890
========
</TABLE>
See Note 4 to the notes to the Consolidated Financial Statements of
Medaphis Corporation and subsidiaries. EBITDA is not a measure of
performance under GAAP. While EBITDA should not be considered as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as
a measure of profitability or liquidity, management believes that EBITDA is
an appropriate measurement to use in evaluating the Company's operating
performance as well as an approximation of the Company's liquidity.
Moreover, substantially all of the company's financing agreements contain
covenants in which EBITDA, as defined therein, is used as a measure of
financial performance. The method of calculating EBITDA set forth above may
be different from calculations of EBITDA employed by other companies and,
accordingly, may not be directly comparable to such other calculations. See
"Management's Discussion and Analysis of Financial
39
<PAGE> 44
Condition and Results of Operations" for a discussion of other measures of
performance determined in accordance with GAAP.
(4) Earnings did not cover fixed charges by $3.9 million, $215.5 million and
$110.0 million in 1995, 1996 and 1997, respectively, and by $5.5 million and
$8.6 million in the three months ended March 31, 1997 and 1998,
respectively.
40
<PAGE> 45
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENT
The Unaudited Pro Forma Consolidated Financial Statement is based on the
historical presentation of the consolidated financial statements of Medaphis.
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 gives effect to the divestiture of HRI as if it had occurred
on January 1, 1997. The Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1997 is not presented since Medaphis' December 31, 1997 balance
sheet does not include HRI.
The Unaudited Pro Forma Consolidated Statement of Operations includes the
historical operating results of Medaphis and HRI from the beginning of the
period covered by such statement until the earlier of the date of disposition or
the end of the period covered by such statement.
The Unaudited Pro Forma Consolidated Financial Statement does not purport
to be indicative of the results that actually would have been obtained if the
combined operations had been conducted during the period presented and they are
not necessarily indicative of operating results to be expected in future
periods. The Unaudited Pro Forma Consolidated Financial Statement and notes
thereto should be read in conjunction with the Consolidated Financial Statements
and the related notes thereto of Medaphis, which are incorporated herein by
reference.
41
<PAGE> 46
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
MEDAPHIS HRI(1) PRO FORMA
--------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue................................................... $ 572,625 $(14,720) $ 557,905
--------- -------- ---------
Salaries and wages........................................ 377,363 (6,738) 370,625
Other operating expenses.................................. 153,372 (3,896) 149,476
Depreciation.............................................. 29,355 (401) 28,954
Amortization.............................................. 24,137 -- 24,137
Interest expense, net..................................... 23,260 (4,438)(2) 18,822
Litigation settlement..................................... 52,500 -- 52,500
Restructuring and other charges........................... 22,640 -- 22,640
--------- -------- ---------
Total expenses.................................. 682,627 (15,473) 667,154
Income (loss) before income taxes......................... (110,002) 753 (109,249)
Income tax (benefit) expense.............................. (16,773) 115(3) (16,658)
--------- -------- ---------
Income (loss) before extraordinary item and cumulative
effect of accounting change............................. $ (93,229) $ 638 $ (92,591)
Basic loss before extraordinary item and cumulative effect
of accounting change per common share................... $ (1.28) $ (1.27)
========= =========
Weighted average shares outstanding....................... 72,679 72,679
========= =========
</TABLE>
- ---------------
(1) The results of HRI are for the period from January 1, 1997 through May 28,
1997 (date of divesture).
(2) Represents the following adjustment to interest expenses assuming the
Company had completed the sale of HRI as of January 1, 1997:
<TABLE>
<S> <C>
Proceeds from sale of HRI, net.............................. $117,000
Interest rate............................................... 9.5%
--------
Annual interest expense savings............................. $ 11,115
Adjustment for period outstanding........................... .417
--------
$ 4,631
Less HRI interest income, as reported....................... 193
--------
$ 4,438
========
</TABLE>
(3) Reflects tax expense for the above adjustments using the Company's effective
tax rate.
42
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company suffered several setbacks in recent years, including: (i)
government investigations into: (a) the billing and collection practices in two
offices of Medaphis Physician Services Corporation ("MPSC"), and (b) the billing
procedures and computerized coding system used at Gottlieb's Financial Services
("GFS") to process claims, which may lead to claims of errors in billing; (ii)
the failure of prior management's acquisition strategy to integrate businesses
acquired; (iii) several restatements of various financial statements of the
Company, including restatements of the Company's fiscal 1995, 1996 and interim
1997 financial statements; (iv) the shut down of the operations of one of the
companies acquired; (v) the abandonment of an extensive reengineering program
that failed to realize the improvement in customer service and reduction of
costs that were expected; (vi) a steep drop in the price of its Common Stock;
and (vii) the filing of various lawsuits and claims made against the Company,
including multiple putative shareholder class action lawsuits alleging
violations of the federal securities laws.
In response to certain of these setbacks, assembly of a new management team
began in the fourth quarter of 1996, headed by David E. McDowell (former
President and Chief Operating Officer of McKesson Corporation). The new
management team combines healthcare industry talent with information technology
expertise from other industries that have already undergone the transition to
effective use of information technology. The Company believes that the combined
strengths of this team position Medaphis to take advantage of growth
opportunities in the healthcare marketplace.
In addition, in February 1997, new management announced its 1997 operating
plan, refocusing the Company on its core businesses of delivering healthcare
information products and business management services, together with enabling
technologies in selected industries. The major components of the plan included:
(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 its core businesses; (iv)
achieving excellence in customer service; and (v) implementing cross-selling
initiatives.
The Company made significant progress in accomplishing the 1997 operating
plan, including the divestiture of HRI, in May 1997 for net proceeds of
approximately $117.0 million, the combination of the operations of HIT and BSG
under the Per-Se name, the improvement of financial controls, the imposition of
cost-containment measures throughout the Company, and the formulation of a new
customer-focused strategy centered on a "markets of one" approach to solutions
meeting the distinct needs of each customer.
The Company also reached a proposed settlement in 1997 with the plaintiffs
in one of the major class-action securities lawsuits pending against it and,
during the third quarter of 1997, the Company recorded a non-cash charge of
$52.5 million related to this settlement. In addition, through the successful
completion of a $210.0 million loan facility (the "Bridge Facility"), management
stabilized and provided for the near-term financing needs of the Company.
43
<PAGE> 48
RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- ------------------------------------
1995 1996 1997 1997 1998
---------------- ----------------- ----------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $538,012 100.0% $ 596,714 100.0% $ 572,625 100.0% $147,546 100.0% $140,340 100.0%
Salaries and wages...... 314,790 58.5 398,573 66.8 377,363 65.9 93,578 63.4 88,198 62.9
Other operating
expenses............... 134,055 24.9 163,677 27.4 153,372 26.8 40,242 27.3 39,339 28.0
Depreciation............ 14,187 2.6 28,276 4.7 29,355 5.1 6,985 4.7 8,304 5.9
Amortization............ 18,048 3.4 25,713 4.3 24,137 4.2 6,114 4.1 6,118 4.4
Interest expense, net... 9,761 1.8 11,585 2.0 23,260 4.1 6,115 4.1 6,375 4.5
Litigation settlement... -- -- -- -- 52,500 9.2 -- -- -- --
Restructuring and other
charges................ 48,750 9.1 180,316 30.2 22,640 3.9 -- -- 561 0.4
-------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Loss before income
taxes.................. (1,579) (0.3) (211,426) (35.4) (110,002) (19.2) (5,488) (3.6) (8,555) (6.1)
Income tax expense
(benefit).............. 1,071 0.2 (74,089) (12.4) (16,773) (2.9) (2,424) (1.6) (3,405) (2.4)
-------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Loss before
extraordinary item and
cumulative effect of
accounting change...... (2,650) (0.5) (137,337) (23.0) (93,229) (16.3) (3,064) (2.0) (5,150) (3.7)
Extraordinary items, net
of tax................. -- -- -- -- 76,391 13.3 -- -- (5,557) (3.9)
Cumulative effect of
accounting change, net
of tax................. -- -- -- -- (2,465) (0.4) -- -- -- --
-------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Net loss............... (2,650) (0.5) (137,337) (23.0) (19,303) (3.4) (3,064) (2.0) (10,707) (7.6)
Pro forma tax
adjustments............ (2,130) (0.4) 979 0.2 -- -- -- -- -- --
-------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Pro forma net loss...... $ (4,780) (0.9)% $(136,358) (22.8)% $ (19,303) (3.4)% $ (3,064) (2.0)% $(10,707) (7.6)%
======== ===== ========= ===== ========= ===== ======== ===== ======== =====
</TABLE>
Fiscal 1996 compared to Fiscal 1995
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $289,968 $294,406
Hospital Services........................................... 69,689 89,715
HRI......................................................... 22,667 31,419
Per-Se Product Operations................................... 58,799 70,047
Per-Se Services Operations.................................. 98,615 113,988
Eliminations................................................ (1,726) (2,861)
-------- --------
$538,012 $596,714
======== ========
</TABLE>
Physician Services' revenue grew only 1.5% in 1996 as compared to 1995.
Excluding the 7.3% growth by acquisitions, Physician Services experienced a 5.8%
decline in revenue, which is attributable to the loss of clients at a higher
rate than had historically been experienced by the Company. These client losses
were mostly due to the reengineering and consolidation effort undertaken by
Physician Services, which diverted management's attention away from client
service.
Hospital Services' revenue grew by 28.7% in 1996 as compared to 1995. The
majority of this growth is attributable to acquisitions made in December 1995
and the first quarter of 1996.
44
<PAGE> 49
HRI's revenue increased by 38.6% in 1996 as compared with 1995. This growth
was caused by increased subrogation recoveries.
Product Operations' revenue increased 19.1% in 1996 as compared with the
same period in 1995. This increase is primarily the result of higher licensing
revenue from the ULTICARE product line.
Services Operations' 1996 revenues increased 15.6% from 1995. The increases
in revenue reflected the demand for Per-Se's services as migration to client
server architectures continued to accelerate. This demand for Per-Se's services
was negatively affected in 1996 by a decrease in the revenues generated by
Imonics.
SALARIES AND WAGES. Salaries and wages increased to $398.6 million (66.8%
of revenue) in 1996 from $314.8 million (58.5% of revenue) in 1995. This
increase was due to a slowdown in the growth of the Company's revenue and an
increase in the employment levels across the Company.
OTHER OPERATING EXPENSES. Other operating expenses increased to $163.7
million (27.4% of revenue) in 1996 from $134.1 million (24.9% of revenue) in
1995. The increase in other operating expenses as a percentage of revenue for
1996, as compared with 1995, is due to a slowdown in the growth of the Company's
revenue without a corresponding slowdown in the growth of the Company's
operating expenses. Other operating expenses are primarily comprised of postage,
facility and equipment rental, telecommunications, travel, office supplies and
legal, accounting and other outside professional services.
DEPRECIATION. Depreciation expense was $28.3 million in 1996 compared to
$14.2 million in 1995. This increase reflects the Company's investment in
property and equipment, including approximately $42.0 million of new computer
and other data processing equipment purchased in connection with the Company's
reengineering program and, to support growth in its business, including
acquisitions.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and software products, was $25.7
million in 1996 versus $18.0 million in 1995. The increases are primarily due to
increased amortization of goodwill and client lists resulting from acquisitions.
INTEREST. Net interest expense was $11.6 million in 1996, compared to $9.8
million in 1995. The increase in 1996 is primarily due to increased borrowings
under the Company's then-current credit facility to finance acquisitions and the
Company's investment in its reengineering project.
RESTRUCTURING AND OTHER CHARGES. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). The objectives of the
Reengineering Project were: (i) to improve profitability in the near term
through office consolidations; (ii) to improve longer-term profitability by
developing technology and then leveraging such technology to make the Company's
workflow process more efficient; and (iii) to standardize operating procedures
throughout MPSC.
In June 1996, a comprehensive assessment of the technology aspect of the
Reengineering Project was completed. Management concluded that, due to increased
development costs and higher than expected operating costs, it was no longer
cost effective to continue the deployment of the technology upon which the
Reengineering Project was based. While technologically feasible, management
determined that such technology had no alternative useful application in the
Company's operations. In connection with the abandonment of this project, the
Company recorded a non-cash charge of $86.1 million during 1996. No further
amounts are expected to be expended in connection with the technology project.
During 1995, the Company recorded restructuring charges of approximately
$15.0 million as a result of the office consolidation aspect of the
Reengineering Project, related primarily to costs associated with the
termination of leases for closed offices and incremental costs associated with
discontinued client contracts. In August 1996, the Company expensed an
additional $3.9 million, related primarily to additional lease termination
costs.
During 1996, the Company adopted a plan to consolidate the three
subsidiaries within its system integration businesses (the "BSG Group
Restructuring") and, later in 1996, revised such plan to entirely shut down one
of such businesses, Imonics Corporation (the "Imonics Shutdown"). The objectives
of the BSG Group Restructuring were to improve profitability through
capitalizing on the synergies of these similar
45
<PAGE> 50
businesses and to better utilize office space and other resources. Management's
decision to shut down Imonics was due to the continued under-performance of this
subsidiary along with management's decision, as discussed above, to abandon the
Reengineering Project, in which Imonics Corporation was instrumental in
technology development. During 1996, the Company recorded expenses of
approximately $10.7 million, consisting primarily of severance and lease
termination costs, in connection with the BSG Group Restructuring and the
Imonics Shutdown.
As of December 31, 1996, the Company had accrued, but had not paid,
expenses of approximately $11.5 million in connection with the above
restructuring plans. Such amount consists primarily of estimated lease
termination costs which will be paid in varying amounts through 2005.
Exclusive of the restructuring charges and software abandonment charges
discussed above, other charges aggregated approximately $80.2 million and $31.9
million in 1996 and 1995, respectively. The primary components of the 1996
amount were: (i) $35.6 million in non-cash property and equipment impairment
charges associated with the abandonment of the Reengineering Plan and the
Imonics Shutdown; (ii) $13.0 million in non-cash intangible asset impairment
charges associated with the write-off of goodwill resulting from the Imonics
Shutdown; (iii) $12.8 million in legal costs associated with various lawsuits
and investigations (see "The Business -- Legal Proceedings"); and (iv) $9.8
million of pooling costs, primarily related to the Company's mergers with BSG
and HDS. The principal components of the 1995 amounts were: (i) $12.0 million in
legal costs associated with various lawsuits and investigations (see "The
Business -- Legal Proceedings"); (ii) $9.2 million of pooling costs, related to
the Company's mergers with Atwork, HRI, and Consort; and (iii) $5.0 million in
non-cash property and equipment impairment charges associated with the office
consolidation component of the Reengineering Project.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions consummated by the Company in 1996 and previous years.
Pro forma adjustments for income taxes have been provided for companies that
elected to be treated as "S" Corporations under the Internal Revenue Code of
1986, as amended, prior to merging with the Company.
Fiscal 1997 compared to Fiscal 1996
REVENUE. Revenue classified by the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $294,406 $279,593
Hospital Services........................................... 89,715 98,067
HRI......................................................... 31,419 14,720
Per-Se Product Operations................................... 70,047 90,977
Per-Se Services Operations.................................. 113,988 90,594
Eliminations................................................ (2,861) (1,326)
-------- --------
$596,714 $572,625
======== ========
</TABLE>
Physician Services' revenue for the year ended December 31, 1997 declined
5.0% from the prior year principally due to an adjustment to revenue of $12.1
million in the third quarter of 1997 that resulted from a detailed review,
performed by the Company, to update the assumptions and methodology underlying
the calculation of accounts receivable, unbilled, for Physician Services. In
1997, management's emphasis has been on enhancing client service to its existing
clients and not on expanding the client base.
Hospital Services' revenue for the year ended December 31, 1997 increased
9.3% as compared to the comparable period in 1996. This increase reflects
internally generated volume growth.
46
<PAGE> 51
Medaphis acquired HRI on August 28, 1995 in a transaction accounted for as
a pooling-of-interests. On May 28, 1997 Medaphis completed the sale of HRI and,
as a result, there are only five months of revenue from HRI in 1997 compared
with a full year for 1996.
Product Operations' revenue increased 29.9% for the year ended December 31,
1997, as compared with the year ended December 31, 1996. This increase is
primarily the result of an increase in license fees associated with the
ULTICARE(R) and scheduling product lines, offset in part by charges of $4.7
million for adjustments to accounts receivable, unbilled relating to
unanticipated collection issues on certain contracts.
Services Operations' revenue in 1996 includes the results of the Company's
wholly-owned subsidiary, Imonics Corporation ("Imonics"), which was shut down at
the end of 1996 (the "Imonics Shutdown"). Imonics generated $12.3 million of
revenue during the year ended December 31, 1996. Excluding the revenue generated
by Imonics, Services Operations' revenue decreased 10.9% for the year ended
December 31, 1997, as compared with the year ended December 31, 1996.
Disruptions associated with the restructuring of this division have negatively
affected revenue. Also negatively impacting the Services Operations' revenue for
1997 was approximately $1.1 million of adjustments for collection issues on
certain contracts.
SALARIES AND WAGES. Salaries and wages for 1997 decreased to $377.4
million (65.9% of revenue) from $398.6 million (66.8% of revenue) in 1996. This
decrease is attributable to management's efforts to reduce costs by streamlining
processes and reducing the overall head count of the Company. Management further
reduced the Company's head count during the fourth quarter of 1997 within
Physician Services and Per-Se.
OTHER OPERATING EXPENSES. Other operating expenses decreased to $153.4
million (26.8% of revenue) in 1997 from $163.7 million (27.4% of revenue) in
1996. The decrease in other operating expenses as a percentage of revenue
reflects the cost management initiatives that were stated in the Company's 1997
business plan. Included in other operating expenses for 1997 are higher than
normal professional fees the Company incurred to assist with a variety of
financial, operational and organizational projects undertaken by the management
of the Company. Management believes that expenditures for professional fees will
decrease in 1998. Other operating expenses are primarily comprised of postage,
facility and equipment rental, telecommunications, travel, office supplies and
legal, accounting and other professional services.
DEPRECIATION. Depreciation expense was $29.4 million in the year ended
December 31, 1997 as compared with $28.3 million for the same period of 1996.
This increase reflects the Company's normal 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 software products, was $24.1
million for the year ended December 31, 1997 as compared with $25.7 million for
the same period of 1996. This decrease is primarily due to the write-offs of
goodwill and capitalized software associated with the Imonics Shutdown.
INTANGIBLE ASSETS. As of December 31, 1997, the Company's balance sheet
included approximately $516 million of unamortized intangible assets, which is
greater than 59% of the Company's total asset balance. The current amortization
rate on the unamortized intangible assets is in excess of $20 million per year.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant
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<PAGE> 52
restructuring charges within the Physician Services segment and (iii) absence of
revenue growth within the Physician Services segment. Therefore, in accordance
with applicable accounting rules, management prepared a 40 year undiscounted
cash flow analysis to determine if these intangible assets were still
recoverable. Management prepared the analysis with assumptions that reflected
its current outlook on the business. In all instances, management believes the
assumptions inherent in the analysis were reasonable and supportable. The
following key assumptions were used in management's undiscounted cash flow
analysis: revenue growth was forecasted at an average rate of 3.4% and the
EBITDA margin was forecasted at approximately 3.5 percentage points above the
current level. Such analysis indicated that no impairment of these intangible
assets had occurred. However, the Company recognizes that modest adjustments to
the assumptions could have a material impact on the analysis and related
conclusions. For example, if the Physician Services segment is unable to improve
its EBITDA margin, revenue growth of at least 4.1% would be required to allow
for recoverability of these assets over the 40 year life. If the projected
undiscounted cash flows used in the Company's recoverability analysis decreased
to one dollar below the carrying value of the intangible assets, the Company
would be required to record a non-cash impairment charge that may exceed $300
million to reduce the Physician Services segment's intangible assets to their
fair value, as determined by discounting the future cash flows of this segment.
Management still believes the current intangible asset balance is recoverable.
INTEREST. Net interest expense was $23.3 million in the year ended
December 31, 1997 as compared with $11.6 million in the same period of 1996. The
increase in interest expense was due to increased borrowing rates. Management
anticipates that interest rate fluctuations and changes in the amount of
borrowings under the Existing Facility will impact future interest expense.
RESTRUCTURING AND OTHER CHARGES. During 1997, the Company recorded
restructuring charges of approximately $6.7 million as compared to charges in
1996 of approximately $14.1 million. The 1997 charges primarily relate to a plan
adopted in August 1997 to further combine the operations of the Company's
technology companies, the BSG and HIT Groups, and to rename the combined
operations "Per-Se Technologies" (the "Per-Se Restructuring"). The objective of
the Per-Se Restructuring was to improve profitability through capitalizing on
perceived synergies of these similar businesses and better utilizing office
space and other resources. In connection with the Per-Se Restructuring, the
Company recorded charges of approximately $5.0 million, primarily consisting of
lease termination costs and severance costs. See "-- Fiscal 1996 as compared to
Fiscal 1995" for an explanation of the restructuring costs incurred in 1996 and
details regarding each of the Company's plans.
As of December 31, 1997, the Company had accrued, but had not paid,
expenses of approximately $9.4 million, in connection with the office
consolidation aspect of the Reengineering Project, the BSG Group Restructuring,
the Imonics Shutdown, and the Per-Se Restructuring. Such amount primarily
consists of estimated lease termination costs which will be paid in varying
amounts through 2005.
Exclusive of the restructuring charges discussed above, other charges
aggregated approximately $15.9 million in 1997 as compared to $166.3 million in
1996, which included $86.1 million of software abandonment expenses. The primary
components of the 1997 amounts were: (i) $7.0 million in non-cash property and
equipment impairment charges associated with the Per-Se Restructuring and the
Company's assessment of the recoverability of certain of its long-lived assets;
(ii) $2.6 million in legal costs associated with various lawsuits and
investigations (see "The Business -- Legal Proceedings"); and (iii) $5.3 million
of various other costs, including severance and other individually
insignificant, non recurring, items. See "-- Fiscal 1996 as compared to Fiscal
1995 -- Restructuring and Other Charges" for an explanation of the $80.2 million
of other charges incurred in 1996, the $86.1 million of software abandonment
expenses incurred in 1996 and additional details regarding each of the Company's
restructuring plans.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with the litigation settlement in 1997 and merger transactions consummated by
the Company in 1996 and previous years. Pro forma adjustments for income taxes
have been provided for companies that elected to be treated as "S" Corporations
under the Internal Revenue Code of 1986, as amended, prior to merging with the
Company.
