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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 58-1651222
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
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(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 23, 1998 was approximately $507,852,618 calculated
using the closing price on such date of $6.938. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of January 23, 1998 was
73,203,981.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held in May 1998 are incorporated herein by reference in Part III.
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MEDAPHIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE OF
FORM 10-K
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ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 8
ITEM 3. LEGAL PROCEEDINGS.................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 13
EXECUTIVE OFFICERS OF THE REGISTRANT............... 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................ 14
ITEM 6. SELECTED FINANCIAL DATA............................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT......................................... 22
ITEM 11. EXECUTIVE COMPENSATION............................. 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................ 23
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THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 15 U.S.C.A
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS
CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.13 TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF COMPANY
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), provides healthcare information
products and business management services, together with enabling technologies
in selected industries. Medaphis provides its products and services through its
Healthcare Services Group and Per-Se Technologies, its Information Technologies
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. Per-Se Technologies
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.
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. Medaphis serves
approximately 20,700 physicians and 2,700 hospitals predominantly in North
America. 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.
RECENT DEVELOPMENTS
On December 23, 1997, Medaphis entered into a $210 million loan facility
(the "New Facility") with an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). The proceeds of the New Facility were used in
part to repay the Company's previous credit facility. As a result, the warrants
issued to the lenders under the previous credit facility for 2% of the
outstanding voting common stock ("Common Stock") of the Company terminated.
Borrowings under the New Facility initially bear interest at Prime plus 250
basis points with rates increasing 100 basis points at June 23, 1998 and 50
basis points each quarter thereafter through the loan's maturity on April 1,
1999. The interest rate at December 31, 1997 was 11.0%. The New Facility
contains certain quarterly financial covenants related to the Company's
performance, is secured by substantially all of the assets of the Company and
its subsidiaries, and is guaranteed by substantially all of the Company's
subsidiaries. The New Facility also contains covenants restricting, among other
things, (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 in respect of the
Company's Common Stock; (v) prepayments or repurchase of other indebtedness and
amendments to certain agreements governing indebtedness; (vi) engaging in
transactions with affiliates and formation of subsidiaries; and (vii) changes of
lines of business. The New Facility is prepayable, in whole or in part, at the
option of Medaphis, at any time. The notes evidencing the New Facility were
placed privately and have no registration rights. Loan costs for the New
Facility totaled approximately $8.1 million.
On December 31, 1997, the Company had $185 million of outstanding
indebtedness under the New Facility. On January 22, 1998, the Company drew down
the remaining $25 million of the New Facility, with the funds used in part to
purchase certain real property then under lease to the Company and to pay for
associated costs of the drawdown, with the balance invested in cash equivalents.
On January 26, 1998, the Company announced that it had received a
commitment for a $100 million revolving credit facility as part of a new planned
$250 million financing package. Under the terms of a senior bank financing
commitment letter between Medaphis and an affiliate of DLJ, such affiliate will
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underwrite a $100 million, three-year revolving credit facility that will be
guaranteed by Medaphis' domestic subsidiaries and secured by a first-priority
lien on substantially all material assets of the Company and its domestic
subsidiaries. The financing is contingent upon customary conditions for this
type of facility and completion of an offering of $150 million in senior notes
maturing in 2005. The proceeds of the financing package will be used to
refinance the New Facility, and for general corporate purposes.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the 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.
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at Health Data
Sciences Corporation ("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 certain revenue of HDS was
improperly recognized and, accordingly, restated the Company's financial
statements for years ended December 31, 1994, 1995 and 1996 and interim periods
of 1997. (the "HDS Restatement").
Subsequent to the HDS Restatement, as part of its continued due diligence
efforts related to the refinancing, management completed its analysis of the
accounting for the December 1995 acquisition of Medical Management Sciences,
Inc. ("MMS") which was originally accounted for as a pooling-of-interests.
Management determined the acquisition of MMS should have been accounted for as a
purchase and accordingly, restated the Company's financial statements for the
years ended December 31, 1995, 1996 and interim periods of 1997 (the "MMS
Restatement").
As a result of the HDS Restatement, the predecessor accountants withdrew
their audit opinion dated March 31, 1997 covering 1994, 1995 and 1996. The audit
opinion issued by the predecessor accountants dated March 31, 1997 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. As discussed in Note 8 of the
Notes to Consolidated Financial Statements, on December 23, 1997, the Company
entered into the New Facility, the proceeds of which were utilized to refinance
the Company's then existing senior credit facility, 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 in the Consolidated Financial Statements have been
re-audited by the Company's current independent accountants.
In the third quarter of 1997 Medaphis combined the operations of Healthcare
Information Technologies ("HIT"), its software products division ("Per-Se
Product Operations"), and the operations of BSG Corporation ("BSG"), its
information technology services division ("Per-Se Services Operations"), under
the name Per-Se Technologies. This combination has helped the Company in its
efforts to contain costs and eliminate redundancies.
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On May 28, 1997, Medaphis sold Healthcare Recoveries, Inc. ("HRI") through
an initial public offering of 100% of its stock, which generated net proceeds to
the Company of approximately $117.0 million. Such proceeds were used to repay
indebtedness under the Company's then existing senior credit facility.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 16 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
The Company's business segments are comprised of Physician Services,
Hospital Services, Per-Se Product Operations and Per-Se Services Operations. The
Company's Physician Services and Hospital Services segments are operated as part
of its Healthcare Services Group and Per-Se Product Operations and Per-Se
Services Operations are operated as part of Per-Se Technologies. Per-Se Product
Operations and Per-Se Service Operations had previously been operated by the
Company as HIT and BSG, respectively.
Physician Services
Physician Services is a leading provider of business management solutions
and claims processing to physicians in the United States. The Company serves
more than 17,000 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 provide comprehensive
practice management services including front office administration, employee
benefit plan design and administration, cash flow forecasting and budgeting and
general consulting services.
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.
To meet the business management service needs of hospital-based, faculty
practice, and office-based physicians, Physician Services has developed a 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. Physician Services has 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.
The Physician Services business is highly competitive. The Company competes
with national and regional physician reimbursement organizations and certain
physician groups and hospitals which provide their own business management
services. Competition among these organizations is based upon the relationship
with the client or prospective client, the efficiency and effectiveness of
converting medical services to cash, the ability to provide proactive practice
management services and, to the extent that service offerings are comparable,
upon price.
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.
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Hospital Services' target market is primarily community hospitals. 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. 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.
- Customized Collection Services. Medaphis' collection agency
services collections contracts in the healthcare industry. Its regional
offices offer (i) a national presence represented through regional
headquarters, (ii) an experienced management team and (iii) a healthcare
focus.
- Extended Business Office Services. Through this program, Hospital
Services assumes responsibility for managing collection of assigned
accounts receivable.
- Managed Care and Charge Accuracy Services. Hospital Services
identifies underpaid claims, helps in contract negotiation and
administration, and assists in payment recovery to assure accurate
reimbursement.
- Claims Resolution Services. These services assist customers in
favorably resolving disputes with third party payors.
- Entitlement Program Services. Under this program, Hospital Services
assists patients in qualifying for reimbursement under appropriate federal,
state, and local government healthcare 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.
The hospital services business in the healthcare industry is highly
competitive. The Company competes with national and regional hospital
reimbursement organizations and certain hospitals which provide their own
business management services. Competition among these organizations is based
upon the relationship with the client or prospective client, the efficiency and
effectiveness of converting medical and hospital services to cash, the ability
to provide proactive practice management services and, to the extent that
service offerings are comparable, upon price.
Per-Se Product Operations
Per-Se Product Operations segment provides application software and systems
integration services to over 1,800 hospitals and 4,000 physicians. Per-Se
Product Operations 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 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.
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., the provider
of advanced radiology information management systems for single and multi-
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site hospitals and imaging center networks; and HDS which distributes
patient-centered clinically-based information systems.
The healthcare information technology business is highly competitive. The
Company competes primarily with national companies, many of which have longer
operating histories and greater financial resources than those of the Company.
These competitors exist in both the "best of breed" niche marketplace and in the
enterprise-wide market for broad sets of application products. Competition among
these companies is based on product quality, ease of use and ease of integration
of new products with other existing and planned applications.
Per-Se Services Operations
Through Per-Se Services Operations, the Company 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. The Company
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.
The systems integration, information technology consulting and software
development industry is highly fragmented and characterized by low barriers to
entry, rapid change and intense competition. The markets in which Per-Se
Services Operations compete include companies specializing in information
technology and systems integration consulting services, application development
companies, software development and systems integration units of major computer
equipment manufacturers, information systems facilities management and
outsourcing organizations, major accounting firms and information systems groups
of large general management consulting firms.
Many of Per-Se Services Operations' competitors have longer operating
histories and substantially greater financial, technical and marketing
resources, and generate greater systems technology consulting and systems
integration revenue. The introduction of lower priced competition or significant
price reductions by current or potential competitors, or such competitors'
ability to respond more quickly than Per-Se Services Operations to new or
emerging technologies or changes in customer requirements, could have an adverse
effect on Per-Se Services Operations' business.
Many of Per-Se Services Operations' current and potential customers
periodically evaluate whether to staff system implementation and deployment
projects with their in-house information systems staff instead of an outside
services company.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
operating profit or loss and identifiable assets attributable to each segment
for each of the fiscal years 1995 through 1997 is presented in Note 16 of Notes
to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
HEALTHCARE INDUSTRY
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
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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.
RESEARCH AND DEVELOPMENT
The Company recorded research and development expenses of approximately
$2.8 million, $3.2 million and $3.3 million in 1995, 1996 and 1997,
respectively.
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 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 Item 3. Legal Proceedings.
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Successful
plaintiffs can receive up to 25-30% of the total recovery from the defendant.
Such qui tam actions or "whistle-blower" lawsuits have increased significantly
in recent years and have increased the risk that a company engaged in the
healthcare industry, such as Medaphis and many of its 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. There
can be no assurance that Medaphis will not be the subject of false claims or qui
tam proceedings relating to its billing and collection activities or that
Medaphis will not be the subject of further government scrutiny or
investigations relating to its billing and accounts receivable
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management services operations. See Item 3. Legal Proceedings. Any such
proceeding or investigation could have a material adverse effect upon the
Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt 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 have an adverse effect
on the operations of hospitals in general, and consequently reduce the amount of
the Company's revenue related to its hospital clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (codified
in scattered titles of the United States Code, including 18, 26, 29 and 42
U.S.C.) 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 payer 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 payer source.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program, projected that the Medicare trust fund
is likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the federal
budget, both the Congress and the Clinton
7
<PAGE> 10
Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change funding mechanisms and other
aspects of both programs. In late 1995, Congress passed legislation that would
substantially reduce projected expenditure increases and would make significant
changes in the Medicare and the Medicaid programs. The Clinton Administration
has proposed alternate measures to reduce, to a lesser extent, projected
increases in Medicare and Medicaid expenditures. Neither proposal became law
prior to Congress' 1996 adjournment. Medaphis anticipates that both the Clinton
Administration and the Republican majorities in Congress will introduce
legislation in 1997 designed to reduce projected increases in Medicare and
Medicaid expenditures and to make other changes in the Medicare and Medicaid
programs. Medaphis anticipates that such proposed legislation would, if adopted,
change aspects of the present methods of paying physicians under such programs
and provide incentives for Medicare and Medicaid beneficiaries to enroll in
health maintenance organizations and other managed care plans. Medaphis cannot
predict the effect of any such legislation, if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These 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.
EMPLOYEES
The Company currently employs approximately 9,800 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
ITEM 2. 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 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 Technologies' principal office is leased and is located in Atlanta,
Georgia. The lease expires in September 1999. In addition to its principal
office, Per-Se Technologies, through its various operating subsidiaries,
operates approximately 36 offices in the United States, Australia, Canada and
Europe. These facilities are leased with expiration dates from April 1998 to
April 2004.
8
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices") (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.
Although the precise scope of the California Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
billing and collection practices in the Designated Offices. No charges or claims
by the government have been made. Although the Company continues to believe that
the principal focus of the 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 will be resolved promptly, that additional subpoenas or
search warrants will not be received by Medaphis or MPSC or that the California
Investigation will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995, were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"),
9
<PAGE> 12
and the Company's underwriters and outside directors were no longer named as
defendants. On June 26, 1996, the court denied plaintiffs' motion to certify
plaintiffs' class. The plaintiffs and the defendants agreed to settle this
action on a class-wide basis for $4.75 million, subject to court approval (the
"1995 Class Action Settlement"). The 1995 Class Action Settlement included the
related putative class action lawsuit currently pending in the Superior Court of
Cobb County, Georgia, described more fully below. On October 29, 1997 the court
certified a class for settlement purposes, approved the settlement and entered
final judgment dismissing the action with prejudice. One of Medaphis' directors
and officers' liability insurance carriers has paid $3.7 million of the 1995
Class Action Settlement. The Company accrued approximately $1.2 million in the
quarter ended December 31, 1996 for the anticipated balance of the 1995 Class
Action Settlement and to pay certain fees incident thereto. On November 6, 1997,
the Company paid the remaining $1.05 million balance of the settlement.
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 government is investigating
allegations concerning the Company's wholly owned subsidiary, Gottlieb's
Financial Services, Inc. ("GFS") (the "GFS Investigation"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying with that request. Although the precise scope and subject matter of
the 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. There can
be no assurance that the GFS Investigation will be resolved promptly 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.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. The Consolidated Second Amended Complaint seeks
compensatory and
10
<PAGE> 13
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. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the 1933 Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such 1933 Act claims.
The parties 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 which were valued
at $22.3 million using an option pricing model. 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
recorded a $52.5 million charge in the quarter ended September 30, 1997 for this
settlement. Such amount has been reflected as a non-current liability as the
Company does not anticipate satisfying the obligation with current assets.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants, additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatements of its fiscal 1995
financial statements, the Company may not be able to sustain a defense to strict
liability on certain claims under the 1933 Act, but the Company believes that it
has substantial defenses to the alleged damages relating to such 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection
11
<PAGE> 14
with Medaphis' acquisition of BSG. The plaintiffs allege failure to perform
diligence, breaches of fiduciary duties of candor, loyalty and fair dealing and
negligence against the BSG defendants (Papermaster, Pickering, Lundeen, Smith,
Noorda and Grosh) and fraud and deceit against the Medaphis defendants (Medaphis
and Brown). Plaintiffs seek compensatory and punitive damages, as well as fees,
interest and other costs. On April 18, 1997, the Medaphis defendants and BSG
defendants filed motions to dismiss the complaint. On or about July 3, 1997, in
lieu of responding to these motions, the plaintiffs filed an amended complaint,
adding new claims under the 1933 Act and common law and new parties, including
former officers of Medaphis, Medaphis' former outside auditors and BSG. On or
about October 29, 1997 all defendants filed motions to dismiss the amended
complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. The Company intends to cooperate fully with the Commission in its
investigation.
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<PAGE> 15
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of January 30, 1998:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- -------- ---------------
<S> <C> <C> <C>
David E. McDowell................ 55 Chairman and Chief Executive 1996
Officer and Director
Randolph L.M. Hutto.............. 49 Executive Vice President 1997
and General Counsel
Allen W. Ritchie................. 40 Executive Vice President and 1998
Chief Financial Officer
C. James Schaper................. 46 Executive Vice President and 1997
Chief Operating Officer
Harvey Herscovitch............... 60 Senior Vice 1997
President -- Strategy &
Organization
</TABLE>
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President, Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
McKesson Drug Company in the United States and Medis Health and Pharmaceutical
Services, Inc. in Canada. 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.
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 (formally 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.
ALLEN W. RITCHIE joined Medaphis in January 1998 as Executive Vice
President and Chief Financial Officer. Mr. Ritchie served as President and Chief
Executive Officer of Royal Precision, Inc. from October 1997 to present. He
served as President, Finance and Administration of AGCO Corporation ("AGCO"),
headquartered in Atlanta, GA from July 1996 until January 1997 and President of
AGCO from January 1996 to July 1996. From September 1991 until December 1995, he
was AGCO's Chief Financial Officer and an
13
<PAGE> 16
Executive Vice President since July 1994. Mr. Ritchie also served on the Board
of Directors of AGCO and as a member of the Board's Strategic Planning
Committee.
C. JAMES SCHAPER joined Medaphis in March 1997 as President of Medaphis
Healthcare Information Technology Company and Executive Vice President of
Medaphis. From 1994 to 1997, Mr. Schaper held numerous positions with Dun &
Bradstreet Software, including President, Chief Executive Officer, Chief
Operating Officer, Executive Vice President, and Senior Vice President, Field
Operations and Marketing. From 1989 to 1994, Mr. Schaper held several positions
with Banyan Systems, Inc., including Senior Vice President, Worldwide Sales and
Marketing, Vice President, North America Field Operations and Regional Vice
President.
HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the Nasdaq National Market under
the symbol MEDA.
The prices in the table below represent the high and low sales price for
the Common Stock as reported in the National Market System for the periods
presented. Such prices are based on inter-dealer bid and asked prices without
markup, markdown, commissions or adjustments and may not represent actual
transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ------- -------
<S> <C> <C>
First Quarter............................................. $53.250 $34.000
Second Quarter............................................ 50.250 34.625
Third Quarter............................................. 42.500 11.250
Fourth Quarter............................................ 18.500 8.250
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---------------------------- ------- -------
<S> <C> <C>
First Quarter............................................. $14.750 $ 9.625
Second Quarter............................................ 10.500 3.500
Third Quarter............................................. 11.000 6.125
Fourth Quarter............................................ 8.750 4.938
</TABLE>
The last reported sales price of the Common Stock as reported on the Nasdaq
National Market on January 23, 1998 was $6.938 per share. As of January 23, 1998
the Company's Common Stock was held of record by 723 stockholders.
Medaphis has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. The New Facility
contains restrictions on the Company's ability to declare or pay cash dividends
on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1997. The selected consolidated financial information of Medaphis
for each of the three fiscal years in the period ended December 31, 1997 and as
of December 31, 1995, 1996 and 1997 has been derived from the audited
consolidated financial statements of Medaphis which give retroactive effect to
the mergers with Atwork, HRI, Rapid Systems, BSG and HDS, all of which have been
accounted for as poolings-of-interests. The selected consolidated financial data
of Medaphis for each of the two fiscal years ended December 31, 1994 and as of
December 31, 1993 and 1994 has been derived from
14
<PAGE> 17
the unaudited consolidated financial statements of Medaphis, which give
retroactive effect to the mergers with Atwork, HRI, Rapid Systems, BSG and HDS,
all of which have been accounted for using the pooling-of-interests method of
accounting. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue.................................. $250,094 $369,483 $538,012 $ 596,714 $572,625
Salaries and wages....................... 151,913 216,950 314,790 398,573 377,363
Other operating expenses................. 65,258 88,655 134,055 163,677 153,372
Depreciation............................. 6,967 9,065 14,187 28,276 29,355
Amortization............................. 6,926 10,310 18,048 25,713 24,137
Interest expense, net.................... 6,202 5,591 9,761 11,585 23,260
Litigation settlement.................... -- -- -- -- 52,500
Restructuring and other charges.......... -- -- 48,750 180,316 22,640
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ 5,984 25,682 (2,650) (137,337) (93,229)
Net income (loss)........................ 5,984 25,682 (2,650) (137,337) (19,303)(3)
Pro forma net income (loss)(1)........... 6,001 24,251 (4,780) (136,358) (19,303)
Weighted average shares outstanding...... 39,179 46,128 52,591 71,225 72,679
PER SHARE DATA(1)(2)
Pro forma basic income (loss) before
extraordinary item and cumulative
effect of accounting change........... $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (1.28)
Pro forma basic net income (loss)........ $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (0.26)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.......................... $ 48,757 $ 65,549 $ 90,043 $ 56,492 $ 93,497
Intangible assets........................ 181,000 376,827 611,544 539,151 515,939
Total assets............................. 334,361 597,487 935,790 936,854 874,027
Total debt............................... 76,308 218,374 161,246 271,727 200,941
Convertible subordinated debentures...... 63,375 63,375 63,375 -- --
Stockholders' equity..................... $166,706 $236,003 $554,074 $ 508,525 $501,781
</TABLE>
- ---------------
(1) In 1995 and 1996, the Company acquired Atwork, Consort, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior
to the mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired
by BSG prior to the Company's merger with BSG had elected "S" corporation
status for income tax purposes. As a result of the mergers (or, in the case
of the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Pro forma net income (loss) and
pro forma net income (loss) per common share are presented in the
consolidated statements of operations as if each of these entities had been
a "C" corporation during the periods presented.