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<PAGE> 53
DEFERRED TAX ASSET. As of December 31, 1997, the Company had recorded a
net deferred tax asset of $60.9 million reflecting primarily a tax benefit of
$104.3 million for net operating loss carryforwards ("NOLs") offset by a
valuation allowance of $26.5 million. The valuation allowance primarily reflects
the Company's assessment of the uncertainty associated with the realizability of
NOLs assumed in certain business combinations; a full valuation allowance has
been provided on such amounts. With respect to the deferred tax asset for which
a valuation allowance has not been provided, realizability of such amount is
dependent on the Company generating sufficient taxable income to be offset by
such NOLs prior to their expiration. Currently, the Company's NOLs are scheduled
to expire in varying amounts from 1998 through 2011; however, no material
amounts are scheduled to expire prior to 2008. Although realization is not
assured, based on the Company's current analyses and estimates, management
believes it is more likely than not that the Company will generate sufficient
taxable income to realize the deferred tax asset fully prior to the expiration
of the carryforward period. In addition, if future taxable income is not
sufficient to utilize the deferred tax asset fully, other tax planning
strategies are available to the Company, which makes it more likely than not
that the Company will be able to utilize the deferred tax asset.
EXTRAORDINARY ITEM. On May 28, 1997, Medaphis sold HRI through an initial
public offering of 100% of its stock, which generated net proceeds to the
Company of approximately $117.0 million. Medaphis had acquired HRI on August 28,
1995 through a business combination accounted for using the pooling-of-interests
method of accounting.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology" ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter which includes November 1997. The Company recorded a
charge of $2.5 million, net of tax of $1.6 million, in the fourth quarter of
1997 as a result of EITF 97-13.
Three Months ended March 31, 1998 compared to 1997
REVENUE. Revenue classified by the Company's different reportable segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Physician Services........................................ $ 71,760 $ 70,099
Hospital Services......................................... 23,756 25,271
HRI....................................................... 8,916 --
Per-Se Product Operations................................. 19,690 23,712
Per-Se Services Operations................................ 23,810 21,706
Eliminations.............................................. (386) (448)
-------- --------
$147,546 $140,340
======== ========
</TABLE>
The 2% decrease in Physician Services' revenue in the first quarter of 1998
from revenue in the same period of 1997 is attributable to system and process
changes in the first quarter of 1998 which delayed the Company's ability to
record certain revenue. The system and process changes related primarily to
billing activities that were delayed out of the first quarter, with the result
that corresponding revenue could not be recognized in that period. Management
believes these systems and process changes were one-time events that will not be
recurring. During the quarter, management at Physician Services continued its
emphasis on customer service and not revenue growth.
The 6% increase in Hospital Services revenue for the three months ended
March 31, 1998, as compared to the same period of the prior year, reflects
volume growth.
Medaphis divested HRI in May 1997 through an initial public offering of
100% of its stock.
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<PAGE> 54
Product Operations' revenue increased 20% during the three months ended
March 31, 1998 as compared with the same period for the prior year. This
increase is primarily a result of an increase in the amount of revenue
associated with the Company's ULTICARE(R) software product.
The 9% decrease in the Services Operations' revenue is primarily a result
of the Company's decision late in 1997 to downsize this segment, which created
less billable hours in the first quarter of 1998 as compared to the first
quarter of 1997. This segment was downsized in 1997 principally to obtain
management efficiencies, but also to reduce unproductive billable staff since
growth in the business had not occurred as quickly as had been planned. The
decline in revenue in the first quarter of 1998 is partly the result of
disruption to the business from the previously-disclosed downsizing and is
expected to be a temporary situation.
SALARIES AND WAGES. Salaries and wages decreased to 62.9% of revenue in
the first quarter of 1998 from 63.4% in the first quarter of 1997. The decrease
in salaries and wages, as a percentage of revenue, is a direct result of the
Company's restructuring and cost containment initiatives implemented during the
third and fourth quarters of 1997.
OTHER OPERATING EXPENSES. Other operating expenses increased to 28.0% of
revenue in the first quarter of 1998 compared to 27.3% in the first quarter of
1997. The increase in other operating expenses as a percentage of revenue for
1998, as compared with 1997, is primarily due to third party commission costs
and increased marketing costs associated with the Product Operations segment.
Other operating expenses are primarily comprised of postage, facility and
equipment rental, telecommunications, travel, outside consulting and legal
services and office supplies.
DEPRECIATION. Depreciation expense was $8.3 million in the first quarter
of 1998 as compared with $7.0 million in the first quarter of 1997. This
increase reflects the Company's investment in property and equipment to support
its business.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $6.1 million in the first quarters of both 1998 and 1997.
INTEREST. Net interest expense was $6.4 million in the first quarter of
1998 as compared with $6.1 million in the first quarter of 1997. The increase is
due primarily to the increased borrowing rate associated with the Bridge Notes,
which were outstanding for approximately two months in 1998 and were not
outstanding in the first quarter of 1997.
RESTRUCTURING AND OTHER CHARGES. In the first quarter of 1998, the Company
recorded a charge of $0.6 million for the severance costs associated with a
former executive.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible goodwill associated
with merger transactions consummated by the Company in previous years.
As of March 31, 1998, the Company had recorded a net deferred tax asset of
$67.9 million primarily reflecting a tax benefit of $104.3 million for NOLs
offset by a valuation allowance of $26.5 million. The valuation allowance
primarily reflects the Company's assessment of the uncertainty associated with
the realizability of NOLs assumed in certain business combinations; a full
valuation allowance has been provided on such amounts. With respect to the
deferred tax assets for which a valuation allowance has not been provided,
realizability of such amount is dependent on the Company generating sufficient
taxable income prior to the expiration of such NOLs. Currently, the Company's
NOLs are scheduled to expire in varying amounts from 1998 through 2011; however,
no material amounts are scheduled to expire prior to 2008. Although realization
is not assured, based on the Company's current analyses and estimates,
management believes it is more likely than not that the Company will generate
sufficient taxable income to fully realize the deferred tax asset prior to the
expiration of the carryforward period. In addition, if future taxable income is
not sufficient to fully utilize the deferred tax asset, other tax planning
strategies are available to the Company, which makes it more likely than not
that the Company will be able to utilize the deferred tax asset.
EXTRAORDINARY ITEM. The Company used the proceeds from the February 1998
issuance of $175 million of Notes and the New Credit Facility to pay off the
Company's previous debt facility. The Company recorded
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<PAGE> 55
a charge of $5.6 million, net of tax of $3.6 million, to write-off the
unamortized costs associated with the previous debt facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $98.7 million at March 31, 1998,
including $7.1 million of cash.
The Company's operating activities used $8.5 million of cash during the
three months ended March 31, 1998 as compared with the generation of cash of
$5.9 million during the three months ended March 31, 1997. The decrease in the
Company's operating cash flows resulted primarily from the timing of payment and
reduction of current liabilities.
Purchases of property and equipment were $15.6 million in the first quarter
of 1998 compared to $3.4 million in the prior year comparable quarter. The
increase reflects the purchase for approximately $10 million of certain real
property that the Company was leasing.
On February 20, 1998, the Company sold $175 million of Notes. The Notes
bear interest at the rate of 9 1/2% per annum, payable semi-annually on February
15 and August 15 of each year, commencing on August 15, 1998. The Notes will
mature on February 15, 2005. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after February 15, 2002, at a
declining premium to par until 2004 and at par thereafter, plus accrued and
unpaid interest. In addition, at any time on or prior to February 15, 2001, the
Company may redeem up to 35% of the original principal amount of the Notes at a
redemption price equal to 109.5% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date, with
the net cash proceeds of one or more equity offerings; provided that at least
$100 million aggregate principal amount of the Notes remain outstanding
immediately following any such redemption.
Payment of principal, of premium, if any, and interest on the Notes will be
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are insignificant
individually and in the aggregate to the consolidated financial statements.
The Company also entered into a new $100 million credit facility (the "New
Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the New Credit Facility. LIBOR
based loans bear interest at LIBOR plus amounts ranging from 1.0% to 2.75% based
on the Company's leverage ratio, as defined in the New Credit Facility. Base
rate loans bear interest at prime plus amounts ranging from 0.0% to 1.75% based
on the Company's leverage ratio, as defined. In addition the Company pays a
quarterly commitment fee on the unused portion of the New Credit Facility
ranging from 0.25% to 0.75% per annum based on the Company's leverage ratio. The
New Credit Facility contains financial and other restrictive covenants,
including without limitation those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of assets,
capital expenditures, and prepayment of the Notes and those requiring
maintenance of minimum net worth, minimum EBITDA (as defined) and minimum
interest coverage and limiting leverage. Amounts outstanding under the New
Credit Facility will be due on February 20, 2001. At March 31, 1998, the Company
had $36 million in borrowings outstanding under the New Credit Facility at
interest rates ranging from 8.1% to 8.2%.
As disclosed in "Summary -- Recent Developments", the Company recently
decided to transition from the computerized coding system used by GFS for
emergency room physician billing to manual coding. The Company does not expect
to incur any material extraordinary charges as a result of the transition from
the computerized coding system. There can be no assurance that any third party
claims or lost business relating to transition from, or modifications previously
made to, the GFS coding system will not have a material adverse effect on the
Company, including, without limitation, on the Company's revenue, results of
operations, financial condition or cash flow.
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<PAGE> 56
The Company believes that its cash flow, together with available borrowings
under the New Credit Facility, will be sufficient to permit the Company to meet
its operating expenses and to service its debt requirements as they become due
in the next twelve months and for the long term, however, there can be no
assurance that such results will be achieved. The Company is a party to legal
actions and government investigations as described in "The Business -- Legal
Proceedings." There can be no assurance that these actions or investigations
will not have a disruptive effect upon the operations of the business or that
the resolution of these actions or investigations will not have a material
adverse effect on the company's liquidity or financial position. If the Company
is unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purposes may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness, thereby reducing the funds available to the
Company for its operations. In addition, the New Credit Facility and the
Indenture contain financial and other restrictive covenants, including without
limitation those restricting the incurrence of additional indebtedness, the
creation of liens, the payment of dividends, sales of assets, capital
expenditures, and prepayments of indebtedness and, with respect to the New
Credit Facility only, those requiring maintenance of minimum net worth, minimum
EBITDA and minimum interest coverage and limiting leverage.
OTHER MATTERS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compliant. GFS's computerized coding system is one of the legacy
systems from which the Company has determined to transition. The Company
believes that it is on target to have completed these system migration efforts
with respect to its Physician Services and Hospital Services businesses in the
first quarter of 1999. Per-Se Technologies products are scheduled to be Year
2000 compliant with releases due out in the third quarter of 1998. The estimated
cost of the Company's Year 2000 compliance efforts is $10 million to $15 million
over 1998 and 1999, the majority of which represents redirection of internal
resources. However, there can be no assurance that the Company will identify all
such Year 2000 problems in its computer systems or those of its customers,
vendors or resellers in advance of their occurrence or that the Company will be
able to successfully remedy any problems that are discovered. The expenses of
the Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
financial condition and results of operations. The revenue stream and financial
stability of existing customers may be adversely impacted by Year 2000 problems,
which could cause fluctuations in the Company's revenue. In addition, failure of
the Company to identify and remedy Year 2000 problems could put the Company at a
competitive disadvantage relative to companies that have corrected such
problems.
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at HDS, which was
acquired in a merger transaction in June 1996 and accounted for as a
pooling-of-interests. These practices related principally to revenue recognized
in fiscal years 1994, 1995 and 1996. As a result of this evaluation, management
determined that the revenue was improperly
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<PAGE> 57
recognized and, accordingly, restated the Company's financial statements for the
years ended December 31, 1994, 1995 and 1996 interim periods of 1997 and (the
"HDS Restatement").
As a result of the HDS-related restatement, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, 1995 and
1996 fiscal years. Consequently, the Company engaged Price Waterhouse to
re-audit the Company's 1995 and 1996 fiscal years and audit the Company's
nine-month period ending September 30, 1997. As indicated in a Current Report on
Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"), the
Company determined to further restate the results of such periods to account for
the December 1995 acquisition by the Company of Medical Management Sciences,
Inc. ("MMS") on a purchase accounting basis (the "MMS Restatement"). Such
acquisition had previously been accounted for as a pooling-of-interests.
The withdrawn audit opinion included an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern due
to certain step-down payments required during 1997 under the Company's Senior
Credit Facility. On December 23, 1997, the Company entered into the Bridge
Notes, the proceeds of which were used to refinance the Senior Credit Facility,
and that increased the Company's borrowing capacity and extended the term into
1999, thereby removing the substantial doubt expressed in the predecessor
accountants' audit opinion. Fiscal years 1995 and 1996 have been re-audited by
the Company's current independent accountants.
The impact of the HDS Restatement and MMS Restatement for the years ended
December 31, 1995 and 1996 and as of the years ended December 31, 1994, 1995 and
1996 is presented below:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
AS OF DECEMBER 31, 1994
Retained Earnings (accumulated deficit)............. $ 4,838 $ (16,059)
Total stockholders' equity.......................... $ 257,097 $ 236,004
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue............................................. $ 559,877 $ 538,012
Pro forma net loss.................................. (8,504) (4,780)
Pro forma basic net loss per share.................. $ (0.15) $ (0.09)
AS OF DECEMBER 31, 1995
Accumulated deficit................................. $ (6,052) $ (21,284)
Total stockholders' equity.......................... $ 421,306 $ 554,074
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenue............................................. $ 608,313 $ 596,714
Pro forma net loss.................................. (123,642) (136,358)
Pro forma basic net loss per share.................. $ (1.74) $ (1.91)
AS OF DECEMBER 31, 1996
Current assets...................................... $ 269,385 $ 255,239
Intangible assets................................... 389,033 539,151
Total assets........................................ 815,624 936,854
Current liabilities................................. 193,752 198,747
Total liabilities................................... 423,334 428,329
Total stockholders' equity.......................... $ 392,290 $ 508,525
</TABLE>
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<PAGE> 58
THE BUSINESS
Medaphis is a leader in delivering healthcare information products and
business management services, together with enabling technologies in selected
industries. Medaphis serves approximately 20,700 physicians and 2,700 hospitals
predominantly in North America. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively. The
Company's large client base and national presence further support the Company's
competitive position. Medaphis provides its services and products through its
Healthcare Services Group and Per-Se Technologies, its Information Technologies
Group. The Company reported a net loss of $19.3 million for the year ended
December 31, 1997, including restructuring and other charges ($22.6 million), a
litigation settlement ($52.5 million) and an extraordinary gain on the sale of
HRI, net of tax ($76.4 million). The Company generated revenue during 1997 of
$557.9 million determined on a pro forma basis giving effect to the disposition
of HRI.
Medaphis' services and product offerings assist healthcare providers in
minimizing the risks of providing patient care, and in competing for physician
and patient loyalty, by enhancing the quality of care delivered. The Healthcare
Services Group fosters quality care delivery by enabling physicians and other
health practitioners to focus on the patient rather than on business and systems
operations management. Per-Se Technologies delivers solutions that use
sophisticated business process, data and enterprise workflow models to ensure
the right service is delivered in the right setting by the right person, using
the right processes at the right time. Both groups differentiate their offerings
from those of competitors by enabling customers to individually tailor solutions
to their unique needs.
Medaphis markets its products and services primarily to integrated
healthcare delivery networks, hospitals, physician practices, long-term care
facilities, home health providers and managed care providers. The Company sells
its software solutions and systems integration services internationally, both
directly and through distribution agreements, in the United States, Canada,
England and Germany. Medaphis Corporation was incorporated in Delaware in 1985,
and operates through a number of wholly-owned subsidiaries.
Healthcare Services Group
The Healthcare Services Group provides a range of business management
services to physicians and hospitals, including clinical data collection, data
input, medical coding, billing, cash collections and accounts receivable
management. These services are designed to assist customers with the business
management functions associated with the delivery of healthcare services,
allowing physicians and hospital staff to focus on providing quality patient
care. These services also assist physicians and hospitals in improving cash
flows and reducing administrative costs and burdens. The Healthcare Services
Group typically enters into contracts with physician and hospital customers
providing for payment to the Company of a contingent management fee that
generally is based upon a percentage of net collections and is billable monthly
upon collection or, where required, on a fixed fee basis. The Healthcare
Services Group consists of two divisions, Physician Services and Hospital
Services.
Per-Se Technologies
Per-Se provides application software and a broad range of information
technology and consulting services to healthcare and other service-oriented
markets such as energy, communications and financial services. Per-Se is an
early entrant in the emerging market for Delivery Chain Management solutions,
which enable users to assess each customer's unique needs and cost-effectively
deliver products and services individually tailored to meet them. Per-Se
develops solutions using a methodology called Deliver to Order(TM) that enables
customers to choose among packaged application software, software supplied by
other companies and modified by Per-Se, enabling technology services, and
outsourcing to balance their needs for flexibility, time to deployment and cost.
In the third quarter of 1997, Medaphis combined the operations of HIT, its
software products operation, with the operations of BSG, its information
technology services operation, under the Per-Se Technologies
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<PAGE> 59
name. This business combination has assisted the Company in its efforts to
contain costs and eliminate redundancies. Per-Se's management expects to benefit
from the synergy of combining HIT's leading information products in the
high-growth healthcare information systems market with BSG's ability to provide
enabling technology infrastructure and services. Per-Se is organized into
Product Operations and Services Operations.
THE INDUSTRY
The healthcare industry is undergoing major changes, as pressures to cut
costs and increase quality and productivity are inspiring healthcare providers
to seek ways to manage their practices more effectively. In general, the
healthcare industry is in a state similar to that of the financial services
industry in the early 1980's. The same type of computerized technology that
fueled substantial growth and change in that industry is just beginning to be
deployed in the healthcare industry. See "Risk Factors -- Evolving Industry
Standards; Rapid Technological Changes" and "Risk Factors -- Competition;
Industry and Market Changes."
According to the Gartner Group, since 1986, healthcare expenditures have
doubled to more than $1.0 trillion, representing approximately 14% of the 1996
U.S. Gross Domestic Product. At the same time, the healthcare delivery system is
experiencing a shift from a highly fragmented group of independent healthcare
providers to integrated healthcare networks that combine all of the services,
products and equipment necessary to address people's healthcare needs. In the
face of escalating costs and increasingly complex care delivery systems,
healthcare providers are seeking to manage costs, increase productivity and
enhance the quality of patient care through improved access to clinical and
financial information. This creates an opportunity for companies such as
Medaphis that provide comprehensive, cost-effective business management services
and information technology.
With more than $1 trillion in annual expenditures, the United States spends
more on healthcare than on information technology and defense combined,
according to industry research firm The Gartner Group. Healthcare in the United
States traditionally was a cottage industry, with more than 5,000 hospitals and
600,000 practicing physicians. Since the early 1990s, the formation of complex
healthcare delivery systems has been the hallmark of the industry as managed
care providers move to control costs and provide higher-quality patient care.
According to Modern Healthcare, an estimated 768 hospitals were involved in
merger and acquisitions activities in 1996. In the past three years, according
to the Gartner Group, 40% of U.S. non-federal hospitals have either completed,
or agreed to be part of, a merger, acquisition or joint venture. In addition,
according to the Gartner Group, more than one-third of U.S. physicians are now
in group practices, and large groups composed of more than 100 physicians
represent almost one-third of all physicians in such group practices.
This trend toward consolidation has a profound impact on information and
business management systems. The need for healthcare providers to manage on a
cost-effective basis the complexity of combining information from different
business systems, while at the same time competing for patient loyalty, is
creating high-growth opportunities for companies such as Medaphis that can
deliver integrated technology solutions and can invest in an information
technology infrastructure to support sophisticated outsourcing services.
Additionally, the federal government's focus on compliance and the demand
for technology products and services are creating growth opportunities for the
Company. The government's drive to curb healthcare fraud and abuse is compelling
healthcare providers to utilize, and providing Medaphis with the opportunity to
offer, increasingly sophisticated compliance services; this gives an advantage
to companies that can invest in technology infrastructure and databases, and
those able to acquire the regulatory expertise necessary to help healthcare
providers comply with complex healthcare laws and reimbursement procedures.
Further, as healthcare delivery systems move to integrate disparate technology
infrastructures, patient databases and information access methods, the demand
for new technology products and services is growing. See "Risk
Factors -- Evolving Industry Standards; Rapid Technological Changes."
According to healthcare industry analyst Sheldon Dorenfest & Associates,
Ltd., expenditures on products and services to support automated information
systems for healthcare providers reached $11.6 billion in 1996, a 16% increase
over the previous year. Industry analysts expect double-digit industry growth to
continue in the
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healthcare information systems expenditures over the next several years, with
expenditures reaching $18 billion by the turn of the century.
Healthcare information systems expenditure increases are virtually
industry-wide. In a survey conducted at HIMSS, the leading healthcare industry
tradeshow, 68% of respondents indicated planned budget increases. According to
Andersen Consulting, information technology expenditures outstrip all other
spending priorities for healthcare executives, logging a 77% response rate
compared to the next closest priorities, buildings/ facilities and human
resource development, at 8% (see Figure 1). See "Risk Factors -- Competition;
Industry and Market Changes."
FIGURE 1
TOP SPENDING PRIORITIES
FOR HEALTHCARE EXECUTIVES
[CHART]
- ---------------
Source: Andersen Consulting, 1996
Estimated compound annual growth rates between 1996 and 2000 for products
and services Medaphis provides also indicate promising market opportunity (see
Figure 2).
FIGURE 2
COMPOUND ANNUAL GROWTH RATE 1996-2000
OF HEALTHCARE INDUSTRY SPENDING
<TABLE>
<CAPTION>
SPENDING AREA RATE
- ------------- ----
<S> <C>
Systems integration and networking.......................... 15%
Interface engines and translation software.................. 38
Data repositories........................................... 50
Internet/Intranet development............................... 58
Decision support systems.................................... 28
Enterprise scheduling software.............................. 50
Managed care and medical management......................... 32
Clinical workstations....................................... 38
Document management and workflow............................ 43
Home care information systems............................... 32
</TABLE>
- ---------------
Source: Volpe, Welty, & Co. 1996
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BUSINESS STRATEGY
Medaphis' primary business objective is to expand its leadership position
in delivering cost-effective, high-quality healthcare information products and
business management services, together with enabling technologies in selected
industries, thereby realizing the growth potential of the Company.
In 1997, Medaphis hired new management talent, instituted new business
processes, invested in new technology, developed new product and service
offerings, and formulated a new customer-focused strategy centered on a "markets
of one" approach to creating individually delivered solutions to meet the
distinct needs of each customer.