(2) In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," and has retroactively restated all periods
presented.
(3) Reflects the 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 incurred in connection with an information
technology project, pursuant to Emerging Issues Task Force Consensus No.
97-13, "Accounting for Costs Incurred in Connection with a Consulting or an
Internal Project that Combines Business Process Reengineering and
Information Technology".
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Medaphis is a leader in delivering healthcare information and business
management services, together with enabling technologies in selected industries.
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. Servicing approximately 20,700 physicians
and 2,700 hospitals, predominantly in North America, 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 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 business 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 creating
solutions that meet 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 "New Facility"), management
believes it has stabilized and provided for the near-term financing needs of the
Company, which will allow Medaphis to pursue its goal of furthering its position
in delivering cost-effective high quality healthcare information products and
business management services, together with enabling technologies in selected
industries.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997
---------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $538,012 100.0% $ 596,714 100.0% $ 572,625 100.0%
Salaries and wages.............. 314,790 58.5 398,573 66.8 377,363 65.9
Other operating expenses........ 134,055 24.9 163,677 27.4 153,372 26.8
Depreciation.................... 14,187 2.6 28,276 4.7 29,355 5.1
Amortization.................... 18,048 3.4 25,713 4.3 24,137 4.2
Interest expense, net........... 9,761 1.8 11,585 2.0 23,260 4.1
Litigation settlement........... -- -- -- -- 52,500 9.2
Restructuring and other
charges....................... 48,750 9.1 180,316 30.2 22,640 3.9
-------- ----- --------- ----- --------- -----
Loss before income taxes........ (1,579) (0.3) (211,426) (35.4) (110,002) (19.2)
Income tax expense (benefit).... 1,071 0.2 (74,089) (12.4) (16,773) (2.9)
-------- ----- --------- ----- --------- -----
Loss before extraordinary item
and cumulative effect of
accounting change............. (2,650) (0.5) (137,337) (23.0) (93,229) (16.3)
Extraordinary item: Gain on sale
of HRI, net of tax............ -- -- -- -- 76,391 13.3
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)
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)%
======== ===== ========= ===== ========= =====
</TABLE>
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
Corporate and 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.
17
<PAGE> 20
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.
Per-Se's 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 unusual revenue adjustments.
Per-Se's 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, Per-Se's 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
Per-Se's Services Operations revenue for 1997 was approximately $1.1 million of
unusual revenue adjustments.
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, telecommunication, travel, outside consulting
services and office supplies.
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.
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 New Facility will impact future interest expense.
RESTRUCTURING AND OTHER CHARGES. See Note 4 of Notes to Consolidated
Financial Statements for a discussion of restructuring and other charges.
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.
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.
18
<PAGE> 21
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.
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
Corporate and 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 growth by acquisitions, Physician Services experienced a 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.
HRI's revenue increased by 38.6% in 1996 as compared with 1995. This growth
was caused by increased subrogation recoveries.
Per-Se's 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.
Per-Se's Services Operations 1996 revenues increased 15.6% from 1995. The
increases in the BSG's 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% 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.
19
<PAGE> 22
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. See Note 4 of Notes to Consolidated
Financial Statements for a discussion of restructuring and other charges.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $93.5 million at December 31, 1997 and
had unrestricted cash and cash equivalents of $17.8 million. The Company used
cash of $10.2 million for operating activities in the year ended December 31,
1997, principally to fund liabilities related to restructuring and other
charges.
Also during 1997, the Company generated approximately $126.4 million of
cash proceeds from the sale of HRI. The net cash proceeds of approximately
$117.0 million were used to reduce the Company's borrowings under its then
credit facility.
On December 23, 1997, Medaphis entered into the New Facility with an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The
proceeds of the New Facility were used in part to repay the Company's previous
credit facility. Borrowings under the New Facility initially bear interest at
Prime plus 250 basis points with rates increasing 100 basis points at June 23,
1998 and 50 basis points each quarter thereafter through the loan's maturity on
April 1, 1999. The interest rate at December 31, 1997 was 11.0%. The New
Facility contains certain quarterly financial covenants related to the Company's
performance, is secured by substantially all of the assets of the Company and
its subsidiaries, and is guaranteed by substantially all of the Company's
subsidiaries. The New Facility also contains customary covenants for facilities
of this type. The New Facility is prepayable, in whole or in part, at the option
of Medaphis, at any time. The notes evidencing the New Facility were placed
privately and have no registration rights. Loan costs for the New Facility
totaled approximately $8.1 million.
On December 31, 1997, the Company had $185.0 million of outstanding
indebtedness under the New Facility. On January 22, 1998, the Company drew down
the remaining $25.0 million of the New Facility, with the funds used in part to
purchase certain real property then under lease to the Company, with the balance
invested in cash equivalents.
On January 26, 1998 the Company announced that it had received a commitment
for a $100 million revolving credit facility as part of a new planned $250
million financing package. Under the terms of a senior bank financing commitment
letter between an affiliate of DLJ and Medaphis, DLJ will fully underwrite a
$100 million, three-year revolving credit facility that will be guaranteed by
Medaphis' domestic subsidiaries and secured by a first-priority lien on
substantially all material assets of the Company and its domestic subsidiaries.
The financing is contingent upon customary conditions for this type of facility
and completion of an offering of $150 million in senior notes maturing in 2005.
The proceeds of the financing package will be used to refinance the New
Facility, and for general corporate purposes. The Company believes that its
liquidity is presently sufficient to meet its current and anticipated needs.
There can be no assurance that events negatively impacting the Company or its
operations or liquidity will not occur.
20
<PAGE> 23
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. 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 revenues. 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
Year 2000 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 recognized and, accordingly, restated
the Company's financial statements for the years ended December 31, 1994, 1995,
1996 and interim periods of 1997 and retained earnings (accumulated deficit) as
of December 31, 1994 (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. As discussed in Note 8 of the Notes to Consolidated Financial
Statements, on December 23, 1997, the Company entered into the New Facility, 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, 1994, 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
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 30, 1997, following a competitive review and request for proposal
process in which Deloitte & Touche LLP ("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 recommended by the Audit
Committee of the Company's Board of Directors, and the Board approved such
change on June 27, 1997. On July 9, 1997, the Company engaged Price Waterhouse
LLP as the Company's new principal accountants. See Item 1. Business -- Recent
Developments.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Management of the Company" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held in May 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held in May 1998 and is
incorporated herein by reference.
22
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held in May 1998 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the section entitled
"Certain Transactions" of the Proxy Statement for the Annual Meeting of
Stockholders to be held in May 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Report of Independent Accountants;
Consolidated Balance Sheets -- as of December 31, 1996 and 1997;
Consolidated Statements of Operations -- years ended December 31, 1995,
1996 and 1997;
Consolidated Statements of Cash Flows -- years ended December 31, 1995,
1996 and 1997;
Consolidated Statements of Stockholders' Equity -- years ended December
31, 1995, 1996 and 1997; and Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Report of Independent Accountants;
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 1995, 1996 and 1997.
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference
to other filings:
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
2.1 -- Amended and Restated Merger Agreement, dated July 28, 1995,
among Registrant, RaySub, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on September 12, 1995).
2.2 -- Merger Agreement, dated December 29, 1995, among Registrant,
CarSub, Inc. and Medical Management Sciences, Inc.
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on January 19, 1996).
2.3 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1995,
File No. 000-19480 (the "1995 Form 10-K")).
2.4 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 333-2506).
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
2.5 -- Merger Agreement, dated January 29, 1995, by and among
Registrant, BullSub, Inc., Automation, Atwork, Atwork
Australia, Atwork Canada-Corp., Atwork-Europe and Atwork,
U.K. (incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4, File No. 33-088910).
2.6 -- Stock Purchase Agreement, dated December 31, 1995, among
MedQuist Receivables Management Company, MedQuist, Inc. and
Medaphis Hospital Services Corporation (incorporated by
reference to Exhibit 2.4 to Current Report on Form 8-K filed
on January 19, 1996).
2.7 -- Merger Agreement, dated October 13, 1995, among Registrant,
NukSub, Inc. and Consort Technologies, Inc. (incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K filed
on December 5, 1995).
2.8 -- Merger Agreement, dated as of May 23, 1996 among Registrant,
RAKSub, Inc., and HDS, Inc. (incorporated by reference to
Exhibit 2.1 to Registration Statement on Form S-4, File No.
333-04451).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8,
Registration No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.5 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
3.6 -- Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.6 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
4.1 -- Indenture by and between Registrant and Trust Company Bank,
as Trustee, dated December 30, 1992 (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on January 11, 1993).
4.2 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1995 Form 10-K).
4.3 -- Commitment Letter from DLJ Bridge Finance, Inc. to
Registrant, dated December 15, 1997, with respect to $210
million in aggregate principal amount of senior secured
increasing rate notes (incorporated by reference to Exhibit
10.1 on Current Report on Form 8-K filed on December 18,
1997).
4.4 -- Note Purchase Agreement, dated December 23, 1997, by and
among Registrant, certain of its subsidiaries and Med
Funding, Inc. with respect to up to $210 million in
aggregate principal amount of Senior Secured Increasing Rate
Notes (including Form of Note) (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on January
8, 1998).
4.5 -- Security Agreement, dated December 23, 1997, by and among
Registrant, certain of its subsidiaries and Med Funding,
Inc. (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed on January 8, 1998).
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
4.6 -- Pledge Agreement, dated December 23, 1997, by and among
Registrant, certain of its subsidiaries and Med Funding,
Inc. (incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K filed on January 8, 1998).
4.7 -- Form of Option Agreement relating to Registrant's Stock
Option Plan (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1, File No. 33-42216).
4.8 -- Form of Option Agreement relating to Registrant's Executive
Performance Plan (incorporated by reference to Exhibit 4.3
to Registration Statement on Form S-1, File No. 33-42216).
4.9 -- Form of Option Agreement relating to Registrant's Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3, File No. 33-71552).
4.10 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to the
1995 Form 10-K).
4.11 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 4.6 to the 1995 Form 10-K).
4.12 -- Registration Rights Agreement, dated as of March 17, 1995,
by and among Registrant, David Michael Warner and John P.
Holton (incorporated by reference to Exhibit 4.10 to Annual
Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480 (the "1994 Form 10-K")).
4.13 -- Form of Common Stock Purchase Warrant issued to Fredrica
Morf and Ursula Nelson (incorporated by reference to Exhibit
4.19 to the 1994 Form 10-K).
4.14 -- Form of Warrant issued to one or more lenders pursuant to
Registrant's Second Amended and Restated Credit Agreement,
dated as of February 4, 1997 (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed on February
18, 1997).
4.15 -- Form of Registration Rights Agreement among Registrant,
Mahmoud R. Ghavi, Barry G. Wahlig, William L. McCready, and
Kimberly D. Elkins (incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed on December 5, 1995).
4.16 -- Form of Registration Rights Agreement among Registrant,
William J. DeZonia, Lori T. Caudill, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained
Annuity Trust (incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed on January 19, 1996).
4.17 -- Form of Registration Rights Agreement among Registrant,
Raymond J. Noorda and Steven G. Papermaster (incorporated by
reference to Exhibit 4.17 to Registration Statement on Form
S-4, file No. 33-2506).
4.18 -- Form of Registration Rights Agreement among Registrant,
Michael Clark, Andrei Mitran, and Steven Theidke
(incorporated by reference to Exhibit 4.18 to Registration
Statement on Form S-4, File No. 33-2506).
4.19 -- Notice of Redemption for 6.5% Convertible Subordinated
Debentures Due 2000 (incorporated by reference to Exhibit
4.21 to the 1995 Form 10-K).
4.20 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees
(incorporated by reference to Exhibit 4.17 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1996,
File No. 000-19480 (the "1996 Form 10-K")).
10.1 -- Amended and Restated Medaphis Corporation Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 28.1
to Registration Statement on Form S-8, File No. 33-46847).
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.2 -- First Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.1 to Registration Statement on Form S-8, File
No. 33-64952).
10.3 -- Second Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File No. 000-19480
(the "1992 Form 10-K")).
10.4 -- Third Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1993).
10.5 -- Fourth Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.6 -- Fifth Amendment to the Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (the "1993 Form 10-K")).
10.7 -- Sixth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1994).
10.8 -- Seventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-95742).
10.9 -- Eighth Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07203).
10.10 -- Ninth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.2 to Registration Statement on Form S-8, File
No. 333-07203).
10.11 -- Tenth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.3 to Registration Statement on Form S-8, File
No. 333-7203).
10.12 -- Eleventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.12 on the 1996 Form 10-K).
10.13 -- Medaphis Corporation Senior Executive Performance
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.2 to Registration Statement on Form S-8, File
No. 33-46847).
10.14 -- First Amendment to Medaphis Corporation Senior Executive
Performance Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.15 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference
to Exhibit 99.1 to Registration Statement on Form S-8, File
No. 33-67752).
10.16 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-71556).
10.17 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-88442).
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.18 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.14 to the 1995 Form
10-K).
10.19 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.2 to Registration
Statement on Form S-8, File No. 333-3213).
10.20 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.1 to Registration
Statement on Form S-8, File No. 333-07627).
10.21 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.21 on the 1996 Form
10-K).
10.22 -- Medaphis Corporation Non-Employee Director Stock Option
Plan, dated as of August 12, 1994 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.23 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 on the 1996 Form 10-K).
10.24 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.24 on the 1996 Form 10-K).
10.25 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
10.26 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
10.27 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
10.28 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
10.29 -- Restricted Stock Plan of the Registrant, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.30 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 to the 1995 Form
10-K).
10.31 -- First Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.27 on
the 1996 Form 10-K).
10.32 -- Second Amendment to Medaphis Corporation Employee Stock
Purchase Plan.
10.33 -- Third Amendment to Medaphis Corporation Employee Stock
Purchase Plan.
10.34 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.35 -- Amended and Restated Medaphis Employees' Retirement Savings
Plan (incorporated by reference to Exhibit 10.29 on the 1996
Form 10-K).
10.36 -- First Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.30 on the 1996 Form 10-K).
10.37 -- Form of Second Amendment to the Amended and Restated
Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.31 on the 1996 Form 10-K).
10.38 -- Third Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.39 -- Fourth Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan.
10.40 -- Loan Agreement, dated October 1, 1983, between Medical
Management Consultants, Inc. and Development Authority of
Cobb County (incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1, File No. 33-42216).
10.41 -- Second Amended and Restated Credit Agreement, dated as of
February 4, 1997, among the Registrant, the lenders listed
therein and the Agent (incorporated by reference to Exhibit
99.2 to Current Report on Form 8-K filed on February 18,
1997).
10.42 -- Waiver and Extension Letter Agreement, dated September 18,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent (incorporated by reference to Exhibit 10.6 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
10.43 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent (incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed on October 27, 1997).
10.44 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Participation Agreement, dated
April 21, 1995, as amended, among Registrant, SunTrust Bank,
Atlanta, and Creditanstalt Corporate Finance, Inc., and
SunTrust Bank, Atlanta, as agent (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K filed on
October 27, 1997).
10.45 -- First Modification, dated November 19, 1997, of the Second
Amended and Restated Credit Agreement, dated February 4,
1997, among Registrant, the lenders signatory thereto and
SunTrust Bank, Atlanta, as agent (incorporated by reference
to Exhibit 10.9 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.46 -- Certificate of Merger of CompMed, Inc. with and into
Medaphis Physician Services Corporation dated as of December
31, 1993 (incorporated by reference to Exhibit 10.30 to the
1993 Form 10-K).
10.47 -- Employment Agreement, dated December 14, 1992, between
MedCorp Holding, Inc. and Dennis A. Pryor (incorporated by
reference to Exhibit 10.26 to the 1992 Form 10-K).
10.48 -- Amendment No. 1 to the Employment Agreement between Dennis
A. Pryor and Medaphis Physician Services Corporation
(formerly MedCorp Holding, Inc., which changed its name to
CompMed, Inc. and subsequently merged into Medaphis
Physician Services Corporation (incorporated by reference to
Exhibit 10.37 to the 1994 Form 10-K)).
10.49 -- Lease Agreement, dated August 1, 1989, between Financial
Enterprises III (a general partnership consisting of Martin
L. Brill and Dennis A. Pryor) and Medical Management
Sciences South, Inc. (incorporated by reference to Exhibit
10.37 on the 1996 Form 10-K).
10.50 -- Agreement for Management Services by and among Registrant,
INTEGRATEC Med-Services, Inc. and Medaphis Hospital Services
Corporation, dated as of January 13, 1993 (incorporated by
reference to Exhibit 10.37 to the 1993 Form 10-K).
10.51 -- Employment Agreement by and between Registrant and Randolph
G. Brown, dated March 24, 1995 (incorporated by reference to
Exhibit 10.46 to the 1994 Form 10-K).
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.52 -- Master Equipment Lease, dated January 25, 1994, by and
between Trust Company Bank and Registrant (incorporated by
reference to Exhibit 10.63 to the 1994 Form 10-K).
10.53 -- Lease and Development and Participation Agreement, dated
April 21, 1995 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.54 -- Master Equipment Lease Agreement Intended for Security with
NationsBank Leasing Corporation, dated May 31, 1995
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995).
10.55 -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996 (incorporated by
reference to Exhibit 10.8 to Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1996).
10.56 -- Equipment Lease, dated September 29, 1995, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.70 to
the 1995 Form 10-K).
10.57 -- Equipment Lease, dated October 31, 1995 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.71 to
the 1995 Form 10-K).
10.58 -- Equipment Lease, dated January 31, 1996 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 to
the 1995 Form 10-K).
10.59 -- Equipment Lease, dated February 29, 1996, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 to
the 1995 Form 10-K).
10.60 -- Tivoli Systems, Inc. End User Software License Agreement,
dated June 30, 1995 (incorporated by reference to exhibit
10.3 to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.61 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File No. 333-2506).
10.62 -- Employment Agreement by and between Registrant and David E.
McDowell, dated November 19, 1996 (incorporated by reference
to Exhibit 10.49 on the 1996 Form 10-K).
10.63 -- Employment Agreement by and between Registrant and Daniel S.
Connors, Jr., dated February 25, 1997 (incorporated by
reference to Exhibit 10.50 on the 1996 Form 10-K).
10.64 -- Employment Agreement by and between Registrant and Carl
James Schaper, dated February 25, 1997 (incorporated by
reference to Exhibit 10.51 on the 1996 Form 10-K).