In 1998, Medaphis plans to capitalize on this progress by continuing to
attract talented people, strengthening its infrastructure, streamlining
operations for efficiency and investing in product and service development,
training, sales, marketing and other programs designed to fuel growth.
To reach its objectives, Medaphis intends to execute strategies that
include:
- CAPITALIZE ON INDUSTRY TRENDS. The healthcare industry is rapidly
transitioning to consolidated care delivery systems, capitation and
managed care. Many physicians who previously practiced in independently
or in small group practices now practice as part of larger groups or
Integrated Delivery Networks that unite physicians with different
practice specialties to cover a broad range or even the entire spectrum
of healthcare needs. The Company's services and products can assist
healthcare providers in pricing services and negotiating agreements in a
marketplace increasingly moving toward capitation and managed care.
Although historically a large portion of Medaphis' Healthcare Services
revenue has come from billing and receivables management services,
Medaphis intends to respond to the changing nature of the healthcare
industry by developing higher value-added services and products that
enable customers to operate more effectively in increasingly complex
environments. The Company plans to grow revenue derived from offerings
such as information management and consulting services for mergers and
group formations; activity-based costing systems; capitation management
and analysis; outcomes reporting; medical guidelines management; patient
eligibility services; and facilities management.
- LEAD INDUSTRY IN DELIVERING INTEGRATED SOLUTIONS. Medaphis intends to
capitalize on its experience as a software provider and systems
integrator to deliver workable integrated solutions that combine new
technologies with customers' existing information systems. There are
substantial opportunities for the expansion of information technology
systems within the healthcare market, which has adopted such technology
at a slower rate than have other industries. Management anticipates that
current healthcare industry trends will continue and that expenditures
for information technology and services will increase as a percentage of
total healthcare expenditures. Medaphis has the healthcare information
products, personnel, services and systems in place to deliver integrated
solutions that capitalize on this growth opportunity.
- DIFFERENTIATE FROM COMPETITORS BY BECOMING KNOWN FOR CREATING
"INDIVIDUALLY DELIVERED" SOLUTIONS. Medaphis plans to deliver
personalized value, attract new customers and strengthen customer loyalty
by focusing on a "markets of one" approach to business that enables its
customers to combine Medaphis' array of packaged applications, tailored
third-party solutions, component frameworks and information technology
services to craft solutions suited to their unique needs.
- LEAD THE COMPLIANCE INITIATIVE IN THE HEALTHCARE MARKET. The healthcare
industry is subject to extensive and complex federal and state government
regulations. These regulations, along with the federal government's close
monitoring of healthcare costs and stricter regulatory controls over the
industry, are driving the demand for better systems to monitor and ensure
compliance with healthcare laws and regulations. Management believes the
Company's size, customer base and access to payor data enable it to
assemble and analyze data and trends more effectively and to invest in
compliance initiatives. Through continued investments in technology and
training, Medaphis intends to strengthen further its market-leading
position in developing and improving compliance systems that enable
customers to safely operate in accordance with continually changing
healthcare regulations. For
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example, in December of 1997 Physician Services teamed with the Graham
Company, a Philadelphia-based insurance broker, to develop an exclusive
insurance product in conjunction with an underwriter for Physician
Services' customers that will pay for losses (civil fines and penalties
and multiple damages) incurred by a physician for any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement,
omission or act in billing his or her professional services.
- EXECUTE PROGRAMS THAT EXPAND EXISTING CUSTOMER RELATIONSHIPS. Medaphis
plans to sell products and services from each of its operations to
existing customers across all operations. In addition, Medaphis will
leverage advanced technology knowledge and capabilities derived from
solutions its Per-Se Technologies operation creates for services
industries such as communications, energy and financial services that
have adopted technology more quickly than healthcare. Medaphis believes
cross-development initiatives will enable it to deliver leading-edge, yet
proven, technology solutions to the healthcare market.
- MAKE STRATEGIC ACQUISITIONS, PARTNERSHIPS AND ALLIANCES. Medaphis
intends to drive organic growth by making a limited number of strategic
acquisitions, as well as by formulating alliances and partnerships, that
extend the skills, processes, capabilities, products, systems or
geographic coverage already in place within the Company.
HEALTHCARE SERVICES GROUP
The Healthcare Services Group consists of Physician Services and Hospital
Services.
Physician Services
Physician Services is a leading provider of business management solutions
and claims processing to physicians in the United States, a market currently
estimated to be approximately $10 billion annually, according to Volpe, Welty &
Company. Of this market, management estimates that approximately 24% is
currently served by outsourcing companies such as Medaphis. Physician Services
offers clients both revenue and cost management services. Revenue management
services include medical coding, electronic and manual claims submission,
automated patient billing, past due and delinquent accounts receivable
collection, capitation analysis (i.e., an analysis of the price per member paid
to healthcare providers by managed care health programs for a predetermined set
of healthcare services and procedures) and contract negotiation with payors,
including managed care organizations. Cost management provides comprehensive
practice management services including front office administration, employee
benefit plan design and administration, cash flow forecasting and budgeting and
general consulting services.
A key goal of Physician Services is to grow its revenue from the
higher-margin consulting services it provides to its customers. These services
include: financial and statistical reporting; alliance, merger and acquisition
advice; budgeting and tax planning services; marketing consultation; managed
care advisory services; and employee compensation and benefit advice.
Physician Services' current systems support approximately 30 different
medical and surgical specialties. Although Physician Services is preparing for
growth in the academic and office-based markets, the majority of Physician
Services' customers are in the hospital-based market. Figure 3 depicts Physician
Services' customer base.
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FIGURE 3
BREAKDOWN OF PHYSICIAN SERVICES' CUSTOMER
BASE BY MEDICAL SPECIALTY
[CHART]
Services Offered by Physician Services
Physicians have been outsourcing their business management services to
Physician Services for nearly 30 years. The solid relationships developed over
that time serve as excellent referral sources and strengthen Physician Services'
position in the growing outsourcing market. Its proactive approach and ability
to guide physicians in the rapidly changing healthcare environment has enabled
Physician Services to be recognized as a leader in its industry.
To meet the business management service needs of hospital-based, faculty
practice, and office-based physicians, Physician Services has developed broad
service selection. Its core services include accounts receivable management,
fee-for-service billing, expense accounting, practice consulting, analysis of
practice statistics, and electronic data interchange ("EDI") consulting
regarding claims and remittance status. Physician Services also has developed a
variety of emerging services in response to the changing business needs of
physicians, including: activity-based costing systems; consulting services
regarding alliances and mergers and acquisitions; capitation management and
analysis; compliance services; consulting regarding EDI for eligibility,
referrals and authorizations; outcomes reporting; and medical guidelines
management.
In order to identify and respond to the needs of its physician customers,
Physician Services has a comprehensive understanding of the various complexities
and requirements in a managed healthcare environment. To better serve its
physician customers, Physician Services has continually expanded its range of
services to include information management and consulting services for mergers
and group formations, and has created a distinct operating unit whose exclusive
mission is to manage specialty networks. Recognizing that different stages of
the healthcare market evolve at different paces, Physician Services is
strategically positioned to assist physician clients at all stages of the
market's evolution. This enables Physician Services to differentiate its
services from its competitors' services by tailoring solutions to meet the
individualized needs of its physician clients.
Physician Services has approximately 5,700 employees in approximately 170
operating locations throughout the United States. Many employees also have
market-specific expertise in the areas of reimbursement, contracting, marketing,
facility management, systems integration and financial and strategic management.
Additionally, Physician Services' emphasis on compliance training will enable
the Company to capitalize on the growing demand for companies with a
sophisticated understanding of healthcare regulations. Physician Services'
ability to leverage such skills of its employee base enables it to provide a
broad spectrum of high quality services.
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Hospital Services
Hospital Services is a leading provider of business management services to
hospitals in the United States, representing over 1,100 hospitals in a highly
fragmented industry. Hospital Services offers services primarily related to
"late stage" (over 90 days) receivables, including claims submission and
automated patient billing. A key goal of Hospital Services is to increase
revenue from strategic value-added services such as: (i) eligibility services,
in which Hospital Services personnel assist patients in qualifying for
reimbursement under appropriate federal, state and local government healthcare
programs and (ii) facilities management contracts, in which Hospital Services
assumes responsibility for the client's entire business office functions,
including patient admissions/registration, medical records and business office
activities.
Hospital Services' resources and expertise address the functional and
professional needs of healthcare providers. Its services are designed to
increase client productivity, profitability and cash flow; maximize return on
revenue through knowledgeable management skills; reduce administrative costs in
a declining reimbursement environment; improve resource utilization and patient
satisfaction; and provide extensive information and management reporting through
comprehensive databases and decision support systems.
Among potential other systems advantages, Hospital Services enjoys the
ability to automate much of the workflow associated with account resolution,
which enhances communication between the Company and its customers. Customers
gain a clearer understanding of the status of their accounts receivable, and can
respond instantaneously to improvement opportunities and problem areas. Hospital
Services' systems advantages also help its employees improve efficiency.
Hospital Services can respond overnight and provide resources to help manage a
customer's entire accounts receivable base. This provides a safety-net for
customer facilities experiencing accounts receivable problems, as well as for
those undergoing changes such as major conversions to different patient
accounting systems.
Products and Services Offered by Hospital Services. Hospital Services'
target market is primarily community hospitals. According to Dataquest 1997,
there are approximately 5,200 of these facilities in the United States yielding
a potential market size of $6-$7 billion annually. Hospital Services offers its
customers a broad range of services, which can be purchased individually or as a
complete package, depending on the customer's needs. This enables Hospital
Services to deliver solutions individually designed to meet a specific
customer's requirements. The products and services offered by Hospital Services
includes:
Patient Financial Services Outsourcing. Under its most intensive
program, Hospital Services customizes management systems and services to
assume responsibility for the customer's entire business office functions,
including patient admissions/registration, medical records and business
office activities. Customer benefits include improved provider focus on
strategic business goals; increased efficiency in overall performance while
reducing operating costs; flexibility and control over difficult-to-manage
functions; and accelerated benefits of consolidation efforts.
Customized Collection Services. Formed in 1914, the collection
agency, owned and operated by Medaphis, services some of the largest
collections contracts awarded in the healthcare industry. Its regional
offices offer (i) a national presence represented through regional
headquarters to adequately support performance commitments, (ii) an
experienced management team dedicated to delivering customized solutions
with customer satisfaction as the ultimate goal and (iii) a healthcare
focus.
Extended Business Office Services. Through this program, Hospital
Services assumes responsibility for managing collection of assigned
accounts receivable. This enables clients to move accounts electronically
to Hospital Services' regional facilities, where centralized resources are
responsible for all billing and follow-up activities on assigned accounts.
Managed Care and Charge Accuracy Services. Hospital Services'
"Managed Care Services" are designed to increase profitability by
identifying underpaid claims, helping in contract negotiation and
administration, and assisting in payment recovery to assure accurate
reimbursement. Managed Care Services include: reimbursement analysis of
complex contracts; elimination of costly errors in authorization oversights
and identification of carve-outs, pass-throughs and stop-losses; modeling
of proposed contract terms to assist on blind contract negotiating;
reducing cost of contract administration; reducing
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contract risks by supporting proactive contract management; performing
account accuracy reviews (pre-billing and post-billing); performing
insurance company defense audits, coding and reimbursement validation
audits and medicare compliance reviews; and performing coding reviews and
optimization, and chargemaster updates.
Claims Resolution Services. These services assist customers in
favorably resolving disputes with third party payors. By utilizing
proprietary techniques developed over several years and employing
specialists with legal, provider and payor healthcare claims administration
experience, Hospital Services challenges payor denials with substantial
success.
Entitlement Program Services. Under this program, Hospital Services
assists patients in qualifying for reimbursement under appropriate federal,
state, and local government healthcare programs. Hospital Services'
entitlement program includes medical assistance certification programs,
out-of-state Medicaid billing programs, health maintenance organization
member retention programs and Medicaid denials billing programs.
Consulting Services. Hospital Services provides specialized
consulting services, including interim management and supervisory services,
business office reviews, evaluations and assessments, management
recruitment, and seminars for in-house personnel.
Shared Systems. Hospital Services' shared systems enable customers to
license and operate Hospital Services' software, on a 'turnkey' basis.
These sophisticated automated collection and managed care systems are fully
interfaced with the provider's internal systems, and all hardware and
system functionality are guaranteed under time-share agreements.
PER-SE TECHNOLOGIES
Per-Se provides application software and a broad range of information
technology and consulting services to healthcare and other service-oriented
markets such as energy, communications and financial services. Per-Se is an
early entrant in the emerging market for Delivery Chain Management solutions,
which enable users to assess each customer's unique needs and cost-effectively
deliver products and services individually tailored to meet them. Per-Se
develops solutions using a methodology called Deliver to Order(TM) that enables
customers to choose among packaged application software, software supplied by
other companies and modified by Per-Se, enabling technology services, and
outsourcing to balance their needs for flexibility, time to deployment and cost.
In the third quarter of 1997, Medaphis combined the operations of HIT, its
software products operation ("Product Operations"), with the operations of BSG,
its information technology services operation ("Services Operations"), under the
Per-Se name. This business combination has enabled the Company to contain costs
and eliminate redundancies. Per-Se management expects to benefit from the
synergy of combining HIT's leading information products in the high-growth
healthcare information systems market with BSG's ability to provide enabling
technology infrastructure and services. Per-Se is organized into Product
Operations and Services Operations.
Product Operations
Per-Se provides application software and systems integration services to
over 1,800 hospitals and 3,450 physicians. Per-Se offers the following product
lines: (i) an integrated enterprise-wide patient-centered information system
that coordinates quality integrated care at nearly 200 acute-care and
extended-care facilities representing more than 30,000 beds, and for thousands
of ambulatory clinics and home-care providers; (ii) an advanced radiology
information management system for both single and multi-site hospitals and
imaging center networks; and (iii) a suite of rules-based staff productivity,
patient scheduling and resource management software installed at over 1,900
global locations. These products address both the business and the clinical
management needs of Per-Se's healthcare provider customers and can function in
either a stand-alone provider setting or across an entire healthcare delivery
network. Per-Se also provides a variety of interfaces to ensure that its
products are compatible with other software products used by healthcare
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providers. Per-Se Product Operations' revenue is derived from software licenses,
resale of hardware, installation and implementation services, and continuing
customer support and software maintenance activities. Customer support and
software maintenance fees generally renew annually to provide a recurring base
of revenue.
Per-Se Product Operations is comprised of Automation Atwork ("Atwork"), the
provider of the rules-based staff productivity, patient scheduling and resource
management software referred to above; Consort Technologies, Inc. ("Consort"),
the provider of advanced radiology information management systems for single and
multi-site hospitals and imaging center networks, and HDS which distributes
patient-centered clinically-based information systems.
Services Operations
Through its Services Operation, Per-Se provides full-service systems
integration, information technology consulting and tailored software development
to more than 100 customers, primarily in service-oriented markets such as
healthcare, energy, communications and financial services. Per-Se provides its
expertise in information technology and business services to organizations
seeking to create competitive advantages through the strategic use of advanced
technologies. These technologies enable customers to streamline business
processes and improve access to information within their organizations, as well
as to create strategic advantages by extending business processes and
information to customers, suppliers and other organizations through networked
systems.
Products Offered by Per-Se
The Company's array of products and services offered through Per-Se
includes the following:
ATWORK. This company is a worldwide leader in rules-based staff
productivity, patient scheduling and resource management software,
currently with over 1,900 installations worldwide. Atwork's systems enable
healthcare facilities to manage all resources and the flow of all patients
throughout the healthcare delivery process. The integration of Atwork's
staff and patient management systems achieves an enterprise-wide balance
between healthcare supply (staff and other resources) and demand (patient
flow).
One-Staff(R). One-Staff provides enterprise-wide staff scheduling
and productivity management. One-Staff's expert, rules-based system
manages positions and schedules for all facility staff, regardless of
department, discipline or location. Comprehensive personnel information
can be accessed and stored on a central database. Staff productivity and
competency-based staff sharing are managed on an enterprise-wide basis.
One-Call(R). One-Call provides enterprise-wide patient scheduling
and resource management. One-Call's expert, rules-based, scheduling
system coordinates enterprise-wide patient flow in conjunction with all
human and physical resources, and all clinical, business and other
necessities. With One-Call, all patients entering the delivery system
are scheduled for every needed procedure, test or office visit,
regardless of the location or discipline, with one telephone call.
ANSOS(TM). ANSOS delivers complete nurse scheduling, productivity
and management for single facilities and multi-facilities. ANSOS is a
leading nurse scheduling product.
ORSOS(TM). ORSOS provides for single-facility and multi-facility
surgical patient scheduling and resource management. ORSOS is an
integrated surgical solution for all healthcare facilities, from
stand-alone surgical centers to components of integrated delivery
systems. It automatically schedules and manages all surgical procedures,
staff, equipment, inventory and other resources across all surgical
locations.
Credentialing Manager(TM). Credentialing Manager delivers
enterprise-wide automated credentialing of physicians and allied health
personnel. When combined with ORSOS or One-Staff, it creates an
integrated credentialing and operating room resource management system.
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HDS. HDS develops and distributes ULTICARE(R), an integrated,
enterprise-wide, patient-centered information system. ULTICARE enables
hospitals, integrated delivery networks, managed-care organizations,
multi-specialty medical groups and a myriad of other healthcare
organizations to optimize provider productivity and patient care, creating
and maintaining a computer-based patient record that enables users to
coordinate outcome-oriented, protocol-based, wellness-focused, acute,
ambulatory, long-term and home healthcare for patients, members and
clients. ULTICARE is currently being used to orchestrate quality integrated
care at nearly 200 acute and extended-care facilities, and for thousands of
ambulatory clinics and home-care providers, representing more than 30,000
beds.
CONSORT. This company is a leading provider of advanced radiology
information management systems for both single and multi-site hospitals and
imaging center networks. By integrating and tracking all radiology
information associated with patient visits from pre-registration to
follow-up letters, Consort's proven software and services help improve
communication between departments and facilities, increase departmental
efficiency and productivity, reduce errors and operating costs and enhance
physician and patient satisfaction. Consort has 20 hospital-based and 15
clinic-based clients.
ProgRIS(TM). This system is a next-generation Radiology
Information System that can be configured to meet the specific
operational requirements of both hospital and imaging center networks.
Consort's solution incorporates industry standards and open architecture
tools, such as the UNIX operating system, relational database management
and graphical Windows user interface. This solution delivers flexibility
in data access and management with a range of expansion options for both
system hardware and software. An Integrated Mammography Information
Reporting and Tracking Module is fully integrated with the base ProgRIS
system.
RESEARCH AND DEVELOPMENT
The Company intends to maintain a leadership position by continuing to
invest in developing industry-leading products and services. Most research and
development investments will occur at Per-Se, which is the technology product
and service development business unit of Medaphis.
From a healthcare application perspective, the Company plans to introduce
more than 30 new products or product enhancements in 1998. Additional product or
service investments will be made in: (i) integrating Per-Se's product offerings
into a unified suite; (ii) creating interfaces among Per-Se applications and
those supplied by other vendors; and (iii) data warehousing, data mart,
Internet/Intranet, customer asset management and call center applications that
capitalize on the Services Operations' subject matter expertise in industries
other than healthcare. The expertise gained through these initiatives will be
leveraged to bring leading-edge, yet proven, solutions to the healthcare market,
which has been slower to adopt new information technology solutions than have
less risk-adverse services industries. Per-Se plans to spend approximately 15%
of projected revenues in 1998 on research and development.
EMPLOYEES
The Company currently employs approximately 9,800 full-time and part-time
employees. The Company's workforce is not unionized and management believes
relations with its employees are satisfactory.
PROPERTIES
The Company's principal executive offices are leased and are located in
Atlanta, Georgia. The lease expires in February 2000.
Healthcare Services Group
Physician Services' principal office is leased and is located in Atlanta,
Georgia. The lease expires in February 2000. In addition to its principal
office, Physician Services, through its various operating subsidiaries, operates
approximately 174 business offices throughout the United States. Two of the
facilities are owned and
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unencumbered. All of the remaining facilities are leased with expiration dates
ranging from April 1998 to April 2005.
Hospital Services' principal office is leased and is located in Norcross,
Georgia. The lease expires in May 2002. In addition to its principal office,
Hospital Services, through its various operating subsidiaries, operates
approximately 41 business offices throughout the United States. These facilities
are leased with expiration dates ranging from April 1998 to September 2002.
Per-Se Technologies
Per-Se's principal office is leased and is located in Atlanta, Georgia. The
lease expires in September 1999. In addition to its principal office, Per-Se,
through its various operating subsidiaries, operates approximately 36 offices in
the United States, Australia, Canada and Europe. These facilities are leased
with expiration dates ranging from April 1998 to April 2004.
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. See "Risk Factors -- Litigation and Government
Investigations" and "--Government Regulation."
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, MPSC, which offices are
located in Calabasas and Cypress, California (the "Designated Offices") (the
"California Investigation"). Medaphis first became aware of the California
Investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally for
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx). On
February 11, 1998, the United States provided Medaphis with a copy of the
Complaint, Substitution of Attorney, and Order which prohibited the Company from
making any use of the Complaint, including any public disclosure, other than for
the purposes of settlement negotiations, without further order of the Court. On
February 12, 1998, upon the joint application of Medaphis and the United States,
the Court issued an order modifying its February 6, 1998 order to allow Medaphis
to make public disclosures concerning the Complaint and its contents to the
extent that Medaphis determined such disclosures were required by applicable
securities laws, provided that such disclosure did not reveal the Relators'
identities.
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According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs. No
charges or claims by the government have been made. The Complaint includes
causes of action under the Federal False Claims Act, 31 U.S.C. sec 3729 et seq.,
and the California False Claims Act, Cal. Gov't Code sec. 12650 et seq. The
Complaint also includes causes of action relating to Medaphis's termination of
Relator II, including a count under the state and federal whistleblower
protection statutes. The Complaint alleges overpayments of approximately
$20,500,000 together with treble damages and additional penalties based on
statutory civil penalties. The Complaint alleges that at least 50,000 separate
false claims were filed under federal programs and at least 8,000 separate false
claims were filed under state programs. The Complaint also alleges unspecified
compensatory, general and punitive damages on behalf of Relator II on his or her
employment claims. The allegations in the Complaint are limited to the office of
CompMed (acquired by Medaphis) in Culver City, California. Medaphis believes
that this Complaint relates to and concerns the California Investigation.