10.65 -- Employment Agreement by and between Registrant and Jerome H.
Baglien, dated January 3, 1997 (incorporated by reference to
Exhibit 10.52 on the 1996 Form 10-K).
10.66 -- Employment Agreement dated July 28, 1997, between Registrant
and Randolph L.M. Hutto (incorporated by reference to
Exhibit 10.10 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.67 -- Employment Agreement dated September 30, 1997, between
Registrant and Mark P. Colonnese (incorporated by reference
to Exhibit 10.11 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
10.68 -- Employment Agreement dated April 9, 1997, between Registrant
and Harvey Herscovitch.
10.69 -- Employment Agreement dated January 25, 1998, between
Registrant and Allen W. Ritchie.
10.70 -- Employment Agreement dated January 27, 1998 between
Registrant and Kevin P. Castle.
10.71 -- Limited Partnership Agreement of Bertelsmann-Imonics GmbH &
Co. KG, dated March 13, 1996 (incorporated by reference to
Exhibit 10.65 to the 1995 Form 10-K).
10.72 -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996
(incorporated by reference to Exhibit 10.7 to Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1996).
10.73 -- Medaphis Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.74 -- First Amendment to the Medaphis Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997).
10.75 -- Second Amendment to the Medaphis Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997).
10.76 -- Third Amendment to the Medaphis Corporation Deferred
Compensation Plan.
10.77 -- Written description of Registrant's Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit 10.4
to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997).
10.78 -- Medaphis Corporation Non-Employee Director Deferred Stock
Credit Plan (incorporated by reference to Exhibit 10.5 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
10.79 -- Separation Agreement dated as of May 28, 1997, between
Registrant and Healthcare Recoveries, Inc. (incorporated by
reference to Exhibit 10.12 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
10.80 -- Form of Letter Agreement dated May 30, 1997 between
Registrant and certain executives.
11 -- Statement re: Computation of Per Share Earnings.
16 -- Letter from Deloitte & Touche regarding change in certifying
accountant (incorporated by reference to Exhibit 16 to
Current Report on Form 8-K filed on July 10, 1997).
21 -- Subsidiaries of Registrant.
23.1 -- Consent of Price Waterhouse LLP.
27 -- Financial Data Schedule (for SEC use only).
99.1 -- Consolidated Class Action Complaint filed in the United
States District Court for the Northern District of Georgia,
Atlanta Division (incorporated by reference to Exhibit 99.1
to the 1995 Form 10-K).
99.2 -- Consolidated Class Action Complaint filed in the United
States District Court, Northern District of Georgia, Atlanta
Division (incorporated by reference to Exhibit 99.2 on the
1996 Form 10-K).
99.3 -- Complaint filed in Los Angeles County Superior Court
(incorporated by reference to Exhibit 99.3 on the 1996 Form
10-K).
99.4 -- Class Action Complaint filed in Superior Court of New
Jersey, Law Division, Essex County (incorporated by
reference to Exhibit 99.4 on the 1996 Form 10-K).
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
99.5 -- Verified Derivative Complaint filed in the United States
District Court, Northern District of Georgia, Atlanta
Division (incorporated by reference to Exhibit 99.5 on the
1996 Form 10-K).
99.6 -- Text of Press Release of the Registrant, dated May 21, 1997
(incorporated by reference to Exhibit 99.1 to Current Report
on Form 8-K filed on May 22, 1997).
99.7 -- Text of Press Release issued by the Registrant on October
27, 1997 (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on October 27, 1997).
99.8 -- Letter from Deloitte & Touche LLP, dated November 20, 1997,
advising the Registrant as to the withdrawal of certain
reports of Deloitte & Touche with respect to certain
financial statements of the Registrant (incorporated by
reference to Exhibit 99.1 to Current Report on Form 8-K
filed on December 4, 1997).
99.9 -- Text of Press Release issued by the Registrant on November
19, 1997 (incorporated by reference to Exhibit 99.2 to
Current Report on Form 8-K filed on December 4, 1997).
99.10 -- Text of Press Release issued by the Registrant on December
15, 1997 (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on December 18, 1997).
99.11 -- Financial Statements of the Registrant as of and for the
years ended December 31, 1995 and 1996 and as of and for the
nine month period ended September 30, 1997 audited by Price
Waterhouse LLP (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on January 8, 1998).
99.12 -- Text of Press Release issued by the Registrant on December
24, 1997 (incorporated by reference to Exhibit 99.2 to
Current Report on Form 8-K filed on January 8, 1998).
99.13 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
</TABLE>
- ---------------
* The exhibits which are referenced in the above documents are hereby
incorporated by reference. Such exhibits have been omitted for purposes of
this filing but will be furnished supplementary to the Commission upon
request.
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the quarter ended December
31, 1997:
<TABLE>
<CAPTION>
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------- ---------------- ------------------
<S> <C> <C>
Medaphis entered into a waiver and extension
agreement with respect to the Second Amended
Facility......................................... No October 27, 1997
Letter from Deloitte & Touche LLP advising Medaphis
as to the withdrawal of their audit opinion for
the year ended December 31, 1996................. No December 3, 1997
Commitment Letter from Donaldson, Lufkin & Jenrette
for a $210 million loan facility................. No December 17, 1997
</TABLE>
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Medaphis Corporation
(Registrant)
<TABLE>
<S> <C>
Date: February 2, 1998 By: /s/ ALLEN W. RITCHIE
--------------------------------------------------------
Allen W. Ritchie
Executive Vice President and
Chief Financial Officer
Date: February 2, 1998 By: /s/ MARK P. COLONNESE
--------------------------------------------------------
Mark P. Colonnese
Vice President and Corporate
Controller (Principal Accounting Officer)
</TABLE>
32
<PAGE> 35
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID E. MCDOWELL Chairman, Chief Executive February 2, 1998
- ----------------------------------------------------- Officer and Director
David E. McDowell
/s/ ALLEN W. RITCHIE Executive Vice President and February 2, 1998
- ----------------------------------------------------- Chief Financial Officer
Allen W. Ritchie
/s/ MARK P. COLONNESE Vice President and Corporate February 2, 1998
- ----------------------------------------------------- Controller (Principal
Mark P. Colonnese Accounting Officer)
/s/ ROBERT C. BELLAS, JR. Director February 2, 1998
- -----------------------------------------------------
Robert C. Bellas, Jr.
/s/ DAVID R. HOLBROOKE, M.D. Director February 2, 1998
- -----------------------------------------------------
David R. Holbrooke, M.D.
/s/ JOHN C. POPE Director February 2, 1998
- -----------------------------------------------------
John C. Pope
/s/ DENNIS A. PRYOR Director February 2, 1998
- -----------------------------------------------------
Dennis A. Pryor
/s/ C. CHRISTOPHER TROWER Director February 2, 1998
- -----------------------------------------------------
C. Christopher Trower
</TABLE>
33
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Medaphis Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Medaphis Corporation and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As more fully discussed in Note 2 of the Notes to Consolidated Financial
Statements, the Company restated its financial statements for the years ended
December 31, 1995 and 1996. As a result of the restatement for certain revenue
recognition practices, the predecessor accountants withdrew their audit opinion
dated March 31, 1997 covering these years. The audit opinion issued by the
predecessor accountants dated March 31, 1997 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. As discussed in Note 8 of the Notes to
Consolidated Financial Statements, on December 23, 1997, the Company entered
into a credit facility 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.
As more fully discussed in Note 1 of the Notes to Consolidated Financial
Statements, during 1997 the Company changed its accounting for business process
reengineering costs incurred in connection with an information technology
project, pursuant to Emerging Issues Task Force Consensus No. 97-13, "Accounting
for Costs Incurred in Connection with a Consulting or an Internal Project that
Combines Business Process Reengineering and Information Technology."
PRICE WATERHOUSE LLP
Atlanta, Georgia
January 27, 1998
F-1
<PAGE> 37
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------- ---------
(AS RESTATED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 7,631 $ 17,794
Restricted cash........................................... 19,568 5,576
Accounts receivable, billed (less allowances of $21,325
and $20,660)........................................... 99,823 100,813
Accounts receivable, unbilled............................. 79,911 75,888
Deferred income taxes..................................... 36,177 --
Other..................................................... 12,129 12,365
--------- ---------
Total current assets.............................. 255,239 212,436
Property and equipment...................................... 97,850 72,763
Deferred income taxes....................................... 43,044 60,857
Intangible assets........................................... 539,151 515,939
Other....................................................... 1,570 12,032
--------- ---------
$ 936,854 $ 874,027
========= =========
Current Liabilities:
Accounts payable.......................................... $ 11,765 $ 12,256
Accrued compensation...................................... 30,332 36,506
Accrued expenses.......................................... 100,675 56,295
Current portion of long-term debt......................... 55,975 11,490
Deferred income taxes..................................... -- 2,392
--------- ---------
Total current liabilities......................... 198,747 118,939
Long-term debt.............................................. 215,752 189,451
Accrued litigation settlement............................... -- 52,500
Other obligations........................................... 13,830 11,356
--------- ---------
Total liabilities................................. 428,329 372,246
--------- ---------
Commitments and contingencies (Notes 9 and 10)
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1997;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1996 and 1997; issued and outstanding, 71,721 in
1996 and 73,204 in 1997................................ 717 732
Common stock, non-voting, $0.01 par value, 600 authorized
in 1996 and 1997; none issued.......................... -- --
Paid-in capital........................................... 666,673 678,998
Accumulated deficit....................................... (158,696) (177,949)
--------- ---------
508,694 501,781
Less treasury stock, at cost -- 16 shares in 1996......... (169) --
--------- ---------
Total stockholders' equity........................ 508,525 501,781
--------- ---------
$ 936,854 $ 874,027
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 38
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- --------
(AS RESTATED)
<S> <C> <C> <C>
Revenue..................................................... $ 538,012 $ 596,714 $572,625
--------- --------- --------
Salaries and wages.......................................... 314,790 398,573 377,363
Other operating expenses.................................... 134,055 163,677 153,372
Depreciation................................................ 14,187 28,276 29,355
Amortization................................................ 18,048 25,713 24,137
Interest expense, net....................................... 9,761 11,585 23,260
Litigation settlement....................................... -- -- 52,500
Restructuring and other charges............................. 48,750 180,316 22,640
--------- --------- --------
Total expenses.................................... 539,591 808,140 682,627
--------- --------- --------
Loss before income taxes.................................... (1,579) (211,426) (110,002)
Income tax expense (benefit)................................ 1,071 (74,089) (16,773)
--------- --------- --------
Loss before extraordinary item and cumulative effect of
accounting change......................................... (2,650) (137,337) (93,229)
Extraordinary item: Gain on sale of HRI, net of tax......... -- -- 76,391
Cumulative effect of accounting change, net of tax.......... -- -- (2,465)
--------- --------- --------
Net loss.......................................... (2,650) (137,337) (19,303)
--------- --------- --------
Pro forma tax adjustments................................... (2,130) 979 --
--------- --------- --------
Pro forma net loss.......................................... $ (4,780) $(136,358) $(19,303)
========= ========= ========
Pro forma basic net loss per common share:
Pro forma basic loss before extraordinary item and
cumulative effect of accounting change................. $ (0.09) $ (1.91) $ (1.28)
Extraordinary item: Gain on sale of HRI, net of tax....... -- -- 1.05
Cumulative effect of accounting change, net of tax........ -- -- (0.03)
--------- --------- --------
Pro forma basic net loss.................................. $ (0.09) $ (1.91) $ (0.26)
========= ========= ========
Weighted average shares outstanding......................... 52,591 71,225 72,679
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 39
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
(AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (2,650) $(137,337) $ (19,303)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization............................. 32,235 53,989 53,492
Gain on sale of HRI, net of tax........................... -- -- (76,391)
Cumulative effect of accounting change, net of tax........ -- -- 2,465
Impairment loss on assets................................. 5,035 135,195 9,810
Deferred income taxes..................................... 740 (77,068) (18,748)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ (3,253) (6,152) (1,698)
Accounts receivable, billed............................ (21,472) (11,316) (3,230)
Accounts receivable, unbilled.......................... (12,094) 1,511 5,418
Accounts payable....................................... 344 (10,297) 1,252
Accrued compensation................................... (204) 5,277 8,322
Accrued expenses....................................... 26,606 28,913 (29,846)
Accrued litigation settlement.......................... -- -- 52,500
Other, net............................................. (5,435) 9,422 5,750
--------- --------- ---------
Net cash provided by (used for) operating
activities...................................... 19,852 (7,863) (10,207)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (76,077) (18,200) (7,029)
Purchases of property and equipment......................... (51,120) (51,135) (19,971)
Proceeds from sale of HRI, net.............................. -- -- 126,375
Proceeds from sale of property and equipment................ -- -- 3,644
Software development costs.................................. (35,611) (37,946) (5,587)
Other....................................................... 650 -- --
--------- --------- ---------
Net cash (used for) provided by investing
activities...................................... (162,158) (107,281) 97,432
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock............................. 147,197 -- 1,216
Proceeds from the exercise of stock options................. 4,621 11,196 6,104
Proceeds from borrowings.................................... 140,243 129,155 327,325
Payments of debt............................................ (136,319) (36,511) (398,111)
Dividends to shareholders of acquired companies............. (4,052) -- --
Repurchase of stock and warrants............................ -- (5,591) --
Debt issuance costs......................................... -- -- (13,596)
Other....................................................... (7,355) 5,547 --
--------- --------- ---------
Net cash provided by (used for) financing
activities...................................... 144,335 103,796 (77,062)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Net change.................................................. 2,029 (11,348) 10,163
Balance at beginning of period (see Note 3)................. 17,241 18,979 7,631
--------- --------- ---------
Balance at end of period.................................... $ 19,270 $ 7,631 $ 17,794
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 40
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PREFERRED TREASURY TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCK STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AMOUNT EQUITY
------ ------ --------- --------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994, AS
RESTATED........................ 45,990 $460 22,191 $ 225 $251,378 $ (16,059) $ -- $ 236,004
Issuance of common stock.......... 4,244 42 -- -- 121,580 -- -- 121,622
Issuance of common stock in
acquisitions.................... 4,020 40 -- -- 148,419 -- -- 148,459
Exercise of stock options
(including tax benefit of
$7,901)......................... 557 6 -- -- 12,516 -- -- 12,522
Issuance and conversion of
preferred stock at acquired
companies....................... 3,344 33 (2,737) 157 37,398 -- -- 37,588
Pre-merger dividends to former
owners.......................... -- -- -- -- -- (1,818) -- (1,818)
Net loss.......................... -- -- -- -- -- (2,650) -- (2,650)
Other............................. 762 8 -- -- 3,096 (757) -- 2,347
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1995, AS
RESTATED........................ 58,917 589 19,454 382 574,387 (21,284) -- 554,074
Changes in HDS's stockholders'
equity in the three months ended
March 31, 1996 (see Note 3)..... -- -- -- -- -- (382) -- (382)
Exercise of stock options
(including tax benefit of
$21,012)........................ 1,536 15 -- -- 31,348 -- 845 32,208
Repurchase of stock and
warrants........................ (58) -- -- -- (4,577) -- (1,014) (5,591)
Conversion of preferred stock at
acquired companies.............. 6,528 65 (19,454) (382) 317 -- -- --
Conversion of subordinated
debentures...................... 4,527 45 -- -- 62,305 -- -- 62,350
Net loss.......................... -- -- -- -- (137,337) -- (137,337)
Other............................. 255 3 -- -- 2,893 307 -- 3,203
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996, AS
RESTATED........................ 71,705 717 -- -- 666,673 (158,696) (169) 508,525
Issuance of common stock.......... 205 2 -- -- 1,214 -- -- 1,216
Exercise of stock options
(including tax benefit of
$2,762)......................... 1,303 13 -- -- 8,594 -- 259 8,866
Net loss.......................... -- -- -- -- -- (19,303) -- (19,303)
Other............................. (9) -- -- -- 2,517 50 (90) 2,477
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1997...... 73,204 $732 -- $ -- $678,998 $(177,949) $ -- $ 501,781
====== ==== ======= ===== ======== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 41
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries ("Medaphis" or the
"Company"), including the retroactive effect of mergers accounted for under the
pooling-of-interests method of accounting. As more fully discussed in Note 2,
the Company has restated its consolidated financial statements for the years
ended December 31, 1995 and 1996. All significant intercompany transactions have
been eliminated. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
NATURE OF OPERATIONS. Medaphis provides business management services and
systems primarily to the healthcare industry throughout the United States. The
Company historically has not experienced any significant losses related to
individual clients, classes of clients or groups of clients in any geographical
area.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, represents amounts invoiced to clients.
Accounts receivable, unbilled, represents amounts recognized for services
rendered but not yet invoiced and is based on the Company's estimate of the fees
that will be invoiced when collections on patient accounts are received. During
the third quarter of 1997, the Company refined its method for calculating the
estimate for accounts receivable, unbilled, which resulted in a decrease of
$10.7 million.
Revenue from software licenses is generally recognized upon shipment of the
products and when no significant contractual obligations remain outstanding.
When the Company receives payment prior to shipment or fulfillment of
significant vendor obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of significant vendor
obligations. The license agreements typically provide for partial payments
subsequent to shipment; such terms result in an unbilled receivable at the date
the revenue is recognized. Costs related to insignificant vendor obligations are
accrued upon recognition of the license revenue. Software maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically one year.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Subject to approval of AcSEC's proposal to defer the
effective date of certain provisions of SOP 97-2 for certain transactions, for
one year, the Company does not believe the adoption of the remaining provisions
of SOP 97-2 will have a significant impact on the pattern of revenue recognition
of software sales.
Revenues from systems integration contracts are recorded based on the terms
of the underlying contracts, which are primarily time and material or fixed
price contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Anticipated losses, if any, are charged to operations in the period such
losses are determined. Revenue for which customers have not yet been invoiced is
reflected as accounts receivable, unbilled in the accompanying consolidated
balance sheets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
F-6
<PAGE> 42
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH. Restricted cash principally represents amounts collected
on behalf of certain clients, a portion of which is held in trust until remitted
to such clients.
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally four to ten
years for furniture and fixtures, three to seven years for equipment, and 20
years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
client lists and software development costs.
Goodwill and Client Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method,
generally over 40 years. Client lists are amortized using the straight line
method over their estimated period of benefit, generally 7 to 20 years.
The Company monitors events and changes in circumstances that could
indicate carrying amounts of intangible assets may not be recoverable. When
events or changes in circumstances are present that indicate the carrying amount
of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows. Should the Company determine that the carrying values of specific
intangible assets are not recoverable, the Company would record a charge to
reduce the carrying value of such assets to their fair values. No impairment
losses related to goodwill or client lists have been recorded during the three
year period ended December 31, 1997, except for those discussed in Note 4
related to the Imonics Shutdown.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software utilized in
providing the Company's business management systems and services. Software
development costs are capitalized upon the establishment of technological
feasibility for each product or process and capitalization ceases when the
product or process is available for general release to customers or is put into
service. Software development costs are amortized using the straight line method
over the estimated economic lives of the assets, which are generally three to
five years.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). In Note 12, the Company presents
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123
requires that companies which elect to not account for stock-based compensation
as prescribed by that statement shall disclose, among other things, the pro
forma effects on net income (loss) and basic net income (loss) per share as if
SFAS No. 123 had been adopted.