Medaphis is engaged in discussions with the United States and California, and
intends to pursue settlement discussions with the United States, the State of
California, and the Relators. The Company has agreed with the government to toll
applicable statutes of limitations through September 30, 1998.
Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the California Investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the California Investigation. The
charges are intended to cover only the anticipated expenses of the California
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.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries, which impacts only certain managed care plans,
cannot be determined by the Company, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error. The Company is
unable to estimate the possible range of loss, if any.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995, were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated
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Complaint no longer contained any claims based on the Securities Act and the
Company's underwriters and outside directors were no longer named as defendants.
On June 26, 1996, the court denied plaintiffs' motion to certify plaintiffs'
class. On May 19, 1997, the plaintiffs and the defendants entered into a
stipulation and settlement agreement, pursuant to which the parties agreed to
settle this action on a class-wide basis for $4.75 million, subject to court
approval (the "1995 Class Action Settlement"). The 1995 Class Action Settlement
included the related putative class action lawsuit filed in the Superior Court
of Cobb County, Georgia, described more fully below. On October 28, 1997 the
court certified a class for settlement purposes, approved the settlement and
entered final judgment dismissing the action with prejudice. One of Medaphis'
directors' and officers' liability insurance carriers has paid $3.7 million of
the 1995 Class Action Settlement directly for the benefit of the plaintiffs. The
Company accrued approximately $1.2 million in the quarter ended December 31,
1996 for the anticipated balance of the 1995 Class Action Settlement and to pay
certain fees incident thereto. On November 6, 1997, the Company paid the
remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February, 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. 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 each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government has requested
that GFS voluntarily produce records, and GFS has complied with that request.
Although the precise scope and subject matter of the GFS Investigation are not
known to the Company, Medaphis believes that the GFS 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. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company or that the GFS
Investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. Currently, the Company has recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, solely for legal and administrative fees, costs and expenses in
connection with the GFS Investigation, which charges do not include any
provision for fines, penalties, damages, assessments, judgments or sanctions
that may arise out of this matter.
In addition, the Company decided in April 1998 to transition from the
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
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.
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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 alleged violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint was brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserted claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. The Consolidated Second Amended Complaint
sought compensatory and rescissory damages, as well as fees, interest and other
costs. On February 14, 1997, the defendants moved to dismiss the Consolidated
Second Amended Complaint in its entirety. On May 27, 1997, the court denied
defendants' motion to dismiss. See "Risk Factors -- Restatement of Financial
Statements; Accounting Issues" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Other Matters."
The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") to settle the 1996 putative shareholder
class action litigation which is the subject of the Consolidated Second Amended
Complaint on a class-wide basis for $20 million in cash (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
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 Stipulation
also includes, among other things: (i) a complete release of claims against the
Company, the individual defendants and certain related persons and entities; and
(ii) certain anti-dilution rights in favor of plaintiffs with respect to certain
future issuances of shares of Medaphis Common Stock or warrants or rights to
acquire Medaphis Common Stock to settle existing civil litigation and claims
pending or asserted against the Company, subject to a 5.0 million share basket
below which there will be no dilution adjustments. The Stipulation also contains
other conditions including, but not limited to, consent and approval of the
Company's insurance carriers and the insurance carriers' payment of the cash
portion of the settlement, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company's insurance carriers consented to the settlement and funded the $20
million cash portion. On March 25, 1998, the Court granted final approval of the
settlement and entered final judgment dismissing the action.
The Company recorded a $52.5 million charge in the quarter ended September
30, 1997 in connection with the Stipulation. This charge is comprised of the
following: (i) $30.2 million representing the original 3,355,556 shares of
common stock valued at the fair value of a common share on the date that the
material terms of the agreement were reached or approximately $9 per share and
(ii) $22.3 million representing the fair value of the warrants on the date the
material terms of the agreement were reached, valued using the Black-Scholes
option pricing model with the following assumptions: expected life -- 5 years,
risk free interest rate -- 6%, dividend rate -- 0% and expected volatility
factor -- 60%. No accounting recognition was required for the additional 600,000
shares to be issued pursuant to the agreement as these shares represent the
maximum number of contingent shares that were issuable based on certain stock
price contingencies during the ten day period prior to October 11, 1997. As a
result of the actual decline in the Company's stock price during such period,
the Stipulation required that the maximum number of contingent shares be
awarded; however, no additional accounting charge is required in connection with
the award of such contingent shares. Although the exact timing of the issuance
of the 3,955,556 shares is not known, the Company does not expect such shares to
be issued before the second quarter of 1998. Additionally, no accounting
recognition has been afforded the cash portion of the Stipulation as this amount
is the responsibility of the insurance carriers. Such amount has been paid
directly to an escrow account for the benefit of the plaintiffs by the insurance
carriers. The Company has classified the entire $52.5 million liability
associated with the settlement as noncurrent since such obligation will be
settled with equity (common stock and warrants) rather than current assets, and
the exact timing of the payment of claims pursuant to such settlement is not
determinable.
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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 "Derivative Suit"). The plaintiff seeks
unspecified compensatory damages and costs on behalf of the Company. On January
28, 1997, Medaphis and certain individual defendants filed a motion to dismiss
the complaint. On February 11, 1997, the plaintiff filed an amended complaint
adding as defendants, additional current and former directors and officers of
Medaphis. On April 23, 1997, Medaphis and all other defendants filed a motion to
dismiss the amended complaint, which motion was denied without prejudice. The
parties have reached an agreement in principle to settle the Derivative Suit for
$250,000 in cash to be paid by the Company's directors' and officers' liability
insurance carrier. Such agreement in principle is subject to definitive
documentation, consent and approval of the insurance carrier (which has been
requested by the Company), and preliminary and final approval of the settlement
by the court.
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 in excess of $100 million,
rescission, injunctive relief and costs. The Company is unable to estimate a
possible range of loss. On January 10, 1997, the defendants filed a demurrer to
the complaint. On February 5, 1997 the Court overruled defendants' demurrer. On
March 18, 1997, the court denied the plaintiff's motion for a preliminary
injunction. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former and
current officers of Medaphis. All of the newly added defendants have responded
to the amended complaint. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the Securities Act, but the Company
believes that it has substantial defenses to the alleged damages relating to
such Securities Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. The Company is unable to estimate a possible range of loss. 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
Securities Act and common law and new parties, including former officers of
Medaphis, Medaphis' former outside auditors and BSG. On or about October 29,
1997 all defendants filed motions to dismiss the amended complaint. On May 12,
1998, the court ruled in favor of defendants on the motions, dismissing all of
plaintiffs' claims with prejudice and without leave to amend. On May 15, 1998,
the Judge signed an order dismissing all of the plaintiff's claims.
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
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its representations and warranties made in the merger agreement between Medaphis
and BSG. On December 31, 1996, Medaphis entered into a standstill and tolling
agreement with Mr. Noorda, Mr. Papermaster and other former BSG shareholders,
which, as extended, runs through June 30, 1998. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement.
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 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.
The Company is unable to estimate a possible range of loss. Additionally,
plaintiffs seek to void various non-compete covenants and contract provisions
between Medaphis and plaintiffs. Defendants have filed a motion to dismiss the
complaint. Discovery has been stayed pending resolution of the motion to
dismiss.
On August 12, 1997, George D. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserts claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties have
reached an agreement in principle to settle the Stickle complaint. The
settlement provides for $137,500 in cash to be paid by the Company's directors'
and officers' liability insurance carrier and a number of shares of Medaphis
Common Stock to be determined such that the aggregate value of the cash portion
of the settlement and the stock portion of the settlement (with the Medaphis
shares being deemed to have an agreed upon value) will approximate $500,000.
Such agreement in principle is subject to definitive documentation, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), and preliminary and final approval of the settlement by the court.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Commission notified the Company that it was
conducting a formal, non-public investigation into, among other things, certain
trading and other issues related to Medaphis' August 14, 1996 and October 22,
1996 announcements of the Company's loss for the quarter ending September 30,
1996 and its restated consolidated financial statements for the three months and
year ending December 31, 1995 and its restated unaudited balance sheets as of
March 31, 1996, and June 30, 1996. In addition, the Company believes that the
Commission is investigating the Company's restatement of its interim financial
statements for each quarter of 1996 and the November 19, 1997 and December 23,
1997 restatements of the Company's financial statements. 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
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the lawsuits, the written demands and the pending governmental investigations
will not have a material adverse effect upon the Company, including, without
limitation, the Company's results of operations, financial position and cash
flow. Because the Company is unable to estimate a range of loss with respect to
any of the pending claims, the Company has not accrued any amounts for any
contingent liability with respect to such unsettled claims.
THE REIMBURSEMENT PROCESS
Healthcare providers receive payment for medical services from their
patients, third-party payors, or a combination of both. Third-party payors
include insurance companies, governments or their intermediaries, health
maintenance organizations, preferred provider organizations, third-party
administrators for self-insured companies and other "managed care" companies.
Although patients generally retain primary responsibility for payment for all
medical services, hospitals and hospital-affiliated physicians usually agree to
process claims with third-party payors. Most hospital-affiliated physicians and
certain hospitals bill the third-party payor before requesting payment from the
patient for any deductible, co-payment or other amount due on account of
uncovered services (collectively the "Patient Obligations"). Most hospitals and
certain hospital-affiliated physicians bill the patient in full or for the
estimated Patient Obligations at the same time they bill the third-party payer.
Obtaining reimbursement from third-party payors is becoming increasingly
difficult because of changes in reimbursement formula, pre-admission
certification and utilization review and administrative procedures generated by
third-party payors in an effort to control costs. In addition, healthcare
providers are increasingly unable to collect charges or deposits of estimated
net balances directly from their patients at the time medical services are
rendered. Consequently, healthcare providers often assume the responsibility for
obtaining reimbursement from third-party payors. To be successful in obtaining
reimbursement from third-party payors, healthcare providers need regulatory and
technical skills to manage complex billing and collection requirements. Even
then, accounts receivable management efforts, if successful, generally result in
the loss of a portion of established charges to patient bad debts, the
incurrence of collection costs and the deferral of cash receipts. Accounts
receivable management performance varies widely depending on patient
demographics and the type of service provided.
Many third-party payors administer reimbursement claims through locally
established operating divisions or through local independent contractors. In
many cases, locally established third-party processing centers establish
independent methods and procedures for handling reimbursement claims.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA"), a division of the U.S. Department of Health and Human
Services. HCFA has established guidelines pursuant to which claims for physician
services are reimbursed in accordance with a resource-based relative value
guide, the values in which vary by geographic location. HCFA currently contracts
with numerous insurance carriers to process regional reimbursement claims.
Although HCFA has established the regulatory framework for Medicare claims
administration, Medicare intermediaries have authority to independently develop
procedures for administering the claims reimbursement process.
The Medicaid program is subject to federal regulation but is administered
by state governments. State governments provide for Medicaid claims
reimbursement either through the establishment of state-owned and operated
processing centers or through contractual arrangements with third-party
administrators. The requirements and procedures for reimbursement implemented by
local Medicaid program administrators differ from state to state.
Similar to the claims administration process of Medicare and Medicaid,
several national health insurance companies administer reimbursement claims
through local or regional offices. Consequently, because guidelines for
reimbursement of claims are generally established by third-party payors at local
or regional levels, reimbursement managers for healthcare providers must become
familiar with the local methods and procedures of third-party payors.
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When physicians and hospitals provide services to patients covered by
certain government programs and when healthcare providers enter into
participation arrangements with Medicare or certain commercial insurers such as
Blue Cross/Blue Shield and most health maintenance organizations, such
healthcare providers are required to accept reimbursement amounts which may be
less than the healthcare providers' established charges. In such cases,
healthcare providers calculate and write off the difference between their
established charges and the charges allowed. In cases in which healthcare
providers enter into participation arrangements, such write-offs, referred to as
contractual allowances, may not be charged to patients.
Nearly all health insurance contracts, self-insured employers, health
maintenance organizations, preferred provider organizations and Medicare require
patients to pay a portion of medical fees in the form of deductibles and
co-payments for services received. Hospital-affiliated physicians generally are
unable to determine the amount of patients' deductibles and co-payments at the
time services are rendered. Consequently, such physicians do not collect such
amounts until an explanation of insurance benefits has been provided by a
third-party payor when the third-party payor remits cash to the physician in
response to a claim, often 60 days or more after the time healthcare services
are rendered. Hospitals generally will require a patient to make an advance
payment or deposit at the time healthcare services are rendered in situations
where the amount of the patient's deductible or co-pay is considered
significant.
Third-party payors reimburse their insurance program beneficiaries, or
their assignees, only for services covered under the terms of the policy.
Typically, but not always, medical services provided for illness and injuries
are covered, whereas routine checkups, physicals, certain injections and other
types of preventive medical services are not. When patients and healthcare
providers are uncertain whether a payor's coverage limitations are applicable to
a particular medical treatment or service, they must either contact the payor's
client service representative or submit a claim and wait for a determination of
whether the claim will be paid or denied.
Third-party payors also make reimbursement contingent on the coordination
of covered services with the benefits available pursuant to any other insurance
policy covering the same beneficiary. A substantial number of patients are
covered by multiple insurance policies. Common examples of such patients include
families with two wage earners as well as Medicare beneficiaries who have
insurance policies which provide reimbursement for certain amounts not funded by
Medicare, usually deductible and co-payments amounts. Whether an insurance
policy's coverage is primary or secondary in payment priority to another policy
is often difficult to determine. Furthermore, regular health insurance coverage
often has subrogation rights with respect to worker's compensation and
automobile insurance coverage for injuries suffered in the workplace or in an
automobile accident and require special handling.
Claims submitted to third-party payors for reimbursement may be denied or
returned for many reasons, including ineligible beneficiary status as a result
of employment changes or other reasons, noncovered services, secondary payer
liability, the failure to submit required information and the submission of
incorrect billing information. The great quantity of informational variables
relating to the administration of claims, including numerous possible diagnoses,
treatment procedures and responsible third-party payors, result in multiple
errors which make time-consuming corrections a costly component of the
reimbursement process.
Additionally, commercial payors and the governmental reimbursement programs
engage in various types of utilization review of claims filed for reimbursement.
The purpose of utilization review programs is to verify that medical services
provided to patients are medically necessary and are eligible for coverage. The
utilization review process further complicates and results in delays in the
reimbursement process.
GOVERNMENT REGULATION
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection service in certain limited
circumstances. The Medicare statutes that restrict the assignment of Medicare
claims are supplemented by Medicare regulations and provisions in the Manual.
The Medicare regulations and the Manual provide that a billing service that
prepares and sends bills for the provider or physician and does not receive and
negotiate the checks made payable to the provider or physician does not violate
the restrictions on assignment of Medicare claims. Management believes that its
practices do not
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violate the restrictions on assignment of Medicare claims because, among other
things, it bills only in the name of the medical provider, checks and payments
for Medicare services are made payable to the medical provider and the Company
lacks any power, authority or ability to negotiate checks made payable to the
medical provider. Medaphis, medical billing and collection activities are also
governed by numerous federal and state civil and criminal laws. In general,
these laws provide for various fines, penalties, multiple damages, assessments
and sanctions for violations, including possible exclusion from Medicare,
Medicaid and certain other federal and state healthcare programs. See "-- Legal
Proceedings."
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Under applicable
law successful plaintiffs can receive up to 25-30% of the total recovery from
the defendant. Such qui tam actions or "whistle-blower" lawsuits have increased
significantly in recent years and have increased the risk that a company engaged
in the healthcare industry, such as Medaphis and many of its clients, may become
the subject of a federal or state investigation or may ultimately be required to
defend a false claims action, may be subjected to government investigation and
possible criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a result
of such an action. The government on its own may also institute a Civil False
Claims Act case, either in conjunction with a criminal prosecution or as a stand
alone civil case. Whether instituted by a qui tam plaintiff or by the
government, the government can recover triple its damages together with civil
penalties of $5,000-$10,000 per false claim. Under applicable case law, a party
successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. The
Company recently became aware that it was a defendant in a qui tam litigation.
There can be no assurance that Medaphis will not be the subject of additional
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 "-- Legal Proceedings" and "Risk
Factors -- Existing Government Regulation." Any such proceeding or investigation
could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Act sets forth various provisions designed
to eliminate abusive, deceptive and unfair debt collection practices by debt
collectors. The Federal Fair Debt Act also provides for, among other things, a
civil right of action against any debt collector who fails to comply with the
provisions thereof. Various states have also promulgated laws and regulations
that govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties and injunctions for failure to comply with such
laws and regulations. Although most of the Company's billing and accounts
receivable management services the Company provides to its clients are not
considered debt collection services, the Company may be subjected to regulation
as a "debt collector" under the Federal Fair Debt Act and as a "collection
agency" under certain state collection agency laws and regulations. Management
believes that the Company operates in accordance with the Federal Fair Debt Act
and complies in all material respects with the applicable collection agency laws
and regulations governing collection practices in the states in which it
conducts its business or is exempt from such laws and regulations.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Hospitals are paid a predetermined amount for operating expenses
relating to each Medicare patient admission based on the patient's diagnosis.
Additional changes in the reimbursement provisions of the Medicare and Medicaid
programs may continue to reduce the rate of increase of federal expenditures for
hospital inpatient costs and charges. Such changes could
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<PAGE> 77
have an adverse effect on the operations of hospitals in general, and
consequently reduce the amount of the Company's revenue related to its hospital
clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements. See "Risk
Factors -- Government Investigatory Resources and Healthcare Reform."
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) (codified
in scattered titles of the United States Code, including 18, 26, 29 and 42
U.S.C.) (the "Health Insurance Act"), which includes an expansion of certain
fraud and abuse provisions, such as expanding the application of Medicare and
Medicaid fraud penalties to other federal healthcare programs, and creating
additional criminal offenses relating to healthcare benefit programs, which are
defined to include both public and private payor programs. The Health Insurance
Act also provides for forfeitures and asset freezing orders in connection with
such healthcare offenses. Civil monetary penalties and program exclusion
authority available to the OIG also have been expanded. The Health Insurance Act
contains provisions for instituting greater coordination of federal, state and
local enforcement agency resources and actions through the OIG. There also have
been several recent healthcare reform proposals which have included an expansion
of the anti-kickback laws to include referrals of any patients regardless of
payor source.
In recent years, the focus of healthcare legislation has been on budgetary
and related funding mechanism issues. A number of reports, including the 1995
Annual Report of the Board of Trustees of the Federal Hospital Insurance
Program, projected that the Medicare trust fund is likely to become insolvent by
the year 2002 if the current growth rate of approximately 10% per annum in
Medicare expenditures continues. Similarly, federal and state expenditures under
the Medicaid program are projected to increase significantly during the same
seven-year period. In response to these projected expenditure increases, and as
part of an effort to balance the federal budget, both the Congress and the
Clinton Administration have made proposals to reduce the rate of increase in
projected Medicare and Medicaid expenditures and to change funding mechanisms
and other aspects of both programs. In late 1995, Congress passed legislation
that would substantially reduce projected expenditure increases and would make
significant changes in the Medicare and the Medicaid programs. The Balanced
Budget Act of 1997 instituted substantial reductions in Medicare program
expenditures. Medaphis anticipates that future legislation may 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 medical reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis' billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
Medaphis' consulting and comprehensive business management services (including
billing and collection services) for the new provider systems.
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<PAGE> 78
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David E. McDowell.................................. 55 Chairman and Chief Executive
Officer and Director
Allen W. Ritchie................................... 40 President and Chief Operating
Officer
Randolph L. M. Hutto............................... 49 Executive Vice President and
General Counsel
Mark P. Colonnese.................................. 42 Senior Vice President and Chief
Financial Officer
Harvey Herscovitch................................. 60 Senior Vice President -- Strategy
and Organization
Robert C. Bellas, Jr. ............................. 55 Director
David R. Holbrooke, M.D. .......................... 57 Director
John C. Pope....................................... 48 Director
Dennis A. Pryor.................................... 55 Director
C. Christopher Trower.............................. 49 Director
</TABLE>
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President and Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
McKesson Drug Company in the United States and Medis Health and Pharmaceutical
Services, Inc. in Canada. Prior to 1992, Mr. McDowell served for over 25 years
as a senior executive at IBM, including as a Vice President and President of the
National Services Division.
ALLEN W. RITCHIE joined Medaphis in January 1998 as Executive Vice
President and Chief Financial Officer, and was named President and Chief
Operating Officer in April 1998. From October 1997 to January 1998, Mr. Ritchie
served as President and Chief Executive Officer of Royal Precision, Inc. From
July 1996 until January 1997 he served as President, Finance and Administration
of AGCO Corporation and President from January 1996 to July 1996. From September
1991 until July 1994, he was AGCO's Chief Financial Officer, and after July 1994
also served as Executive Vice President.
RANDOLPH L. M. HUTTO joined Medaphis in August 1997 as Executive Vice
President and General Counsel. From 1992 to 1996, Mr. Hutto was employed by
First Data Corporation (formerly known as First Financial Management
Corporation) where he served in a variety of executive positions, including
Senior Executive Vice President -- General Counsel and, most recently, Senior
Vice President -- Planning and Development. Prior to that, Mr. Hutto was a
partner in the law firm of Sutherland, Asbill & Brennan.
MARK P. COLONNESE joined Medaphis in October 1997 as Vice President and
Corporate Controller. In April 1998, he assumed the role of Senior Vice
President and Chief Financial Officer. Prior to his joining the Company, he
served as Vice President and Chief Financial Officer of Applied Analytical
Industries, a publicly traded pharmaceutical development and service company,
from July 1993 to October 1997. From February 1983 to July 1993, Mr. Colonnese
served in a variety of management positions at Schering-Plough Corporation
culminating in his serving as senior director of planning and business analysis.
HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
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<PAGE> 79
ROBERT C. BELLAS, JR. became a director of the Company in 1987. He has been
a general partner of Morgenthaler Ventures, a private equity investment firm
based in Cleveland, Ohio, since 1984, where he is responsible for the firm's
investments in healthcare services, medical devices and biomedical ventures. Mr.
Bellas is a member of the Board of Directors of CardioThoracic Systems, Inc.,
Vical, Inc., and several privately held healthcare companies.
DAVID R. HOLBROOKE, M.D. became a director of the Company in 1994. Dr.