LEGAL COSTS. The Company records charges for the legal and administrative
fees, costs and expenses and damages or settlements it anticipates incurring in
conjunction with its legal matters when management can reasonably estimate these
costs.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events to assess the likelihood that tax benefits will be realized in the
future.
PRO FORMA PROVISION FOR INCOME TAXES. In 1995 and 1996, the Company
acquired the Automation Atwork Companies ("Atwork"), Rapid Systems Solutions,
Inc. ("Rapid Systems") and BSG Corporation ("BSG") in merger transactions
accounted for as poolings-of-interests. Prior to the mergers, Atwork, Rapid
F-7
<PAGE> 43
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Systems and a company acquired by BSG prior to the merger between BSG and the
Company (the "BSG Merger") had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma provision (benefit) for income taxes, taken together with
reported income tax expense (benefit), presents the combined pro forma tax
expense (benefit) of such entities as if they had been "C" corporations during
the periods presented.
PRO FORMA BASIC NET LOSS PER COMMON SHARE. Pro forma basic net loss per
common share is presented in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 provides
for new accounting principles used in the calculation of earnings per share and
was effective for financial statements for both interim and annual periods ended
after December 15, 1997. The Company has restated the pro forma basic net loss
per common share for all periods presented to give effect to SFAS No. 128.
Pro forma basic net loss per common share is based on the weighted average
number of shares of common stock outstanding during the period. Pro forma
diluted net loss per common share is not presented as it is antidilutive. Stock
options and warrants are the only securities issued which would have been
included in the pro forma diluted earnings per share calculation.
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 including 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.
SEGMENT REPORTING. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for
the way companies report information about operating segments including the
related disclosures about products and services. The Company has adopted SFAS
No. 131 during the year ended December 31, 1997 and, as required, has restated
prior years for comparability. See Note 16 where the Company discloses
information about its reportable segments.
2. RESTATEMENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at Health Data
Sciences Corporation ("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 1995 and 1996. As a result of
this evaluation, management determined that the revenue was improperly
recognized and, accordingly, restated the Company's financial statements for the
years ended December 31, 1995, 1996 and interim periods of 1997 and retained
earnings (accumulated deficit) as of December 31, 1994 (the "HDS Restatement").
Subsequent to the restatement related to HDS, as part of its continued due
diligence efforts related to the refinancing, management completed its analysis
of the accounting for the December 1995 acquisition of Medical Management
Sciences, Inc. ("MMS") which was originally accounted for as a
pooling-of-interests. Management determined the acquisition of MMS should have
been accounted for as a purchase and accordingly, restated the Company's
financial statements for the years ended December 31, 1995, 1996 and interim
periods of 1997 (the "MMS Restatement").
As a result of the HDS Restatement, the predecessor accountants withdrew
their audit opinion dated March 31, 1997 covering 1994, 1995 and 1996. The audit
opinion issued by the predecessor accountants, dated
F-8
<PAGE> 44
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1997, 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. As discussed in Note 8 of the Notes to Consolidated Financial
Statements, on December 23, 1997, the Company entered into a credit facility,
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 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>
F-9
<PAGE> 45
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS AND DIVESTITURES
From January 1, 1995 through December 31, 1996, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
<TABLE>
<CAPTION>
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
- ---------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Sage Communication, Inc. ("Sage")....................... * October 1996
The Medico Group, Ltd................................... * April 1996
Medical Management Computer Sciences, Inc............... * February 1996
CBT Financial Services, Inc............................. * February 1996
The Receivables Management Division of MedQuist, Inc.... $ 17,300 December 1995
Medical Management Sciences Inc. ("MMS")................ 148,000 December 1995
The Halley Exchange, Inc. ("Halley").................... * December 1995
Billing and Professional Services, Inc.................. * October 1995
Medical Office Consultants, Inc......................... * May 1995
Computers Diversified, Inc.............................. 15,500 April 1995
Medical Management, Inc................................. 8,000 March 1995
The Decision Support Group, Inc......................... * January 1995
</TABLE>
- ---------------
* Consideration not material.
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The operating results of the acquired businesses
are included in the Company's consolidated statements of operations from the
respective dates of acquisition. The pro forma impact of the foregoing
acquisitions are not presented due to the immaterial effect these acquisitions
have on the Company's results of operations for 1995 and 1996.
In addition to the foregoing acquisitions, the Company combined with seven
businesses in 1995 and 1996 which were accounted for using the
pooling-of-interests method of accounting. Following is a list of the mergers
and the shares exchanged:
<TABLE>
<CAPTION>
SHARES
COMPANY EXCHANGED MERGER DATE
- ------- --------- -----------
<S> <C> <C>
HDS......................................................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
February
Intelligent Visual Computing, Inc. ("IVC").................. * 1996
November
Consort Technologies, Inc. ("Consort")...................... 825,000 1995
Healthcare Recoveries, Inc. ("HRI")......................... 3,265,000 August 1995
Atwork...................................................... 8,000,000 March 1995
</TABLE>
- ---------------
* Consideration not material
Since these business combinations have been recorded using the
pooling-of-interests method of accounting, no adjustment has been made to the
historical carrying amounts of assets acquired and liabilities assumed. The
accompanying consolidated financial statements have been restated to include the
financial position and operating results of the significant mergers, Atwork,
HRI, Rapid Systems, BSG and HDS, for all periods prior to the mergers.
Prior to its merger with the Company, HDS reported on a fiscal period
ending March 31. HDS's financial position and operating results as of and for
the year ended March 31, 1996 were combined with the Company's financial
position and operating results as of and for the years ended December 31, 1995.
Accordingly, HDS's operating results for the three months ended March 31, 1996
were duplicated in each of the years ended
F-10
<PAGE> 46
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and 1996. HDS's revenues and net income for that three-month
period were $3,758,000 and $382,000, respectively. The beginning cash and cash
equivalents balance in the accompanying 1996 consolidated statement of cash
flows does not equal the December 31, 1995 cash and cash equivalents balance as
a result of the combination of HDS's financial position as of March 31, 1996
with the financial position of the Company as of December 31, 1995.
A summary of revenue and net income (loss) for each of the three
significant pooling-of-interests transactions consummated in 1996 for the year
ended December 31, 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
NET INCOME
COMPANY REVENUE (LOSS)
- ------- ------- ----------
<S> <C> <C>
Rapid Systems............................................. $14,722 $ 972
BSG....................................................... 69,663 (1,045)
HDS, as restated.......................................... 10,449 (4,294)
</TABLE>
A summary of revenue and pro forma net income (loss) for each of the three
significant pooling-of-interests transactions consummated after the first
quarter of 1996 for interim year-to-date periods preceding the dates of
consummation are as follows (in thousands):
<TABLE>
<CAPTION>
INTERIM PERIOD PRO FORMA
PRECEDING NET INCOME
COMPANY CONSUMMATION REVENUE (LOSS)
- ------- -------------- ------- -----------------
<S> <C> <C> <C>
Rapid Systems................................ March 31, 1996 $ 5,248 $ (498)
BSG.......................................... March 31, 1996 19,539 2,497
HDS.......................................... March 31, 1996 3,758 382
</TABLE>
On 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
$126.4 million and an extraordinary gain of $76.4 million, net of taxes of $46.2
million. Medaphis acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests and therefore, the resultant gain from
the sale has been presented as an extraordinary item. The net proceeds from the
sale were used to pay down borrowings under the Second Amended Facility (see
Note 8).
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring charges.................................... $15,037 $ 14,076 $ 6,687
Software abandonment..................................... 1,800 86,088 --
Property and equipment impairment........................ 5,030 35,592 6,959
Intangible asset impairment.............................. -- 13,048 --
Legal costs.............................................. 12,000 12,800 2,600
Pooling charges.......................................... 9,200 9,798 (46)
Severance costs.......................................... 4,933 3,913 2,524
Other.................................................... 750 5,001 3,916
------- -------- -------
$48,750 $180,316 $22,640
======= ======== =======
</TABLE>
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two components
of the Reengineering Project: (1) workflow, process and operational improvements
along with new technology development, and (2) office consolidation within its
wholly owned operating subsidiary,
F-11
<PAGE> 47
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medaphis Physician Services Corporation ("MPSC") (the "MPSC Restructuring
Plan"). The Company had recorded a restructuring reserve for the exit costs
associated with the MPSC Restructuring Plan in 1995 of $6.7 million for the
costs associated with the termination of certain leases, $5.5 million for the
costs associated with discontinued client contracts and $2.8 million for other
exit activities. In August 1996, the Company revised the MPSC Restructuring Plan
and increased its lease termination costs by $2.0 and reduced other reserves by
$3.8 million. During the first half of 1996, the Company incurred $5.2 million
of costs that were related to the Reengineering Project, which had not
previously been reserved. In 1997, the Company reevaluated the adequacy of the
reserves established for the MPSC Restructuring Plan and recorded an additional
charge of $1.7 million for lease termination costs.
During 1996, the Company adopted a plan to consolidate its system
integration businesses, BSG Corporation ("BSG"), Rapid Systems Solutions, Inc.