Holbrooke has been the President and Chief Executive Officer of Advocates Rx,
Inc., a medical management and healthcare venture development company, since
1995. From 1983 to 1995, Dr. Holbrooke served as President and Chief Executive
Officer of Holbrooke & Associates. Dr. Holbrooke has a 25 year history of
entrepreneurship, management, medical practice, and new business development
experience in the healthcare services industry. He currently is active as a
board member and investor in several privately held healthcare companies.
JOHN C. POPE became a director of the Company in 1997. He has been Chairman
of the Board of MotivePower Industries, Inc., a manufacturer of locomotives and
locomotive components, since December 1995. From January 1988 to July 1994, Mr.
Pope held various positions with UAL Corporation and its subsidiary, United
Airlines, Inc., most recently as President, Chief Operating Officer and
Director. Mr. Pope is also a member of the Board of Directors of Federal-Mogul
Corporation and Wallace Computer Services, Inc.
DENNIS A. PRYOR joined the Company in January 1993 in connection with the
acquisition of CompMed, Inc. and subsequently became a director of the Company.
In 1993, Mr. Pryor also served as Chief Executive Officer of CompMed. From 1976
through 1992, Mr. Pryor was the principal owner and Chairman of the Board of
CompMed.
C. CHRISTOPHER TROWER became a director of the Company in 1997, and is
engaged in the private practice of law in Atlanta, Georgia. 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.
MANAGEMENT COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of December 31, 1997, by (i) each of the
Company's directors, (ii) the Company's named executive officers (as defined)
and (iii) such directors and all executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY PERCENT OF
NAME OWNED(1) CLASS
- ---- ------------------ ----------
<S> <C> <C>
David E. McDowell........................................... 120,000(2) *
Randolph L. M. Hutto........................................ 1,000 *
C. James Schaper............................................ 83,334(3) *
Allen W. Ritchie............................................ -- --
Jerome H. Baglien........................................... 83,334(3) *
Harvey Herscovitch.......................................... 20,334(4) *
Robert C. Bellas, Jr. ...................................... 12,915(5) *
David R. Holbrooke, M.D. ................................... 38,700(6) *
John C. Pope................................................ -- --
Dennis A. Pryor............................................. 104,000(7) *
C. Christopher Trower....................................... 700 *
All executive officers and directors as a group (11
persons).................................................. 380,983 *
</TABLE>
- ---------------
* Beneficial ownership represents less than 1% of the outstanding Common
Stock.
(1) Under the rules of the Commission, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which
includes the power to vote or to direct the voting of such
75
<PAGE> 80
security, or "investment power," which includes the power to dispose of or
to direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities which that person has the right to
acquire within sixty (60) days. Under these rules, more than one person may
be deemed to be a beneficial owner of the same securities and a person may
be deemed to be a beneficial owner of securities as to which he has no
economic or pecuniary interest. Except as set forth in the footnotes below,
the persons named below have sole voting and investment power with respect
to all shares of Common Stock shown as being beneficially owned by them.
(2) Includes 120,000 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans; does not include 210,000 shares that may be acquired
upon the exercise of stock options granted under the Company's stock option
plans which are subject to an accelerated vesting schedule based on
appreciation in the market value of the Common Stock as described elsewhere
in this Proxy Statement.
(3) Includes 83,334 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
(4) Includes 13,334 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
(5) Includes 1,143 shares that are held by the Bellas Family Partnership. Also
includes 7,200 shares that are not currently outstanding, but that may be
acquired under the Non-Employee Director Stock Option Plan (the "Director
Plan").
(6) Includes 1,500 shares held in a bank account for the benefit of Dr.
Holbrooke's son, a minor. Also includes 7,200 shares that are not currently
outstanding, but may be acquired under the Director Plan.
(7) Includes 104,000 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
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<PAGE> 81
MANAGEMENT COMPENSATION
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of (i) the Company's
Chief Executive Officer, (ii) the four other most highly compensated executive
officers of the Company (determined as of December 31, 1997) and (iii) one
additional individual who would have been among the Company's four most highly
compensated executive officers, but for the fact that he was not serving as an
executive officer of the Company at December 31, 1997 (referred to herein as the
"named executive officers") for 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
- --------------------------- ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David E. McDowell............ 1997 $300,000 $150,000 $119,812 810,000* $ 4,661
Chief Executive Officer 1996 42,692 -- -- 810,000 519,770(3)
(11/96 - Present)
Randolph L. M. Hutto......... 1997 102,612 $100,000(4) -- 250,000 101,909(5)
Executive Vice President 1996 -- -- -- -- --
and General Counsel
(7/97 - Present)
C. James Schaper............. 1997 182,692 187,500(6) -- 500,000* 104,071(7)
Executive Vice President 1996 -- -- -- -- --
(2/97 - 4/98)
and Chief Operating Officer
(1/98 - 4/98)
Jerome H. Baglien............ 1997 219,538 187,500(6) 34,308 500,000* 4,296
Senior Vice President and 1996 -- -- -- -- --
Chief Financial Officer
(1/97 - 1/98)
Harvey Herscovitch........... 1997 120,616 155,000(6)(8) 36,147 130,000* 340
Senior Vice President, 1996 -- -- -- -- --
Strategy and Organization
(4/97 - Present)
</TABLE>
- ---------------
* Reflects the repricing, exchange and reissuance of certain stock options
outstanding as of April 25, 1997. See "Management Compensation -- Stock
Option Grants."
(1) Includes amounts reimbursed for certain personal expenses, including housing
and travel expenses.
(2) Includes amounts paid by the Company on behalf of each named executive
officer for matching 401(k) plan contributions, matching non-qualified
deferred compensation plan contributions, and life, medical and dental
insurance premiums.
(3) Includes $500,000 signing incentive received by Mr. McDowell in connection
with his entering into a five-year employment agreement with the Company on
November 19, 1996, and $19,000 prepaid rent and security deposit paid by the
Company on behalf of Mr. McDowell for housing in Atlanta, Georgia.
(4) Reflects incentive compensation for 1997 guaranteed under Mr. Hutto's
employment agreement.
(5) Includes $100,000 loan by the Company to Mr. Hutto in connection with his
entering into a three-year employment agreement with the Company on July 28,
1997. This loan will be forgiven in whole by the Company in the event Mr.
Hutto remains employed with the Company through and until July 28, 1998. In
the event Mr. Hutto terminates his employment with the Company prior to July
28, 1998, Mr. Hutto must repay a pro-rata portion of the loan to the Company
in accordance with the employment agreement.
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<PAGE> 82
(6) Reflects the amount earned by this executive in 1997 pursuant to a letter
agreement in which the Company agreed that if this executive remained
employed by the Company on December 31, 1997, then the Company would pay
this amount to him as a special one time bonus.
(7) Includes $100,000 signing incentive received by Mr. Schaper in connection
with his entering into a three-year employment agreement with the Company on
February 25, 1997.
(8) Reflects $50,000 incentive compensation for 1997.
Stock Option Grants
The following table sets forth information with respect to options granted
under the Company's Amended and Restated Non-Qualified Stock Option Plan, as
amended (the "Stock Option Plan"), to each of the named executive officers
during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------------
NAME GRANTED 1997 (PER SHARE)(1) DATE 5% 10%
- ---- ---------- ------------ -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E. McDowell........... 600,000* 5.36% $ 5.38 11/19/07 $2,176,292.64 $5,606,708.59
210,000(3)* 1.88% 5.38 11/19/07 $ 761,702.42 $1,962,348.01
Randolph L. M. Hutto........ 250,000 2.23% 9.06 7/28/07 $1,424,839.39 $3,610,822.76
C. James Schaper............ 250,000 2.23% 10.25 2/25/08 $1,820,244.61 $4,748,611.56
250,000* 2.23% 5.38 2/25/08 $ 936,464.21 $2,431,512.39
Jerome H. Baglien........... 250,000 2.23% 11.38 2/07/08 $2,020,027.55 $5,269,800.63
250,000* 2.23% 5.38 2/07/08 $ 930,984.40 $2,413,809.43
Harvey Herscovitch.......... 40,000 .36% 10.50 2/11/08 $ 298,342.53 $ 778,309.02
40,000* .36% 5.38 2/11/08 $ 149,152.16 $ 386,837.80
50,000 .45% 5.38 4/25/08 $ 190,903.70 $ 498,025.11
</TABLE>
- ---------------
* Reflects the repricing, exchange and reissuance of certain stock options
outstanding as of April 25, 1997 and having an exercise price of $5.50 and
above, including certain options outstanding under the Stock Option Plan.
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. Such options may not be exercised
later than 11 years, or earlier than six months, after the original date of
grant.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions. The amounts
reflected in this table may not necessarily be achieved.
(3) These options are subject to an accelerated vesting schedule based upon the
appreciation in the market value of the Company's common stock. The vesting
schedule is as follows: (i) 1/3 based on 100% appreciation in the market
price of the Company's Common Stock above the closing price of the Company's
Common Stock on the Nasdaq National Market on November 19, 1996; (ii) 1/3
based on 200% appreciation in the market price of the Company's Common Stock
above the closing price of the Company's Common Stock on the Nasdaq National
Market on November 19, 1996; and (iii) 1/3 based on 300% appreciation in the
market price of the Company's Common Stock above the closing price of the
Company's Common Stock on the Nasdaq National Market on November 19, 1996.
In any event, the options will vest on November 19, 2001 or upon a change in
control event.
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<PAGE> 83
Stock Option Exercises
None of the named executive officers exercised any stock options during
1997. The table below shows the number of shares of Common Stock covered by both
exercisable and unexercisable stock options held by the named executive officers
as of December 31, 1997. The table also reflects the values for in-the-money
options based on the positive spread between the exercise price of such options
and the last reported sale price of the Common Stock on December 31, 1997, the
last trading date in 1997 for the Common Stock.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David E. McDowell................................ 120,000 690,000 $135,000 $776,250
Randolph L. M. Hutto............................. -- 250,000 -- --
C. James Schaper................................. -- 250,000 -- $281,250
Jerome H. Baglien................................ -- 250,000 -- $281,250
Harvey Herscovitch............................... -- 90,000 -- $101,250
</TABLE>
Compensation of Directors
In July 1997, the Company adopted a non-employee director compensation
plan. The intent of this plan is to compensate non-employee members of the Board
fairly for their talents and time spent on behalf of the Company. The plan
provides both cash and equity compensation. The cash compensation consists of an
annual retainer in the amount of $16,000 and a fee in the amount of $1,000 for
each Board meeting attended. Each Board committee chairman receives an annual
retainer in the amount of $2,000 and a fee in the amount of $750 for each
committee meeting attended, and each Board committee member other than a
committee chairman receives a fee in the amount of $650 for each committee
meeting attended. Equity compensation under the plan consists of an initial
grant of 10,000 stock options (upon first election or appointment to the Board)
and an annual grant of 2,000 stock options for each year of service thereafter.
The stock option plan under which these options are granted is the Company's
Non-Employee Director Stock Option Plan. Non-employee directors may elect to
defer receipt and taxation of the cash compensation under this plan by
participating in the Company's Non-Employee Director Deferred Stock Credit Plan
(the "Deferred Stock Credit Plan"). Deferral of taxation is accomplished under
the Deferred Stock Credit Plan using a cash-based feature similar in substance
to a restricted stock program (i.e., the prospective economic benefit to each
participant reflects the full market price per share of the Common Stock, and
varies with fluctuations in that price). The pay element is paid to the
participant upon retirement from the Board.
The Company reimburses each director for out-of-pocket expenses associated
with each Board or committee meeting attended and for each other business
meeting at which the Company has requested the director's presence.
Employment Agreements
In November 1996, the Company and David E. McDowell, the Company's Chairman
and Chief Executive Officer, entered into a five-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. McDowell received a signing
incentive of $500,000 and is to receive a base salary of at least $300,000 per
year. Mr. McDowell is entitled to reimbursement of certain expenses, including
housing and travel expenses, and is also entitled to receive an amount equal to
any federal and state income taxes payable by him as a result of such expense
reimbursement. Upon early termination of the agreement by the Company other than
for cause or by Mr. McDowell for "good reason" or by either party for any reason
following certain change in control events, the Company is obligated to pay Mr.
McDowell his annual salary, to provide for the continued vesting of stock
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<PAGE> 84
option awards described in the agreement and to provide for certain health
insurance benefits to Mr. McDowell through November 19, 2001. Upon certain
change in control events and a termination of the agreement by Mr. McDowell, the
Company will pay to Mr. McDowell (in lieu of its obligation to make the
foregoing payments of salary and to provide the foregoing benefits), a
termination payment in periodic installments or a lump sum (at Mr. McDowell's
option) equal to the salary that would have been payable to Mr. McDowell
pursuant to the agreement from the date of termination until November 18, 2001,
and an additional amount sufficient to make Mr. McDowell whole with respect to
any tax which may be imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"). A "change in control event" is generally defined
in the agreement as the adoption of a plan of liquidation or approval of the
dissolution of the Company, certain mergers and consolidations of the Company,
the sale or transfer of substantially all of the Company's assets, certain
changes in the composition of the Company's Board of Directors, or the
acquisition of more than 30% of Common Stock by any individual, entity, group or
other person. Mr. McDowell also received options to purchase up to 810,000
shares of Common Stock.
In January 1997, the Company and Jerome H. Baglien, the Company's former
Senior Vice President and Chief Financial Officer, entered into a three-year
employment agreement which contains certain non-competition and nonsolicitation
provisions. Pursuant to that agreement, Mr. Baglien is to receive a base salary
of $250,000 per year (subject to adjustments by any increases given in the
normal course of business), and is entitled to an incentive compensation payment
equal to 80% of his base salary, subject to achievement of certain performance
objectives set by the Board. Mr. Baglien is entitled to reimbursement of certain
expenses, including relocation expenses, and is also entitled to receive an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. Upon early termination of Mr. Baglien's employment
by the Company other than for cause or by Mr. Baglien for "good reason," the
Company is obligated to continue to pay Mr. Baglien his annual salary and to
cover him under certain welfare plans as if his employment had not been
terminated. Mr. Baglien also received options to purchase up to 250,000 shares
of Common Stock. In June 1997, the Company and Mr. Baglien entered into a letter
agreement in which the Company agreed that if Mr. Baglien remained employed by
the Company on December 31, 1997, then the Company would pay him a special one
time bonus for 1997 in the amount of $187,500. Mr. Baglien resigned from his
position with the Company in January 1998. See also "Certain Transactions."
In February 1997, the Company and C. James Schaper, a former Executive Vice
President of the Company, entered into a three-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Schaper received a signing bonus of
$100,000, and is to receive a base salary of $250,000 per year (subject to
adjustments by any increases given in the normal course of business), and is
entitled to an incentive compensation payment equal to 80% of his base salary,
payable at the discretion of the Board. At the end of the first year of the
agreement, Mr. Schaper is eligible to receive an additional payment of $100,000.
In the event Mr. Schaper's employment is terminated by the Company without
cause, the Company will remain subject to its obligations under the agreement as
if Mr. Schaper remained employed for the balance of the agreement's three-year
term. In the event that Mr. Schaper elects to resign from the Company following
a change in control of the Company, he is entitled to receive a severance
payment equal to the greater of one year of salary continuation at his then
current base salary or the amount of the payments due and owing to him through
the remaining term of the agreement. A "change in control" is generally defined
in the agreement as any consolidation, merger, reorganization or other
transaction in which the Company is not the surviving entity or the sale of a
substantial portion of the Company's assets. Mr. Schaper also received options
to purchase up to 250,000 shares of Common Stock. In June 1997, the Company and
Mr. Schaper entered into a letter agreement in which the Company agreed that if
Mr. Schaper remained employed by the Company on December 31, 1997, then the
Company would pay him a special one time bonus for 1997 in the amount of
$187,500. In January, 1998, Mr. Schaper was appointed the Chief Operating
Officer of the Company. In April, 1998, Mr. Schaper resigned his position with
the Company. See also "Certain Transactions."
In April 1997, the Company and Harvey Herscovitch, the Senior Vice
President, Strategy and Organization of the Company, entered into a two-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Herscovitch is
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<PAGE> 85
to receive a base salary of $140,000 per year (subject to adjustments by any
increases given in the normal course of business), and is entitled to an
incentive compensation payment equal to 40% of his base salary, payable at the
discretion of the Board. Mr. Herscovitch is also entitled to a housing allowance
and to reimbursement of certain commuting expenses. In the event Mr.
Herscovitch's employment is terminated by the Company without cause, the Company
will remain subject to its obligations under the agreement as if Mr. Herscovitch
remained employed for the balance of the agreement's two-year term. In the event
that Mr. Herscovitch elects to resign from the Company following a change in
control of the Company, he is entitled to receive a severance payment equal to
the greater of one year of salary continuation at his then current base salary
or the amount of the payments due and owing to him through the remaining term of
the agreement. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or the sale of a substantial portion of the
Company's assets. Mr. Herscovitch also received options to purchase up to 40,000
shares of Common Stock. In June 1997, the Company and Mr. Herscovitch entered
into a letter agreement in which the Company agreed that if Mr. Herscovitch
remained employed by the Company on December 31, 1997, then the Company would
pay him a special one time bonus for 1997 in the amount of $105,000. See also
"Certain Transactions."
In July 1997, the Company and Randolph L. M. Hutto, the Executive Vice
President, General Counsel and Secretary of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Hutto received a signing bonus of $100,000 (structured as a loan to be
forgiven in the event Mr. Hutto remains employed by the Company on the first
anniversary of the agreement), and is to receive a base salary of $250,000 per
year (subject to adjustments by any increases given in the normal course of
business). Mr. Hutto also is entitled to an incentive compensation payment equal
to 80% of his base salary, payable at the discretion of the Board; provided,
however, that the payment of such incentive compensation for 1997 is guaranteed,
and is to be pro-rated based upon the number of months that Mr. Hutto is
employed by the Company during 1997. Upon early termination of Mr. Hutto's
employment by the Company other than for cause or by Mr. Hutto for "good
reason," Mr. Hutto is entitled to elect a severance payment equal to two years
of salary and benefit continuation, or his then current monthly salary
multiplied by the number of months remaining in the initial term of the
agreement, in each case excluding any incentive bonus payments. In the event Mr.
Hutto's employment by the Company is terminated in connection with a change in
control of the Company, he is entitled to receive a severance payment equal to
two years of salary and benefits, including incentive bonus payments. A "change
in control" is generally defined in the agreement as any consolidation, merger,
reorganization or other transaction in which the Company is not the surviving
entity or certain changes in the composition of the Company's Board of
Directors. Mr. Hutto also received options to purchase up to 250,000 shares of
Common Stock. See also "Certain Transactions."
In January 1998, the Company and Allen W. Ritchie, the President and Chief
Operating Officer of the Company, entered into a three-year employment agreement
which contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Ritchie is to receive a base salary
of $300,000 per year, subject to adjustments in the normal course of business,
and he is entitled to an incentive compensation payment of up to 80% of his base
salary, payable at the discretion of the Board. Upon early termination of Mr.
Ritchie's employment by the Company other than for cause or by Mr. Ritchie for
"good reason," Mr. Ritchie is entitled to elect a severance payment equal to two
years of salary and benefit continuation, or his then current monthly salary
multiplied by the number of months remaining in the initial term of the
agreement, in each case excluding any incentive bonus payments. In the event Mr.
Ritchie's employment by the Company is terminated in connection with a change in
control of the Company, he is entitled to receive a severance payment equal to
two years of salary and benefits, including incentive bonus payments. A "change
in control" is generally defined in the agreement as any consolidation, merger,
reorganization or other transaction in which the Company is not the surviving
entity or certain changes in the composition of the Company's Board of
Directors. Mr. Ritchie is also to receive options to purchase up to 300,000
shares of Common Stock. See also "Certain Transactions."
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Compensation Committee Interlocks and Insider Participation
The Company has a Compensation Committee composed of Robert C. Bellas, Jr.,
(Chairman), David R. Holbrooke, M.D., and John C. Pope. Each member of the
Compensation Committee is a "non-employee director" as defined in Rule 16b-3 of
the Exchange Act and is an "outside director" as provided for in Section 162 (m)
of the Code.
CERTAIN TRANSACTIONS
Leases. MPSC leased certain offices in Chattanooga, Tennessee from
Financial Enterprises, III ("FE III"), a limited liability company in which
Dennis A. Pryor (a member of the Board of Directors) owns a 50% interest. MPSC
made payments on behalf of a client pursuant to a separate lease of offices in
Raleigh, North Carolina owned by FE III. MPSC paid FE III approximately $57,300
pursuant to such leases during 1997.
Acquisition Transactions. Effective May 6, 1996, the Company acquired all
of the outstanding stock of BSG in a merger transaction (the "BSG Merger")
pursuant to the terms of a Merger Agreement (the "BSG Merger Agreement") dated
as of March 15, 1996, among the Company, BSG and BSGSub, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company ("BSGSub"). In the BSG
Merger, BSGSub merged with and into BSG with BSG surviving such merger as a
wholly owned subsidiary of the Company. As a result of the BSG Merger, all of
the issued and outstanding stock of BSG converted into the right to receive a
total of 7,539,179 shares of Common Stock. The amount of Common Stock issued in
connection with the BSG Merger was determined by arm's-length negotiations
between the Company and BSG and included, among other factors, consideration of
BSG's historical and projected earnings and valuations of and purchase prices
paid for comparable companies.
Less than one percent of the outstanding capital stock of BSG was owned by
Steven G. Papermaster, and Mr. Papermaster received 1,150 shares of Common Stock
in connection with the BSG Merger. NP Ventures, Ltd., an affiliate of Mr.
Papermaster's, owned approximately 29.5% of the outstanding capital stock of BSG
and received 2,224,100 shares of Common Stock in connection with the BSG Merger.
On May 6, 1996, the Common Stock received by Mr. Papermaster and NP Ventures,
Ltd. had market values of $50,600 and $97,860,400, respectively, as calculated
based upon $44.00, the closing price of the Common Stock on the Nasdaq Stock
Market on May 6, 1996. Mr. Papermaster entered into an employment agreement with
BSG (now owned by the Company) with a two-year term which contains certain
non-competition and non-solicitation provisions and a separate non-competition
and non-solicitation agreement with a four-year term which also contains certain
non-competition and non-solicitation provisions. Pursuant to the employment
agreement, Mr. Papermaster is entitled to receive a base salary of $225,000 per
year and is also entitled to participate in the Company's incentive compensation
plan.
NFT Ventures, Inc. owned 58.84% of the outstanding capital stock of BSG and
received 4,436,205 shares of Common Stock in connection with the BSG Merger.
Such shares of Common Stock had a market value of $195,193,020 on May 6, 1996,
as calculated based upon $44.00, the closing price of the Common Stock on the
Nasdaq Stock Market on May 6, 1996.
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 the Company in connection with the BSG Merger. On the date
of the demand, Mr. Papermaster was an executive officer and a director of the
Company. Mr. Papermaster resigned such positions on March 21, 1997, and he
resigned from all offices with subsidiaries of the Company on October 14, 1997.
The indemnification demand claims damages of $35 million (the maximum damages
payable by the Company under the indemnification agreement) for the alleged
breach by the Company of its representations and warranties made in the BSG
Merger Agreement. On December 31, 1996, the Company entered into a standstill
and tolling agreement with Mr. Papermaster, Mr. Noorda and other former BSG
shareholders, which, as extended, runs through September 30, 1998.
Employment Agreements and Other Matters. As part of the Company's purchase
of CompMed, Inc., effective December 31, 1992, Dennis A. Pryor and the Company
entered into an employment agreement with a two-year term, which contains
certain non-competition and non-solicitation provisions. That agreement was
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<PAGE> 87
subsequently amended in 1994 extending the term for an additional four years.
Pursuant to the amended agreement, during 1997, Mr. Pryor received a base salary
of $50,000 together with certain employee benefits.
As part of the Company's acquisition of HRI, effective August 28, 1995,
Patrick B. McGinnis and HRI entered into an employment agreement with a
three-year term, which contains certain non-competition, non-solicitation,
severance and other provisions concerning Mr. McGinnis' responsibilities.
Pursuant to that agreement, during 1997, Mr. McGinnis received salary and bonus
compensation of $77,637, together with certain employee benefits. The Company
agreed with Mr. McGinnis that, upon a sale by the Company of all the outstanding
common stock of HRI in a public offering, the Company would cause HRI to issue
to Mr. McGinnis a number of shares of HRI common stock equal to 0.8% of the
number of shares outstanding immediately prior to the offering. Pursuant to that
agreement, in connection with the HRI public offering in May 1997, Mr. McGinnis
received 80,000 shares of HRI common stock. Based on the public offering price
for HRI's common stock as reflected in HRI's final prospectus dated May 21,
1997, the shares issued to Mr. McGinnis had a value of approximately $1,120,000.
In June 1996, Michael L. Douglas, the Company's former Chief Operating
Officer and a former director of the Company, and the Company entered into an
employment agreement with a two-year term which contained certain
non-competition, non-solicitation, severance and other provisions concerning Mr.
Douglas' responsibilities. Pursuant to that agreement, Mr. Douglas received a
base salary of $225,000 per year, reimbursement of certain relocation expenses,
an incentive compensation payment and was also entitled to participate in the
Company's incentive compensation plan. Mr. Douglas also received 50,000
restricted shares of Common Stock and options to purchase up to 100,000 shares
of Common Stock. That agreement contained a provision which entitled Mr. Douglas
to a severance payment in the amount of 75% of his base salary upon (i)
termination of Mr. Douglas' employment with the Company or (ii) forfeiture of
the restricted shares of Common Stock. Effective January 31, 1997, Mr. Douglas
and the Company entered into an agreement which contains a mutual general
release and certain confidentiality, non-competition and non-solicitation
provisions. Pursuant to the agreement, Mr. Douglas is entitled to receive a
severance payment equal to $168,500, to be paid out in the form of nine months
of salary continuation at Mr. Douglas' regular base rate of pay of $225,000,
and, at the end of the salary continuation period, a lump sum payment equal to
four weeks of accrued vacation. The agreement contains an acknowledgment of the
termination of the foregoing employment agreement and of the forfeiture of all
of the stock options and restricted shares of Common Stock previously granted to
him.
Effective February 21, 1997, Michael R. Cote, the Company's former Chief
Financial Officer, and the Company entered into an agreement which contains a
general release of the Company and certain confidentiality and non-solicitation
provisions. Pursuant to that agreement, Mr. Cote is entitled to receive a
severance payment of $131,250, which is equal to nine months of salary
continuation at Mr. Cote's regular base rate of pay of $175,000. Mr. Cote's
restricted stock award dated August 12, 1994 will continue to vest in accordance
with the four-year vesting schedule set forth in the Company's Restricted Stock
Plan.
William R. Spalding, a former Executive Vice President of the Company,
received an advance from the Company in the amount of $300,000. In connection
with this advance, Mr. Spalding issued to the Company a Deferred Bonus Note,
dated January 1, 1996, in the principal amount of $300,000 (the "Deferred Bonus
Note"). No interest accrued or was payable with respect to the outstanding
principal balance of the Deferred Bonus Note. Under the terms of the Deferred
Bonus Note, the principal amount of the note was to be forgiven in three equal
installments in 1997, 1998 and 1999, provided that Mr. Spalding remained an
employee of the Company on the date that an installment of principal was due.
Upon a change in control followed by Mr. Spalding's termination of employment
for any reason within twelve months of such change in control or Mr. Spalding's
death or disability, the outstanding principal amount of the Deferred Bonus Note
was to be canceled. A change in control event is generally defined for purposes
of the Deferred Bonus Note to include the adoption of a plan of liquidation or
approval of the dissolution of the Company, certain mergers and consolidations
of the Company, the sale or transfer of substantially all of the Company's
assets, the sale or transfer of all of the assets or stock of an operating
subsidiary of the Company, other than as security for obligations of the
Company, or the sale or transfer of substantially all of the assets of an
operating division of the Company or its subsidiaries, other than as security
for obligations of the Company. On February 26, 1997,
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<PAGE> 88
the Company transferred to a third party the assets of the Decision Support
Division of Medaphis Healthcare Information Technology Company, a wholly owned
subsidiary of the Company. On April 11, 1997, Mr. Spalding resigned as Executive
Vice President of the Company. As a result of the change in control of the
Decision Support Division and Mr. Spalding's subsequent termination of
employment, the outstanding principal balance of the Deferred Bonus Note was
canceled and no amount remains payable thereunder. Mr. Spalding incurred
approximately $137,000 in additional income tax liability as a result of the
cancellation of the Deferred Bonus Note, all of which was reimbursed by the
Company.
In January 1997, the Company and Jerome H. Baglien, the Company's former
Senior Vice President and Chief Financial Officer, entered into a three-year
employment agreement which contains certain non-competition and nonsolicitation
provisions. Pursuant to that agreement, Mr. Baglien is to receive a base salary
of $250,000 per year (subject to adjustments by any increases given in the
normal course of business), and is entitled to an incentive compensation payment
equal to 80% of his base salary, subject to achievement of certain performance
objectives set by the Board. Mr. Baglien is entitled to reimbursement of certain
expenses, including relocation expenses, and is also entitled to receive an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. Upon early termination of Mr. Baglien's employment
by the Company other than for cause or by Mr. Baglien for "good reason," the
Company is obligated to continue to pay Mr. Baglien his annual salary and to
cover him under certain welfare plans as if his employment had not been
terminated. Mr. Baglien also received options to purchase up to 250,000 shares
of Common Stock. In June 1997, the Company and Mr. Baglien entered into a letter
agreement in which the Company agreed that if Mr. Baglien remained employed by
the Company on December 31, 1997, then the Company would pay him a special one
time bonus for 1997 in the amount of $187,500. Mr. Baglien resigned from his
position with the Company in January 1998. See also "Management
Compensation -- Employment Agreements."
In February 1997, the Company and Daniel S. Connors, Jr., the Company's
former Senior Vice President, Personnel and Administration, entered into a
two-year employment agreement which contains certain non-competition and
non-solicitation provisions. Pursuant to that agreement, the Company agreed to
pay Mr. Connors a base salary of $150,000 per year (subject to adjustments by
any increases given in the normal course of business), and an incentive
compensation payment under the Company's incentive compensation plan of up to
40% of his base salary. The Company also agreed to reimburse Mr. Connors for
certain expenses, including relocation expenses, and also to reimburse him an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. The Company loaned Mr. Connors $75,000 for the
purpose of obtaining a Georgia residence, the amount of which was to be forgiven
on a pro-rata basis over a five-year period, provided that Mr. Connors remained
employed by the Company. The agreement provides that in the event Mr. Connor's
employment is terminated by the Company without cause, the Company will remain
subject to its obligations under the agreement as if Mr. Connors remained
employed for the balance of the agreement's two-year term. Mr. Connors also
received options to purchase up to 50,000 shares of Common Stock. In June 1997,
the Company and Mr. Connors entered into a letter agreement in which the Company
agreed that if Mr. Connors remained employed by the Company on December 31,
1997, then the Company would pay him a special one time bonus for 1997 in the
amount of $112,500. Mr. Connors resigned from his position with the Company in
September 1997.
In February 1997, the Company and C. James Schaper, a former Executive Vice
President of the Company, entered into a three-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Schaper received a signing bonus of
$100,000, and is to receive a base salary of $250,000 per year (subject to
adjustments by any increases given in the normal course of business), and is
entitled to an incentive compensation payment equal to 80% of his base salary,
payable at the discretion of the Board. At the end of the first year of the
agreement, Mr. Schaper is eligible to receive an additional payment of $100,000.
In the event Mr. Schaper's employment is terminated by the Company without
cause, the Company will remain subject to its obligations under the agreement as
if Mr. Schaper remained employed for the balance of the agreement's three-year
term. In the event that Mr. Schaper elects to resign from the Company following
a change in control of the Company, he is entitled to receive a severance
payment equal to the greater of one year of salary continuation at his then
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current base salary or the amount of the payments due and owing to him through
the remaining term of the agreement. A "change in control" is generally defined
in the agreement as any consolidation, merger, reorganization or other
transaction in which the Company is not the surviving entity or the sale of a
substantial portion of the Company's assets. Mr. Schaper also received options
to purchase up to 250,000 shares of Common Stock. In June 1997, the Company and
Mr. Schaper entered into a letter agreement in which the Company agreed that if
Mr. Schaper remained employed by the Company on December 31, 1997, then the
Company would pay him a special one time bonus for 1997 in the amount of
$187,500. Mr. Schaper resigned his position with the Company in April, 1998. See
also "Management Compensation -- Employment Agreements."
In April 1997, the Company and Harvey Herscovitch, the Senior Vice
President, Strategy and Organization of the Company, entered into a two-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Herscovitch is
to receive a base salary of $140,000 per year (subject to adjustments by any
increases given in the normal course of business), and is entitled to an
incentive compensation payment equal to 40% of his base salary, payable at the
discretion of the Board. Mr. Herscovitch is also entitled to a housing allowance
and to reimbursement of certain commuting expenses. In the event Mr.
Herscovitch's employment is terminated by the Company without cause, the Company
will remain subject to its obligations under the agreement as if Mr. Herscovitch
remained employed for the balance of the agreement's two-year term. In the event
that Mr. Herscovitch elects to resign from the Company following a change in
control of the Company, he is entitled to receive a severance payment equal to
the greater of one year of salary continuation at his then current base salary
or the amount of the payments due and owing to him through the remaining term of
the agreement. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or the sale of a substantial portion of the
Company's assets. Mr. Herscovitch also received options to purchase up to 40,000
shares of Common Stock. In June 1997, the Company and Mr. Herscovitch entered
into a letter agreement in which the Company agreed that if Mr. Herscovitch
remained employed by the Company on December 31, 1997, then the Company would
pay him a special one time bonus for 1997 in the amount of $105,000. See also
"Management Compensation -- Employment Agreements."
In July 1997, the Company and Randolph L. M. Hutto, the Executive Vice
President, General Counsel and Secretary of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Hutto received a signing bonus of $100,000 (structured as a loan to be
forgiven in the event Mr. Hutto remains employed by the Company on the first
anniversary of the agreement), and is to receive a base salary of $250,000 per
year (subject to adjustments by any increases given in the normal course of
business). Mr. Hutto also is entitled to an incentive compensation payment equal
to 80% of his base salary, payable at the discretion of the Board; provided,
however, that the payment of such incentive compensation for 1997 is guaranteed,
and is to be pro-rated based upon the number of months that Mr. Hutto is
employed by the Company during 1997. Upon early termination of Mr. Hutto's
employment by the Company other than for cause or by Mr. Hutto for "good
reason," Mr. Hutto is entitled to elect a severance payment equal to two years
of salary and benefit continuation, or his then current monthly salary
multiplied by the number of months remaining in the initial term of the
agreement, in each case excluding any incentive bonus payments. In the event Mr.
Hutto's employment by the Company is terminated in connection with a change in
control of the Company, he is entitled to receive a severance payment equal to
two years of salary and benefits, including incentive bonus payments. A "change
in control" is generally defined in the agreement as any consolidation, merger,
reorganization or other transaction in which the Company is not the surviving
entity or certain changes in the composition of the Company's Board of
Directors. Mr. Hutto also received options to purchase up to 250,000 shares of
Common Stock. See also "Management Compensation -- Employment Agreements."
In January 1998, the Company and Allen W. Ritchie, the President and Chief
Operating Officer of the Company, entered into a three-year employment agreement
which contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Ritchie is to receive a base salary
of $300,000 per year, subject to adjustments in the normal course of business,
and he is entitled to an
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incentive compensation payment of up to 80% of his base salary, payable at the
discretion of the Board. Upon early termination of Mr. Ritchie's employment by
the Company other than for cause or by Mr. Ritchie for "good reason," Mr.
Ritchie is entitled to elect a severance payment equal to two years of salary
and benefit continuation, or his then current monthly salary multiplied by the
number of months remaining in the initial term of the agreement, in each case
excluding any incentive bonus payments. In the event Mr. Ritchie's employment by
the Company is terminated in connection with a change in control of the Company,
he is entitled to receive a severance payment equal to two years of salary and
benefits, including incentive bonus payments. A "change in control" is generally
defined in the agreement as any consolidation, merger, reorganization or other
transaction in which the Company is not the surviving entity or certain changes
in the composition of the Company's Board of Directors. Mr. Ritchie is also to
receive options to purchase up to 300,000 shares of Common Stock. See also
"Management Compensation -- Employment Agreements."
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of December 31, 1997,
concerning each person known to the Board to be a "beneficial owner," as such
term is defined by the rules of the Securities and Exchange Commission, of more
than 5% of the outstanding shares of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENT
STOCK BENEFICIALLY OF
NAME AND ADDRESS OWNED(1) CLASS
---------------- ------------------ -------
<S> <C> <C>
Ardsley Advisory Partners and Philip J. Hempleman(2)........ 7,590,000 10.36%
646 Steamboat Road, Greenwich, Connecticut 06830
NFT Ventures, Inc.(3)....................................... 4,436,205 6.06%
899 W. Center Street, Orem, Utah 84057
</TABLE>
- ---------------
(1) See Note (1) under "Management Common Stock Ownership."
(2) The information regarding Ardsley Advisory Partners and Philip J. Hempleman
is given in reliance upon a Schedule 13G filed by such stockholders on or
about February 5, 1998 with the Commission.
(3) Includes 4,436,205 shares as to which NFT Ventures, Inc. ("NFT") has shared
voting and shared investment power. The information regarding NFT is given
in reliance upon a Schedule 13D filed by such stockholder on or about May
17, 1996 with the Commission. See "Certain Transactions."
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DESCRIPTION OF NEW CREDIT FACILITY
Concurrently with the closing of the offering of the Old Notes, the Company
entered into the New Credit Facility with certain financial institutions as
lenders (the "Lenders"), DLJ Capital Funding, Inc. as syndication agent and
Wachovia Bank, N.A. as administrative agent. Donaldson, Lufkin & Jenrette
Securities Corporation acted as arranger (the "Arranger"). All existing and
future material domestic subsidiaries of the Company have guaranteed and will
guarantee the indebtedness under the New Credit Facility. The following is a
summary of the material terms and conditions of the New Credit Facility and is
subject to the provisions of the New Credit Facility.
GENERAL
The New Credit Facility consists of a three-year $100 million revolving
credit facility (the "Revolver"). Amounts outstanding under the Revolver will be
due and payable in full on February 20, 2001. Subfacilities for letters of
credit ($10 million) and for swingline (same day) loans ($7.5 million) are also
available under the Revolver. The Revolver is available in multiple drawings
from time to time, subject to certain limitations, including the limitation of a
borrowing base based on the Company's eligible billed and unbilled receivables.
Advances under the Revolver may be used to finance working capital and other
general corporate purposes of the Company and its subsidiaries, including
acquisitions agreed to by the Lenders.
INTEREST RATES; FEES
Amounts outstanding under the Revolver will bear interest, at the Company's
option, at either LIBOR (adjusted for any reserves) plus a specified margin
(2.5% at closing) ranging from 1.0% to 2.75% (based on the ratio of the
Company's debt to its EBITDA (as such term will be defined in the New Credit
Facility (the "Leverage Ratio")) for interest periods of 1, 2, 3 or 6 months, or
the Base Rate, which will be determined by reference to, among other things, the
administrative agent's reference rate, again, plus a specified margin (1.5% at
closing) ranging from 0% to 1.75% based on the Leverage Ratio.
Interest on the amounts outstanding under the Revolver bearing interest at
the Base Rate will be payable quarterly in arrears. Interest on amounts
outstanding under the Revolver bearing interest based on LIBOR will be payable
in arrears at the end of the applicable interest period and every three months,
where the applicable interest period exceeds three months.
The Company will pay a commitment fee on the unused portion of the Revolver
which will be payable quarterly in arrears. The amount of the commitment fee
will be determined based on the Leverage Ratio and will range from 0.25% to 0.5%
per annum (0.5% at closing). The New Credit Facility also provides for payment
of fees with respect to letters of credit issued thereunder, plus additional
up-front or funding fees, as well as an additional commitment fee of 0.25% on up
to a certain amount of the unused portion of the Revolver.
MANDATORY PREPAYMENTS
The Revolver is subject to customary mandatory prepayments, including the
following: (i) 100% of the net cash proceeds of certain permitted asset sales;
(ii) 100% of the net cash proceeds from certain types of permitted debt
offerings and (iii) 50% of the net cash proceeds from certain types of permitted
equity offerings. Such mandatory prepayments do not require corresponding
commitment reductions. In addition, the Revolver is subject to mandatory
prepayments to the extent outstanding extensions of credit thereunder exceed the
borrowing base at any time.
COLLATERAL
All amounts owing under the New Credit Facility are secured by a security
interest in substantially all of the material assets of the Company and its
domestic subsidiaries (including, without limitation, a pledge of the capital
stock of such subsidiaries).
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COVENANTS
The obligations of the Lenders under the New Credit Facility are subject to
the satisfaction of certain conditions precedent, including, without limitation,
the absence of a material adverse change in the business or affairs of the
Company. The Company and each of its existing and future subsidiaries are
subject to certain affirmative and negative covenants contained in the New
Credit Facility, including without limitation, covenants that restrict, subject
to certain specified exceptions: (i) the incurrence of additional indebtedness
and other obligations and the granting of additional liens; (ii) mergers,
acquisitions, investments and acquisitions and dispositions of assets; (iii) the
incurrence of capitalized lease obligations; (iv) dividends and other equity
payments; (v) prepayments or repurchase of other indebtedness and amendments to
certain agreements governing indebtedness, including the Indenture and the
Notes; (vi) engaging in transactions with affiliates and formation of
subsidiaries; (vii) the use of proceeds; and (viii) changes of lines of
business. There are also covenants relating to compliance with ERISA and
environmental and other laws, payment of taxes, maintenance of corporate
existence and rights, maintenance of insurance and financial reporting, as well
as other customary covenants for this type of financing. Certain of these
covenants may be more restrictive than those set forth in the Indenture. In
addition, the New Credit Facility requires the Company to maintain compliance
with certain specified financial covenants, including covenants relating to
maximum Leverage Ratio, minimum interest coverage ratio, minimum net worth, and
minimum EBITDA. The New Credit Facility restricts the refinancing, prepayment or
defeasance of the Notes.
EVENTS OF DEFAULT
The New Credit Facility includes customary events of default, including
without limitation, bankruptcy, a change of control (as defined in the New
Credit Facility) of the Company, the invalidity of guarantees or security
documents under the New Credit Facility, and cross-default to other indebtedness
of the Company and its subsidiaries. The occurrence of any of such events of
default could result in acceleration of the Company's obligations under the New
Credit Facility and foreclosure on the collateral securing such obligations,
which could have a material adverse effect on holders of the Notes.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued under an Indenture
(the "Indenture") between the Company and State Street Bank and Trust Company,
as trustee (the "Trustee"), dated February 20, 1998. The terms of the New Notes
are identical in all material respects to the respective terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Old Securities and (ii)
holders of the New Notes will generally not be entitled to certain rights,
including the payment of Liquidated Damages (as defined), pursuant to the
Registration Rights Agreement. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. In the event that the Exchange Offer is
consummated, any Old Notes which remain outstanding after consummation of the
Exchange Offer and the New Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount thereof have taken certain actions or
exercised certain rights under the Indenture. The following summary of the
material provisions of the Indenture and the Registration Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Indenture and the Registration Rights Agreement, including the definitions
therein of certain terms used below. Copies of the Indenture and Registration
Rights Agreement are available as set forth below under "-- Additional
Information". The definitions of certain terms used in the following summary are
set forth below under "-- Certain Definitions." For purposes of this summary,
the term "Company" refers only to Medaphis Corporation and not to any of its
Subsidiaries.
The Old Notes are and the New Notes will be general unsecured obligations
of the Company and rank and will rank pari passu in right of payment with all
current and future unsecured senior indebtedness of the Company. The Old Notes
are and the New Notes will be guaranteed by the Subsidiary Guarantors, which
consist of all of the Company's present and future Restricted Subsidiaries,
other than Foreign Subsidiaries. See "-- Subsidiary Guarantees." The Subsidiary
Guarantees are general unsecured obligations of the Subsidiary Guarantors and
rank pari passu in right of payment with all current and future unsecured senior
indebtedness of the Subsidiary Guarantors. However, the Notes and the Subsidiary
Guarantees will be effectively subordinated to secured indebtedness of the
Company and the Subsidiary Guarantors, including borrowings under the New Credit
Facility, which is secured by a first priority lien on substantially all of the
material assets of the Company and the Subsidiary Guarantors. As of April 30,
1998, the Company and the Subsidiary Guarantors had approximately $43 million of
secured indebtedness outstanding and had approximately $37 million of additional
borrowing ability under the New Credit Facility.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture, and the Subsidiary Guarantee
of any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary
will be released in accordance with the provisions of the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $175.0 million and
will mature on February 15, 2005. Interest on the Notes will accrue at the rate
of 9 1/2% per annum and will be payable semi-annually in arrears on February 15
and August 15, commencing on August 15, 1998, to Holders of record on the
immediately preceding February 1 and August 1. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal of,
premium, if any, interest and Liquidated Damages, if any, on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the
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Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments of principal, premium, if any, interest and
Liquidated Damages, if any, with respect to Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in registered form, in denominations of $1,000
and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") by the Subsidiary Guarantors. The
Subsidiary Guarantees are general unsecured obligations of the Subsidiary
Guarantors and will rank pari passu in right of payment with all current and
future unsecured senior indebtedness of the Subsidiary Guarantors. However, the
Subsidiary Guarantees will be effectively subordinated to secured indebtedness
of the Subsidiary Guarantors, including guarantees of borrowings under the New
Credit Facility which will be secured by a first priority lien on substantially
all of the material assets of the Subsidiary Guarantors. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee will be limited in a manner
intended to avoid it being deemed to constitute a fraudulent conveyance under
applicable law. See, however, "Risk Factors -- Fraudulent Conveyance."
Except for a merger or consolidation in which a Subsidiary Guarantor is
sold and its Subsidiary Guarantee is released in compliance with the provisions
of the next paragraph, the Indenture provides that no Subsidiary Guarantor may
consolidate with or merge with or into, another corporation, Person or entity,
whether or not affiliated with such Subsidiary Guarantor, unless (i) the Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor
under its Subsidiary Guarantee and the Indenture pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) unless such merger or consolidation involves only
Restricted Subsidiaries and the surviving Person is a Subsidiary Guarantor, the
Company would be permitted by virtue of the Company's pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described below under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor, or the designation of a Subsidiary Guarantor as an
Unrestricted Subsidiary, then such Subsidiary Guarantor (in the event of a sale
or other disposition, by way of such a merger, consolidation or otherwise, of
all of the capital stock of such Subsidiary Guarantor, or designation of a
Subsidiary Guarantor as an Unrestricted Subsidiary) or the corporation acquiring
the property (in the event of a sale or other disposition of all of the assets
of such Subsidiary Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "-- Certain Covenants -- Asset Sales."
The Company conducts certain of its foreign operations through Foreign
Subsidiaries, which do not guarantee the Notes. The Company's ability to meet
its cash obligations may in part depend upon the ability of such Foreign
Subsidiaries and any future Foreign Subsidiaries to make cash distributions to
the Company. Furthermore, any right of the Company to receive the assets of any
such Foreign Subsidiary upon such Foreign Subsidiary's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in the distribution of the proceeds of those assets) effectively
will be subordinated by operation of law to the claims of such Foreign
Subsidiary's creditors (including trade creditors) and holders of its preferred
stock, except to the extent that the Company or its Restricted Subsidiaries are
recognized as creditors or preferred stockholders of such Foreign Subsidiary, in
which case the claims of the Company or its Restricted Subsidiaries would still
be subordinate to any indebtedness or preferred stock of such Foreign
Subsidiaries senior in right of payment to that held by the Company or its
Restricted Subsidiaries.
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The financial statements of the Subsidiary Guarantors have not been
presented as all subsidiaries, except for certain inconsequential foreign
subsidiaries, have provided guarantees and the Parent does not have any
significant operations or assets, separate from its investment in its
subsidiaries.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the
Company's option prior to February 15, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 or more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.750%
2003........................................................ 102.375
2004 and thereafter......................................... 100.000
</TABLE>
Notwithstanding the foregoing, at any time or from time to time on or prior
to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of Notes originally issued under the Indenture at a redemption
price of 109.5% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the redemption date, with
net cash proceeds of one or more Equity Offerings; provided that at least $100.0
million in aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption; and provided, further, that such
redemption shall occur within 90 days of the date of the closing of such Equity
Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided that no
Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its address set forth
in the register of Holders of Notes. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest and
Liquidated Damages, if any, cease to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes. However, in certain circumstances the
Company may be required to offer to purchase Notes as set forth under
"-- Certain Covenants -- Change of Control" and "-- Certain Covenants -- Asset
Sales."
CERTAIN COVENANTS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 15 Business Days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or
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transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. To the extent that any applicable securities laws or
regulations conflict with the terms hereof, the Company shall comply with such
laws or regulations and shall not be deemed to have breached its obligations
under the Indenture or Notes by virtue thereof.
On or before the Change of Control Payment Date, the Company will, to the
extent lawful, (1) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the paying
agent an amount equal to the Change of Control Payment in respect of all Notes
or portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The paying agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control occurs, there can be no assurance that the Company
will have sufficient funds to, or otherwise be able to, make the Change of
Control Payment. See "Risk Factors -- Potential Failure to Make Payment Upon a
Change of Control."
The Company's obligation to make a Change of Control Offer may deter a
third party from seeking to acquire the Company in a transaction that could
constitute a Change of Control.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee in the case of any Asset Sale for
which the Company or any of its Restricted Subsidiaries receives consideration
in excess of $15.0 million) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
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Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation or other agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are converted by the Company or such Restricted Subsidiary
within 90 days following the closing of the Asset Sale into cash (to the extent
of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days of the receipt of any Net Proceeds from an Asset Sale, the
Company and its Restricted Subsidiaries may apply such Net Proceeds, at their
option, (a) to repay secured Indebtedness (and, in the case of any such
Indebtedness that was borrowed under a revolving credit line, to correspondingly
reduce commitments with respect thereto), or (b) to the acquisition of a
controlling interest in another business, the making of a capital expenditure or
the acquisition of other long-term assets, in each case, in the same or a
related or complementary line of business as the Company or any of its
Restricted Subsidiaries was engaged in on the date of the Indenture (as
determined in good faith by the Company). Pending the final application of any
such Net Proceeds, the Company may temporarily reduce the revolving credit lines
under the New Credit Facility (without any corresponding commitment reduction)
or otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds."
Not later than 30 days after any date (an "Asset Sale Offer Trigger Date")
that the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company
shall mail to each holder of Notes at such holder's registered address a notice
stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the
Company is offering to purchase the maximum principal amount of Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash equal to 100%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Asset Sale Offer Purchase
Date"), which shall be a business day, specified in such notice, that is not
earlier than 30 days or later than 60 days from the date such notice is mailed;
(ii) the amount of accrued and unpaid interest and Liquidated Damages, if any,
thereon as of the Asset Sale Offer Purchase Date; (iii) that any Note not
tendered will continue to accrue interest and Liquidated Damages, if any; (iv)
that, unless the Company defaults in the payment of the purchase price for the
Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment
pursuant to the Asset Sale Offer shall cease to accrue interest and Liquidated
Damages, if any, after the Asset Sale Offer Purchase Date; (v) the procedures,
consistent with the Indenture, to be followed by a holder of Notes in order to
accept an Asset Sale Offer or to withdraw such acceptance; and (vi) such other
information as may be required by the Indenture and applicable laws and
regulations.
On the Asset Sale Offer Purchase Date, the Company will: (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale; (ii) deposit with the paying agent the aggregate purchase
price of all Notes or portions thereof accepted for payment and any accrued and
unpaid interest and Liquidated Damages, if any, on such Notes as of the Asset
Sale Offer Purchase Date; and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Asset Sale Offer. The paying agent
will promptly mail to each holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Note plus any accrued and
unpaid interest and Liquidated Damages, if any, thereon, and the Trustee will
promptly authenticate and mail to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part will be
promptly returned to the holder of such Note. On and after an Asset Sale Offer
Purchase Date, interest and Liquidated Damages, if any, will cease to accrue on
the Notes or portions thereof accepted for payment, unless the Company defaults
in the payment of the purchase price therefor. The Company will announce the
results of the Asset Sale Offer to holders of the Notes on or as soon as
practicable after the Asset Sale Offer Purchase Date. To the extent that the
aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the Aggregate principal amount of Notes
surrendered by Holders thereof
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exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be
purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other applicable
securities laws and regulations in connection with any Asset Sale Offer. To the
extent that any applicable securities laws or regulations conflict with the
terms hereof, the Company shall comply with such laws or regulations and shall
not be deemed to have breached its obligations under the Indenture or Notes by
virtue thereof.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or in connection with any settlement or resolution of any
claims against or litigation involving the Company, but not including Qualified
Insurance Payments) or to the direct or indirect holders of the Company's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions or other payments payable in Equity
Interests (other than Disqualified Stock) of the Company or any successor under
the Indenture); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company; (iii) purchase,
redeem, defease or otherwise acquire or retire for value any Subordinated
Indebtedness prior to its Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in, and not otherwise
permitted by, clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the provisions of the first paragraph of the covenant described below under
the caption "-- Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v) (but only to the extent of the
dividends paid to the Company or its Wholly Owned Restricted Subsidiaries
pursuant to such clause (v)) and (vii) of the next succeeding paragraph),
is less than the sum of (1) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date of the Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (2) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock), plus (3) to
the extent that any Restricted Investment that was made after the date of
the Indenture is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (4) 50% of any cash
dividends received by the Company or a Wholly Owned Restricted Subsidiary
or a Subsidiary Guarantor after the date of the Indenture from an
Unrestricted Subsidiary of the Company, to the extent that such dividends
were not otherwise included in
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Consolidated Net Income of the Company for such period, plus (5) to the
extent that any Unrestricted Subsidiary is redesignated as a Restricted
Subsidiary after the date of the Indenture, the lesser of (A) the fair
market value of the Company's and its Restricted Subsidiaries' Investment
in such Subsidiary as of the date of such redesignation or (B) the fair
market value of the Company's and its Restricted Subsidiaries' Investment
in such Subsidiary as of the date on which such Subsidiary was originally
designated as an Unrestricted Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness or Equity Interests of the
Company or any Restricted Subsidiary in exchange for, or, so long as no
Default or Event of Default shall have occurred and be continuing, out
of the net cash proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of, other Equity Interests of the
Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph;
(iii) so long as no Default or Event of Default shall have occurred
and be continuing, the defeasance, redemption, repurchase or other
acquisition of Subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness;
(iv) so long as no Default or Event of Default shall have occurred
and be continuing, the retirement, repurchase or redemption of any
shares of Disqualified Stock or any Subordinated Indebtedness by
conversion into, or by exchange for, shares of Disqualified Stock, or
out of the net cash proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of other shares of Disqualified
Stock; provided that (a) such newly issued Disqualified Stock is not
subject to mandatory redemption earlier than the Stated Maturity of the
Disqualified Stock or Subordinated Indebtedness being retired,
repurchased or redeemed, (b) such Disqualified Stock is in an aggregate
liquidation preference that is equal to or less than the sum of (x) the
aggregate liquidation preference of the Disqualified Stock being retired
or the aggregate principal amount of the Subordinated Indebtedness being
repurchased or redeemed, (y) the amount of accrued and unpaid dividends
or interest, if any, and premiums owed, if any, on the Disqualified
Stock or Subordinated Indebtedness being retired, repurchased or
redeemed and (z) the amount of customary fees, expenses and costs
related to the incurrence of such Disqualified Stock and (c) such newly
issued Disqualified Stock is incurred by the same Person that initially
incurred the Disqualified Stock or Subordinated Indebtedness being
retired, repurchased or redeemed, except that the Company may incur
Disqualified Stock to refund or refinance Disqualified Stock of any
Wholly Owned Subsidiary of the Company or any Subsidiary Guarantor;
(v) the payment of any dividend or other distribution by a
Restricted Subsidiary of the Company to the holders of any class of its
Equity Interests on a pro rata basis;
(vi) so long as no Default or Event of Default shall have occurred
and be continuing, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any director, officer or
employee (or any of its Restricted Subsidiaries') pursuant to any
director, officer or employee equity subscription agreement, stock
option agreement, employment agreement or employee benefit plan or
similar plan or arrangement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $1.0 million in any one fiscal year;
(vii) repurchases of Equity Interests deemed to occur upon the
exercise of stock options or warrants upon the surrender of Equity
Interests to pay the exercise price and any applicable taxes with
respect to such stock options or warrants; and
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(viii) so long as no Default or Event of Default shall have
occurred and be continuing, Restricted Payments not otherwise permitted
hereby in an aggregate amount not to exceed $10.0 million since the date
of the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by the Subsidiary
Guarantors be transferred to any Subsidiary other than a Restricted Subsidiary.
For purposes of making such determination, all Investments made by the Company
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the greatest of
(x) the net book value of such Investments at the time of such designation and
(y) the fair market value of such Investments at the time of such designation
(as determined in good faith by the Company's Board of Directors). Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment with a fair market value in excess of $1.0 million
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $10.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not, and will not permit any of
its Subsidiaries to, issue any Disqualified Stock; provided, however, that the
Company and the Subsidiary Guarantors may incur Indebtedness (including Acquired
Indebtedness) and the Company and the Subsidiary Guarantors may issue shares of
Disqualified Stock if (A) the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.5 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom and the acquisitions in connection
therewith), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period, and (B) no Default or Event of Default shall have occurred
and be continuing at the time or as a consequence of the incurrence of such
Indebtedness or the issuance of such Disqualified Stock.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and Subsidiary Guarantors of
Indebtedness under the New Credit Facility and the issuance and creation of
letters of credit and banker's acceptances thereunder and any related
reimbursement obligation (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and its Restricted Subsidiaries thereunder) in an aggregate amount not to
exceed $100.0 million outstanding at any one time under this subsection
(i), less the lesser of $50.0 million and the aggregate amount of all Net
Proceeds of Asset Sales that have
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been applied since the date of the Indenture to reduce permanently the
commitments with respect to such Indebtedness pursuant to the covenant
described under the caption "-- Asset Sales;"
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Subsidiary Guarantors of the Subsidiary
Guarantees in an aggregate principal amount not to exceed $175.0 million;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
of the Company or such Restricted Subsidiary that was permitted by the
Indenture to be incurred at the time it was incurred;
(v) the incurrence by the Company, any of the Subsidiary Guarantors or
any Restricted Subsidiary of intercompany Indebtedness between or among the
Company, any of the Subsidiary Guarantors or any Restricted Subsidiary;
provided, however, that (i) if the Company or a Subsidiary Guarantor is the
obligor on such Indebtedness, such Indebtedness is unsecured and
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and the Subsidiary Guarantees, as the case may be, and
(ii)(A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company, a Subsidiary Guarantor or a Restricted Subsidiary and (B) any sale
or other transfer of any such Indebtedness to a Person that is not either
the Company, a Subsidiary Guarantor or a Restricted Subsidiary shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company, such Subsidiary Guarantor or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (v);
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that was permitted by the terms of the Indenture to be
incurred at the time it was incurred; provided, that the notional principal
amount of such Hedging Obligations at the time such Hedging Obligations
were incurred do not exceed the principal amount of Indebtedness to which
such Hedging Obligations relate;
(vii) the guarantee by the Company or any of the Subsidiary Guarantors
of Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred at the time it was incurred by another
provision of this covenant;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute the incurrence of Indebtedness (and Liens, if any,
securing such Indebtedness) by a Restricted Subsidiary of the Company; or
(ix) the incurrence by the Company or any of the Subsidiary Guarantors
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Subsidiary, in an aggregate principal
amount not to exceed $20.0 million at any time outstanding; or
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (x), not to exceed
$10.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described above or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company shall, in its sole
discretion, classify such item of Indebtedness in any manner that complies with
this covenant and such item of Indebtedness will be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first paragraph
hereof.
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Accrual of interest, the accretion of accreted value and the payment of interest
in the form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Liens of any kind (other than Permitted Liens) upon any
property or assets of the Company or any such Restricted Subsidiary or any
shares of stock or debt of any such Restricted Subsidiary unless (i) if such
Lien secures Indebtedness which is pari passu with the Notes, then the Notes are
secured on an equal and ratable basis with the obligations so secured until such
time as such obligation is no longer secured by a Lien or (ii) if such Lien
secures Subordinated Indebtedness, any such Lien will be subordinated to a Lien
granted to the holders of the Notes in the same collateral as that securing such
Lien to the same extent as such Subordinated Indebtedness is subordinated to the
Notes.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to (i) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries,
(iii) guarantee any Indebtedness of the Company or any other Restricted
Subsidiary or the Company or (iv) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries. However, the foregoing
restrictions will not apply to encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the New Credit Facility as in effect as of the date of the Indenture, and
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are not materially more restrictive with respect to
such dividend and other payment restrictions than those contained in the New
Credit Facility as in effect on the date of the Indenture, (c) the Indenture,
the Notes and the Subsidiary Guarantees, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or its Subsidiaries, or the property or assets of the Person or its
Subsidiaries, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred at the
time it was incurred, (f) customary non-assignment provisions in leases and
other agreements entered into in the ordinary course of business, including
licenses of intellectual property, (g) purchase money obligations for property
acquired in the ordinary course of business, (h) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are not materially more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) any agreement for the sale of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale or (j)
any Permitted Liens.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the
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District of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under all
outstanding Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "-- Incurrence
of Indebtedness and Issuance of Disqualified Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable in
any material respect to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that the following shall not be
deemed to be Affiliate Transactions: (1) transactions pursuant to the New Credit
Facility; (2) any employment agreement or other employee benefit plan or
arrangement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business, (3) transactions between or among the Company
and/or its Restricted Subsidiaries and (4) Restricted Payments and Permitted
Investments that are permitted by the provisions of the Indenture described
above under the caption "-- Restricted Payments."
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback transaction
(other than a sale and leaseback transaction with respect to any of the Excluded
Properties); provided that the Company or such Restricted Subsidiary may enter
into a sale and leaseback transaction if (i) the Company or such Restricted
Subsidiary could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Disqualified Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described above under the
caption "-- Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee if such proceeds exceed $15.0 million) of the property
that is the subject of such sale and leaseback transaction and (iii) the
transfer of assets in such sale and leaseback transaction is permitted by, and
the Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption "-- Asset Sales."
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary after the
date of the Indenture (other than a Foreign Subsidiary, unless the Company
elects to have a Foreign Subsidiary which is a Restricted Subsidiary guarantee
the Notes), then such newly acquired or created Restricted Subsidiary shall
execute a Subsidiary Guarantee and deliver an opinion of counsel, in accordance
with the terms of the Indenture.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) copies of all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) copies of all current reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Subsidiary Guarantors have agreed that, for so
long as any Old Notes remain outstanding, they will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes;
(ii) default in payment when due of the principal of or premium, if
any, on the Notes;
(iii) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "Certain
Covenants -- Change of Control," "Certain Covenants -- Asset Sales,"
"Certain Covenants -- Restricted Payments" or "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock";
(iv) failure by the Company or any of its Subsidiaries for 60 days
after receipt of notice to comply given by the Trustee or the holders of at
least 25% in principal amount of Notes then outstanding to comply with any
of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which
there is issued or by which there is be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries, other than Indebtedness owed to the Company
or a Restricted Subsidiary) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, on such
Indebtedness after the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more, and such default has not
been cured, waived or postponed pursuant to an agreement with the holders
of such Indebtedness within 30 days after written notice as provided in the
Indenture, or such acceleration shall not be rescinded or annulled within
10 days after written notice as provided in the Indenture;
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(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million to the extent
that such judgments are not covered by insurance, which judgments remain
unpaid, undischarged or unstayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; and
(viii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect in any material
respect or any Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or an Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default or rescind an acceleration
and its consequences under the Indenture, except a continuing Default or Event
of Default in the payment of interest on, or the principal of, the Notes or an
acceleration based thereon.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within
five Business Days upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or the Subsidiary Guarantors, as such, shall have any liability for any
obligations of the Company or the Subsidiary Guarantors under the Notes, any
Subsidiary Guarantee or the Indenture, as applicable, or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes and the
Subsidiary Guarantees. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes and the Subsidiary Guarantees ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due solely
from the trust referred to below, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's and the
Subsidiary Guarantors' obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a
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Default or an Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and other insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or an Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the Company
or others; and (vii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, in the case of Officer's Certificate,
stating that all conditions precedent provided for in clauses (i)-(vi) have been
complied with, and, in the case of the opinion of counsel, that the conditions
precedent provided for in clauses (ii), (iii) and (v) have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes and the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Notes), and any
existing default or compliance with any provision of the Indenture, the Notes or
the Subsidiary Guarantees may be waived with
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the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase or, or tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter or waive the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
captions "Certain Covenants -- Change of Control" and "Certain
Covenants -- Asset Sales," which may be amended with the consent of the Holders
of at least a majority in principal amount of Notes then outstanding), (iii)
reduce the rate of or change the time for payment of interest on any Note, (iv)
waive a Default or an Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under the captions "Certain
Covenants -- Change of Control" and "Certain Covenants -- Asset Sales,") or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee together may amend or supplement the Indenture, the
Notes or a Subsidiary Guarantee to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, or sale of all or substantially
all of the Company's assets, to provide for a release or assumption of a
Subsidiary Guarantee in compliance with the provisions of the Indenture, to make
any change that would provide any additional rights or benefits to the Holders
of Notes or that does not adversely affect the legal rights under the Indenture
of any such Holder, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture will provide that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Medaphis Corporation,
2700 Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, Attention:
Treasurer.
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BOOK-ENTRY, DELIVERY AND FORM
The Old Notes sold to Qualified Institutional Buyers initially were in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
were deposited with the Trustee, as custodian for The Depository Trust Company
("DTC"), and registered in the name of DTC or its nominee for credit to the
accounts of DTC's Direct and Indirect Participants (as defined below). The Old
Notes sold in offshore transactions in reliance on Regulation S, initially were
in the form of one or more temporary registered, global book-entry notes without
interest coupons (the "Regulation S Temporary Global Notes"). The Regulation S
Temporary Global Notes were deposited with the Trustee, as custodian for DTC, in
New York, New York and registered in the name of a nominee of DTC for credit to
the accounts of Indirect Participants participating in DTC through the Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). During the
40-day period commencing on the day after the original date on which the Old
Notes were issued (the "40-Day Restricted Period"), beneficial interests in the
Regulation S Temporary Global Note may be held only through Euroclear or CEDEL,
and, pursuant to DTC's procedures Indirect Participants that hold a beneficial
interest in the Regulation S Temporary Global Note will not be able to transfer
such interest to a person that takes delivery thereof in the form of an interest
in the U.S. Global Notes. Within a reasonable time after the expiration of the
40-Day Restricted Period, the Regulation S Temporary Global Notes will be
exchanged for one or more permanent global notes (the "Regulation S Permanent
Global Notes"; collectively with the Regulation S Temporary Global Notes, the
"Regulation S Global Notes") upon delivery to DTC of certification of compliance
with the transfer restrictions applicable to the Notes and pursuant to
Regulation S as provided in the Indenture. After the 40-Day Restricted Period,
(i) beneficial interests in the Regulation S Temporary Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
U.S. Global Notes and (ii) beneficial interests in the U.S. Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
Regulation S Permanent Global Notes. Upon consummation of the Exchange Offer,
the New Notes will be in the form of one or more registered global notes without
coupons (collectively, the "New Global Notes"). Upon issuance, the New Global
Notes will be deposited with the Trustee, as custodian for DTC, and registered
in the name of DTC or its nominee for credit to the account of DTC's Direct and
Indirect Participants. All registered global notes are referred to herein
collectively as "Global Notes."
Transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time. In addition, beneficial interests in the Regulation S Global Notes
and the U.S. Global Notes are subject to restrictions on transfer.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, including Euroclear and Cedel. Access to DTC's
system is also available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a Direct Participant
(collectively, the "Indirect Participants").
DTC has advised the Company that, pursuant to DTC's procedures, DTC will
maintain records of the ownership interests of Direct Participants in the Global
Notes and the transfer of ownership interests by and
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between Direct Participants. DTC will not maintain records of the ownership
interests of, or the transfer of ownership interests by and between, Indirect
Participants or other owners of beneficial interests in the Global Notes. Direct
Participants and Indirect Participants must maintain their own records of the
ownership interests of, and the transfer of ownership interests by and between,
Indirect Participants and other owners of beneficial interests in the Global
Notes.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "-- Transfers of Interests
in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company, the Subsidiary Guarantors
and the Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, if any, Liquidated Damages, if
any, and interest on Global Notes registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee as the registered holder
under the Indenture. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests in
any Global Note or (ii) any other matter relating to the actions and practices
of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the
Subsidiary Guarantors nor the Trustee will be liable for any delay by DTC or its
Direct Participants or Indirect Participants in identifying the beneficial
owners of the Notes, and the Company and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
The Global Notes trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its
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Direct Participants) for legended Notes in certificated form, and to distribute
such certificated forms of Notes to its Direct Participants. See "-- Transfers
of Interests in Global Notes for Certificated Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Direct Participants, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Subsidiary
Guarantors, or the Trustee shall have any responsibility for the performance by
DTC or its respective Direct and Indirect Participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if, with
respect to Regulation S Global Notes, the 40-Day Restricted Period has expired
and (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct and Indirect Participants and the DTC identify as being
the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear
restrictive legends unless the Certificated Note represents a beneficial
interest in the New Global Notes or the Company determines otherwise in
compliance with applicable law.
Neither the Company, the Subsidiary Guarantors nor the Trustee will be
liable for any delay by the holder of any Global Note or DTC in identifying the
beneficial owners of Notes, and the Company and the Trustee may conclusively
rely on, and will be protected in relying on, instructions from the holder of
the Global Note or DTC for all purposes.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Subsidiary Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchaser in the offering of the Old Notes,
entered into the Registration Rights Agreement, pursuant to which the Company
and the Subsidiary Guarantors agreed to file with the Commission a registration
statement with respect to the New Notes, of which this Prospectus forms a part
(the "Exchange Offer Registration Statement"). If (i) the Company and the
Subsidiary Guarantors are not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy or
(ii) any Holder of Transfer Restricted Securities notifies the Company prior to
the 20th day following consummation of the Exchange Offer that (a) it is
prohibited by law or Commission policy from participating in the Exchange Offer
or (b) that it may not resell the New Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and this Prospectus is not
appropriate or available for such resales or (c) that it is a broker-dealer and
owns Old Notes acquired directly from the Company or an affiliate of the
Company, the Company and the Subsidiary Guarantors will, subject to certain
conditions, file with the Commission a Shelf Registration Statement to cover
resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
an Old Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of this Prospectus, (iii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Act or may be sold
under Rule 144(k) under the Act.
The Registration Rights Agreement provides that (i) the Company and the
Subsidiary Guarantors will file the Exchange Offer Registration Statement with
the Commission on or prior to 60 days after the Closing Date, (ii) the Company
and the Subsidiary Guarantors will use their reasonable commercial efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its reasonable commercial
efforts to issue, on or prior to 30 Business Days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, the
Company and the Subsidiary Guarantors will use their reasonable commercial
efforts to file the Shelf Registration Statement with the Commission on or prior
to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 120 days
after such obligation arises. If (a) any such Registration Statement is not
filed with the Commission on or prior to the date specified for such filing, (b)
any of such Registration Statements is not declared effective by the Commission
on or prior to the date specified for such effectiveness (the "Effectiveness
Target Date"), (c) the Company fails to consummate the Exchange Offer within 30
Business Days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company and the Subsidiary Guarantors will pay
Liquidated Damages to each Holder of Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default,
in an amount equal to $.05 per week per $1,000 principal amount of Notes held by
such Holder. Liquidated Damages will be payable in the same manner and on the
same dates as to which interest on the Notes is payable to holders of record as
of the previous record dates for the payment of interest. The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company to the Global Note Holder by wire
transfer of immediately available funds and to Holders of Certificated
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Securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback, but excluding by way of granting or, or foreclosure upon, a Lien)
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, will be governed by the provisions of the Indenture described above under
the caption "Certain Covenants -- Change of Control" and/or the provisions
described above under the caption "Certain Covenants -- Merger, Consolidation or
Sale of Assets" and not by the provisions of the covenant described under the
caption "Certain Covenants -- Asset Sales"), whether in a single transaction or
a series of related transactions (a) that have a fair market value in excess of
$1,000,000 or (b) for Net Proceeds in excess of $1,000,000 and (ii) the issue or
sale by the Company or any of its Restricted Subsidiaries of Equity Interests of
any of the Company's Subsidiaries. Notwithstanding the foregoing, the following
items shall not be deemed to be Asset Sales: (i) a transfer of assets by the
Company to a Subsidiary Guarantor or by a Restricted Subsidiary to the Company
or to a Subsidiary Guarantor or by a Restricted Subsidiary that is not a
Subsidiary Guarantor to another Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Restricted Subsidiary to the Company or to a Subsidiary
Guarantor or an issuance of Equity Interests by a Restricted Subsidiary pro rata
to all of its holders of one or more classes of Equity Interests in a manner
that does not dilute the Equity Interests of the Company or such Subsidiary
Guarantor, as the case may be, (iii) a Restricted Payment that is permitted by
the covenant described above under the caption "-- Restricted Payments" or a
Permitted Investment, (iv) sales or exchanges of inventory in the ordinary
course of business, (v) sales or exchanges of obsolete, surplus or outdated
equipment or abandoned reengineering assets no longer used or useful in the
business of the Company and its Restricted Subsidiaries, (vi) leases and
subleases (and licenses and sublicenses) of assets that are not treated as
Capital Leases on the books and records of the Company and its Restricted
Subsidiaries, (vii) the issuance of Equity Interests of a Restricted Subsidiary
to officers, employees or directors pursuant to any employee stock purchase plan
or similar employee benefit plan or arrangement in the ordinary course of
business and (viii) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including cash in an
amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP.
"Attributable Debt" means in respect of a sale and leaseback transaction,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net base rental payments during the remaining
term of the
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lease included in such sale and leaseback transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any lender party to the
New Credit Facility or with any domestic commercial or investment bank having
capital and surplus in excess of $500 million, (iii) repurchase obligations with
a term of not more than 30 days for underlying securities of the types described
in clauses (i) and (ii) above entered into with any financial institution
meeting the qualifications specified in clause (ii) above, (iv) commercial paper
having a rating of at least P-1 or A-1 from Moody's Investors Service, Inc. or
Standard & Poor's Corporation, respectively, and in each case maturing within
six months after the date of acquisition and (v) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
(i)-(iv) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is currently exercisable or is exercisable
only upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares), or (iii) the first day on which a majority of the
members of the entire Board of Directors are not Continuing Directors. For
purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring Voting Stock of the Company will be
deemed to be a transfer of such portion of such Voting Stock as corresponds to
the portion of the equity of such entity that has been so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses or charges (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash
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expense that was paid in a prior period) of such Person and its Subsidiaries for
such period to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items (excluding any such non-cash item to the extent that it
represents a reversal of an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense) increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP, plus (vi) without duplication,
restructuring and other extraordinary and unusual charges in an amount not
greater than $93.1 million incurred during the year ended December 31, 1997,
plus (vii) without duplication, any deferred financing charges that will be
taken in 1998 as a result of the offering of the Old Notes. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior governmental approval (unless such approval has been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or to a Wholly Owned Subsidiary thereof or to a
Subsidiary Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (unless
such approval has been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, except without duplication to the extent distributed to the Company or
one of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable for cash, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof for
cash, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any issuance of common stock by the Company
(excluding Disqualified Stock) that is registered pursuant to the Securities
Act, other than issuances on Form S-8 and issuances registered on Form S-4.
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"Excluded Properties" means the properties of the Company and its
Restricted Subsidiaries in the following locations: (i) Lawrenceville, Georgia,
(ii) Jacksonville, Florida, (iii) Grand Rapids, Michigan and (iv) Greenville,
Texas.
"Existing Indebtedness" means up to $20.0 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the New Credit Facility and the Notes) in existence on the
date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations); provided, that interest expense counted as a Fixed
Charge in one period because it was accrued in such period shall not be counted
in a second period because it was paid in such second period, and (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all dividend payments, whether or not in cash, on any series
of preferred stock of such Person or any of its Restricted Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity Interests of
the Company (other than Disqualified Stock) or payable to the Company or a
Restricted Subsidiary of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal; in each of the foregoing cases, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referrent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, and the application of the proceeds thereof, as
if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded.
"Foreign Subsidiary" means: (a) the following Wholly Owned Restricted
Subsidiary of Imonics Corporation, a Georgia corporation: Imonics GmbH, a
corporation formed in Germany; (b) the following 50%-Owned Restricted Subsidiary
of Imonics Corporation, a Georgia corporation: Bertelsmann Imonics GmbH & Co.
Kg, a corporation formed in Germany; (c) the following Wholly Owned Restricted
Subsidiary of BSG Alliance/IT, Inc., a Delaware corporation: SageComm
International Limited, a corporation formed in the U.K.; (d) the following
wholly owned Restricted Subsidiary of Health Data Science Corporation: Health
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Data Sciences, Ltd., a corporation organized under the laws of Canada; and (e)
every future Restricted Subsidiary of the Company or a Restricted Subsidiary of
the Company that is incorporated in a jurisdiction outside of the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means, with respect to any Person, a guarantee (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without limitation, by
way of a pledge of assets or through letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness of any
other Person.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, for borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or bankers' acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, and, to the extent not
otherwise included, all Indebtedness of others secured by a Lien on any asset of
such Person (whether or not such Indebtedness is assumed by such Person) and, to
the extent not otherwise included, the Guarantee by such Person of any
Indebtedness of any other Person if such obligation would be a contingent
obligation that is required to be described in the footnotes to the financial
statements of such Person prepared in accordance with GAAP. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, relocation and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities of another Person, together with all items
that are or would be classified as investments on a consolidated balance sheet
prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of
the Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Restricted Payments." Investments will exclude accounts receivable
in the ordinary course of business, extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices and endorsements of
negotiable instruments.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under
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applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any other agreement to give a
security interest in any asset).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) and (ii)
any extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any sale or other disposition
of assets (including, without limitation, any cash received upon the sale or
other disposition of any non-cash consideration received in any sale or other
disposition of assets) or the issuance of Equity Interests of Subsidiaries or
the Company, net of the direct costs relating to such Asset Sale or issuance of
Equity Interests (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, estimated taxes paid or payable as a result
thereof, amounts required to be applied to the repayment of Indebtedness secured
by a Lien on the asset or assets that were the subject of such Asset Sale and
any reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated February
13, 1998, by and among the Company, the lenders and agents party thereto and DLJ
Capital Funding, Inc., as syndication agent, including any related notes,
guarantees, collateral documents, instruments and agreements from time to time
executed in connection therewith, and in each case as amended, amended and
restated, modified, renewed, refunded, replaced or refinanced from time to time
in whole or in part (including with the same or different agents, lenders or
borrowers).
"Non-Recourse Debt" means Indebtedness or Disqualified Stock (i) as to
which neither the Company nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), or (b) is directly or indirectly liable (as
a guarantor or otherwise); and (ii) as to which the lenders or their respective
representatives have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investments in the Company or in any
Subsidiary Guarantor or Wholly Owned Restricted Subsidiary that is engaged in
the same or a related or complementary line of business as the Company and its
Subsidiaries were engaged in on the date of the Indenture (as determined in good
faith by the Company); (b) any Investments in Cash Equivalents; (c) any
Investments by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investments (i) such Person becomes a Wholly
Owned Restricted Subsidiary of the Company or a Subsidiary Guarantor that is
engaged in the same or a related or complementary line of business as the
Company and its Restricted Subsidiaries were engaged in on the date of the
Indenture (as determined in good faith by the Company) or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company or a Subsidiary Guarantor and
that is engaged in the same or a related or complementary line of business as
the Company and its Subsidiaries were engaged in on the date of the Indenture
(as determined in good faith by the Company); (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "Certain Covenants -- Asset Sales"; (e) any acquisition of assets solely
in exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) Hedging Obligations and Guarantees permitted to be incurred
under the covenant described under the caption "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; (g) Investments resulting from advances made to customers
in the ordinary course of business, or acquired in satisfaction of such advances
or otherwise as a
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result of a customer's bankruptcy; (h) aggregate Investments not to exceed $10.0
million by the Company or a Subsidiary Guarantor in (1) any joint venture that
is engaged in the same or a related or complementary line of business as the
Company and its Subsidiaries were engaged in on the date of the Indenture (as
determined in good faith by the Company) or (2) a Receivables Subsidiary;
provided, that the foregoing Investment in a Receivables Subsidiary is in the
form of a note that the Receivables Subsidiary is required to repay as soon as
practicable from available cash collections less amounts required to be
established as reserves pursuant to contractual agreements with entities that
are not Affiliates of the Company entered into as part of a Qualified
Receivables Transaction; (i) loans or advances, to the extent made with cash in
an aggregate principal amount not to exceed $5.0 million at any one time
outstanding, to employees of the Company or Restricted Subsidiaries to permit
such employees to purchase stock or stock options pursuant to employee benefit
plans or similar plans or agreements; and (j) other Investments in any Person
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (j) that are at
the time outstanding, not to exceed $10.0 million.
"Permitted Liens" means (i) Liens on assets of the Company securing
Indebtedness under the New Credit Facility that was permitted by the terms of
the Indenture to be incurred and Liens on assets of Restricted Subsidiaries
securing Guarantees of Indebtedness under the New Credit Facility permitted by
the Indenture to be incurred; (ii) Liens in favor of the Company or any Wholly
Owned Restricted Subsidiary or any Subsidiary Guarantor; (iii) Liens on property
of a Person existing at the time such Person is merged into or consolidated
with, the Company or any Restricted Subsidiary of the Company or becomes a
Restricted Subsidiary as the result of the acquisition of Equity Interests of
such Person; provided that such Liens were not incurred in contemplation of such
acquisition, merger or consolidation and do not extend to any assets other than
those of the Person acquired, merged into or consolidated with the Company or a
Restricted Subsidiary; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were not incurred in contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds, leases, contracts (other than contracts in respect of
borrowed money and other Indebtedness), reimbursement obligations in respect of
letters of credit or bankers acceptances or other obligations of a like nature,
in each case incurred in the ordinary course of business; (vi) Liens to secure
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations incurred pursuant to subsection (ix) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Disqualified Stock"; provided that (a) any such Lien attached to the property
concurrently with or within 90 days after the acquisition thereof or the
execution of the Capital Lease with respect thereto, (b) such Lien attaches
solely to the property so acquired in such transaction or to property subject to
such Capital Lease, and (c) the principal amount of the Indebtedness secured
thereby does not exceed 100% of the cost of such property; (vii) Liens existing
on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings diligently pursued, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens on assets of a
Receivables Subsidiary incurred in connection with a Qualified Receivables
Transaction; (x) Liens arising out of transactions permitted under the covenant
entitled "-- Sale and Leaseback Transactions"; provided that such Lien attaches
only to to the property subject to lease entered in connection with such
transaction; (xi) Liens securing Permitted Refinancing Indebtedness; provided,
that such Lien attaches only to the assets that secured the Indebtedness being
refinanced; and (xii) Liens with respect to obligations that do not exceed $10.0
million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of premiums, if any, paid and reasonable expenses
incurred in connection therewith); (ii) such Permitted
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Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable in all material respects to the Holders of Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by the Company or by a Restricted Subsidiary who is an obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, except that the Company may incur Permitted Refinancing Indebtedness
to extend, refinance, renew, replace, defease or refund, Indebtedness of any
Wholly Owned Restricted Subsidiary of the Company or any Subsidiary Guarantor.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"preferred stock" means any Equity Interests with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Qualified Insurance Payments" means payments made by a third party
insurance company pursuant to an insurance policy entered into by the Company or
any of its Restricted Subsidiaries in the ordinary course of business, directly
to, or for the benefit of, holders of Equity Interests of the Company or its
Restricted Subsidiaries, less any reimbursement payments or additional
contributions required from the Company or its Restricted Subsidiaries in
connection with such payments (other than ordinary premiums).
"Qualified Receivables Transaction" means any transaction or series of
transactions pursuant to which the Company or any of its Subsidiary Guarantors,
or any of their respective customers, may sell, convey or otherwise transfer to
a Receivables Subsidiary, or may grant a security interest in, any accounts
receivable (whether now existing or arising in the future) of the Company or any
of its Subsidiary Guarantors, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable, all contracts and
all guarantees or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are customarily
transferred or in respect of which security interests are customarily granted in
connection with asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means an Unrestricted Subsidiary of the Company
which engages in no activities other than in connection with a Qualified
Receivables Transaction and which is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary and with which neither
the Company nor any Restricted Subsidiary of the Company has any material
contract, agreement, arrangement or understanding other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that might be
obtained at the time from persons who are not Affiliates of the Company, other
than fees payable in the ordinary course of business in connection with
servicing accounts receivable and with which neither the Company nor any
Subsidiary of the Company has any obligation to maintain or preserve such
Subsidiary's financial condition or cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors of the Company giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not then an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" means (a) with respect to the Notes, any
Indebtedness of the Company which is by its terms expressly subordinated in
right of payment to the Notes and (b) with respect to any Subsidiary Guarantee,
any Indebtedness of the applicable Subsidiary Guarantor which by its term is
subordinated in right of payment to such Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). A Subsidiary of the
Company shall, at any time, be either a Restricted Subsidiary or an Unrestricted
Subsidiary, but not both.
"Subsidiary Guarantors" means, so long as the same are Subsidiaries of the
Company, (a) each of the following Restricted Subsidiaries of the Company:
Medaphis Physician Services Corporation, a Georgia corporation; Gottlieb's
Financial Services, Inc., a Georgia corporation; Medical Management Sciences,
Inc., a Maryland corporation; Medaphis Services Corporation, a Georgia
corporation; Medaphis Healthcare Information Technology Company, a Georgia
corporation; Automation Atwork, a California corporation; Consort Technologies,
Inc., a Georgia corporation; Health Data Sciences Corporation, a Delaware
corporation; BSG Corporation, a Delaware corporation; (b) the following
Restricted Subsidiaries of Medaphis Services Corporation, a Georgia corporation:
AssetCare, Inc., a Georgia corporation; National Healthcare Technologies, Inc.,
an Indiana corporation; (c) the following Restricted Subsidiaries of BSG
Corporation, a Delaware corporation: BSG Alliance/IT, Inc., a Delaware
corporation; and BSG Government Solutions, Inc., a Maryland corporation; and (d)
any other Subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the Indenture, and their respective successors and assigns until
released.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than the
Subsidiary Guarantors as of the date of the Indenture or any successor to any of
them) that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a)
has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable in any material
respect to the Company or such Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (d)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries (other
than as a result of a Permitted Lien on outstanding Equity Interests of such
Person). Any such designation by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
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caption "Incurrence of Indebtedness and Issuance of Disqualified Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Disqualified Stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the outstanding Capital
Stock of such Person that is at the time entitled to vote in the election of the
Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending 180 days after the Expiration Date (subject
to extension under certain limited circumstances described herein) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer -- Exchange Agent." See "The Exchange Offer -- Resales of New Notes."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be
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deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon on behalf of
the Company by Randolph L.M. Hutto, Executive Vice President and General Counsel
of the Company, and by Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, have been so incorporated in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60621.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a Web site (www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "MEDA." Reports, proxy statements and other information concerning
the Company may be inspected at the offices of the NASDAQ National Market.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, filed with the Commission on February 2, 1998 (as
amended by Form 10-K/A for the fiscal year ended December 31, 1997, filed
with the Commission on June 22, 1998); and
(ii) The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998, filed with the Commission on May 14, 1998.
(iii) The Company's Current Reports on Form 8-K filed on January 8,
1998, January 28, 1998, February 13, 1998, February 18, 1998, March 2, 1998
and June 26, 1998.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the consummation of the Exchange Offer shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such document. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of
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<PAGE> 123
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Copies of the above documents (excluding exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein) may be
obtained without charge upon written or oral request by each person to whom this
Prospectus is delivered from the Company at 2700 Cumberland Parkway, Suite 300,
Atlanta, Georgia 30339, Attention: Caryn Dickerson, Vice President and Treasurer
(telephone number (770) 444-5300).
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVE OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Disclosure Regarding Forward-Looking
Statements.......................... iii
Summary............................... 1
Risk Factors.......................... 14
The Exchange Offer.................... 26
Certain Federal Income Tax
Consequences........................ 34
Use of Proceeds....................... 36
Capitalization........................ 37
Selected Historical Consolidated
Financial Data...................... 38
Unaudited Pro Forma Consolidated
Financial Statement................. 41
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 43
The Business.......................... 54
Management............................ 74
Certain Transactions.................. 82
Principal Stockholders................ 86
Description of New Credit Facility.... 87
Description of Notes.................. 89
Plan of Distribution.................. 117
Legal Matters......................... 118
Experts............................... 118
Available Information................. 118
Incorporation of Certain Documents by
Reference........................... 118
</TABLE>
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$175,000,000
[MEDAPHIS LOGO]
MEDAPHIS CORPORATION
SERIES B
9 1/2% SENIOR
NOTES DUE 2005
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PROSPECTUS
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JUNE 26, 1998
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