("Rapid Systems") and Imonics Corporation ("Imonics") (the "BSG Group
Restructuring"). In December 1996, the Company adopted a plan to shut down
Imonics (the "Imonics Shutdown"). In connection with the BSG Group Restructuring
and the Imonics Shutdown, Medaphis recorded charges of $3.0 million for the
costs associated with the termination of certain leases and $6.5 million for
severance costs for approximately 200 Imonics employees who had been notified of
their termination and $1.2 million for other exit activities.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies, the BSG and HIT Groups, under the Per-Se name (the "Per-Se
Restructuring"). In connection with the Per-Se Restructuring, the Company
recorded charges of $2.7 million for the costs associated with the termination
of certain leases and $2.3 million for severance costs related to approximately
100 employees who had been notified of their termination.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for all restructurings discussed above
are as follows:
<TABLE>
<CAPTION>
1995 COSTS RESERVE COSTS RESERVE
INITIAL APPLIED BALANCE APPLIED BALANCE
RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31, RESERVE
CHARGE RESERVE 1995 ADJUSTMENTS RESERVES 1996 ADJUSTMENTS
------- ------- ------------ ----------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Lease termination costs.... $ 6,726 $ (736) $ 5,990 $ 5,017 $ (3,493) $ 7,514 $ 4,395
Incremental costs
associated with
discontinued client
contracts................ 5,488 (797) 4,691 (2,690) (2,001) -- --
Severance.................. -- -- -- 6,541 (3,793) 2,748 2,292
Other...................... 2,823 (1,035) 1,788 5,208 (5,774) 1,222 --
------- ------- ------- ------- -------- ------- -------
$15,037 $(2,568) $12,469 $14,076 $(15,061) $11,484 $16,687
======= ======= ======= ======= ======== ======= =======
<CAPTION>
COSTS RESERVE
APPLIED BALANCE
AGAINST DECEMBER 31,
RESERVE 1997
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Lease termination costs.... $(3,894) $8,015
Incremental costs
associated with
discontinued client
contracts................ -- --
Severance.................. (3,683) 1,357
Other...................... (1,222) --
------- ------
$(8,799) $9,372
======= ======
</TABLE>
The terminated leases have various expiration dates through 2005.
Software Abandonment. In connection with the Halley acquisition in 1995,
the Company recorded a $1.8 million charge related to the cost of purchased
research and development activities related to acquired technology for which
technological feasibility had not yet been established and which had no
alternative future uses.
In June 1996, the Company began a comprehensive assessment of the
Reengineering Project. The comprehensive review was completed and management
concluded that it was not cost effective to continue the development and
deployment of the software and technology upon which the Reengineering Project
was based and that the reengineering software and technology had no alternative
useful application in the Company's operations. In connection with abandonment
of its Reengineering Project and the Imonics Shutdown, the Company abandoned
certain software development projects and recorded charges for the write-off of
$86.1 million of capitalized software development costs related to these
projects.
F-12
<PAGE> 48
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment Impairment. In connection with the abandonment of
the Reengineering Project and the Imonics Shutdown in 1996 and the MPSC
Restructuring Plan in 1995, the Company assessed the recoverability of certain
of its long lived assets and recorded impairment losses of approximately $5.0
million and $35.6 million in 1995 and 1996, respectively.
In connection with the Per-Se Restructuring and the Company's assessment of
the recoverability of certain of its long-lived assets, the Company recorded a
charge of $7.0 million for impairment losses during 1997.
Intangible Asset Impairment. In connection with the Imonics Shutdown in
1996, Medaphis recorded a charge of $13.0 million for the write-off of the
unamortized goodwill associated with the purchase of Imonics.
Legal Costs. In 1995, the Company recorded a charge of $12.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with the California Investigation and various putative class
action lawsuits which were based on this investigation.
In 1996, the Company accrued an additional $2.0 million for the legal and
administrative fees, costs and expenses associated with the California
Investigation. Also in 1996, the Company recorded a charge of $5.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with various putative class action lawsuits which have been filed
since August 14, 1996 (the "1996 Lawsuits") against the Company and certain of
its former officers, one of whom was also a director. The Company also accrued
$4.6 million for the legal costs and other fees the Company had or planned to
incur in connection with the turnaround effort undertaken by the new management
team and various other legal matters. Also in 1996, the Company had recorded a
$1.2 million charge for the anticipated settlement of the 1995 Class Action
Settlement (see Note 10).
In 1997, the Company recorded charges of $3.0 million for the legal and
administrative fees, costs and expenses it has incurred and plans to incur in
connection with the GFS Investigation.
Also in 1997, the Company evaluated the adequacy of the reserves
established for the California Investigation and the turnaround plan adopted in
December 1996 and reduced these reserves by $3.4 million. The Company also
increased its reserve for the 1996 Lawsuits by $3.0 million.
Pooling Charges. In 1995 and 1996, Medaphis acquired seven companies in
merger transactions accounted for under the pooling-of-interests method of
accounting. In connection therewith, the Company incurred transaction fees,
costs and expenses, which it accrued at the closing of the transaction. Such
estimates were adjusted based on actual charges. The impact of these charges and
subsequent adjustments are set forth below as (income)/expense:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Atwork...................................................... $6,000 $ (430) $
HRI......................................................... 2,000 (778) --
Consort..................................................... 1,200 (529) --
IVC......................................................... -- 169 --
Rapid Systems............................................... -- 584 (15)
BSG......................................................... -- 6,094 (14)
HDS......................................................... -- 4,688 (17)
------ ------ ----
$9,200 $9,798 $(46)
====== ====== ====
</TABLE>
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $4.9
million, $0.9 million and $0.5 million in 1995, 1996 and 1997, respectively, in
accordance with Statement of Financial Accounting Standards No. 112 to reflect
the expense for employees' rights to involuntary severance benefits that have
accumulated to date.
F-13
<PAGE> 49
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996 and 1997 the Company recorded charges of $3.0 million and $0.3
million, respectively, for severance costs associated with former executive
management. In 1997, the Company also extended the stock option exercise period
for the former chief executive officer of the Company and recorded a charge of
$1.7 million.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 2,873 $ 2,508
Buildings................................................... 5,563 4,854
Furniture and fixtures...................................... 23,276 20,208
Equipment................................................... 120,731 113,704
Leasehold improvements...................................... 12,308 14,100
-------- --------
164,751 155,374
Less accumulated depreciation............................... 66,901 82,611
-------- --------
$ 97,850 $ 72,763
======== ========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $488,138 $486,907
Client lists................................................ 79,954 79,954
Software development costs.................................. 34,030 34,716
Other....................................................... 1,000 --
-------- --------
603,122 601,577
Less accumulated amortization............................... 63,971 85,638
-------- --------
$539,151 $515,939
======== ========
</TABLE>
Expenditures on capitalized software development costs were approximately
$35.6 million, $37.9 million and $5.6 million in 1995, 1996 and 1997,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $5.1 million, $6.6 million and $5.9 million in 1995, 1996 and
1997, respectively. The unamortized balance of software development costs at
December 31, 1996 and 1997 was $15.1 million and $12.9 million, respectively.
F-14
<PAGE> 50
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued costs of businesses acquired........................ $ 9,904 $ 2,474
Funds due clients........................................... 19,568 3,076
Deferred revenue............................................ 18,853 17,469
Accrued legal costs......................................... 15,173 7,546
Accrued restructuring and severance costs................... 18,080 10,284
Interest.................................................... 985 712
Other....................................................... 18,112 14,734
-------- --------
$100,675 $ 56,295
======== ========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under the credit facilities...................... $242,730 $185,000
Capital lease obligations, weighted average effective
interest rates of 8.4% and 8.1%........................... 27,810 14,800
Other....................................................... 1,187 1,141
-------- --------
271,727 200,941
Less current portion........................................ 55,975 11,490
-------- --------
$215,752 $189,451
======== ========
</TABLE>
At December 31, 1996, the Company had a $250 million revolving credit
agreement ("the Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line. The Company had
the option of making "LIBOR" based loans or "base rate" loans under the Senior
Credit Facility. LIBOR based loans bore interest at LIBOR for the then current
interest period plus amounts varying from 1.25% to 1.75% based on the Company's
financial performance. Base rate loans bore interest equal to prime. At December
31, 1996, the Company had LIBOR based loans outstanding at interest rates
ranging from 6.78% to 6.90%. The Senior Credit Facility contained, among other
things, financial covenants which required the Company to maintain certain
financial ratios. The Company was in compliance with all covenants as of
December 31, 1996.
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement, increased the
revolving line of credit from $250 million to $285 million and had a maturity
date of June 30, 1998. The Second Amended Facility also required mandatory loan
commitment reductions to $200 million and $150 million on July 31, 1997 and
January 31, 1998, respectively. On May 28, 1997, the Company divested HRI
through an initial public offering of 100% of its stock. This sale generated
approximately $126.4 million of net proceeds, of which $117.0 million was used
to reduce the Company's borrowings under the Second Amended Facility and it also
reduced the loan commitment under the Second Facility to $168 million, which met
the required reduction for July 31, 1997.
On December 23, 1997, Medaphis entered into a $210 million loan facility
(the "New Facility") with an affiliate of Donaldson, Lufkin & Jenrette. The
proceeds of the New Facility were used to repay the Second Amended Facility.
Borrowings under the New Facility initially bear interest at Prime plus 250
basis points with rates increasing 100 basis points at June 23, 1998 and 50
basis points each quarter thereafter through the
F-15
<PAGE> 51
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan's maturity on April 1, 1999. At December 31, 1997, the New Facility bore
interest at 11.0%. The New Facility contains certain quarterly financial
covenants related to the Company's performance, is secured by substantially all
of the assets of the Company and its subsidiaries, and is guaranteed by
substantially all of the Company's subsidiaries. The New Facility also contains,
among other things, (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 in
respect of the Company's voting common stock ("Common Stock"); (v) prepayments
or repurchase of other indebtedness and amendments to certain agreements
governing indebtedness; (vi) engaging in transactions with affiliates and
formation of subsidiaries; and (vii) changes of lines of business. The facility
is callable, in whole or in part, at the option of Medaphis, at any time. The
notes evidencing the New Facility were placed privately and have no registration
rights. Loan costs for the New Facility totaled approximately $8.1 million. The
Company was in compliance with all covenants as of December 31, 1997.
It is the Company's policy to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs for the years ended 1995, 1996, and 1997 were
$0.5 million, $0.3 million and $3.0 million, respectively.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the Company's Common Stock on each of
January 1, 1998 and April 1, 1998, provided that the Second Amended Facility has
not been repaid and terminated prior to such vesting dates. As a result of the
Company securing the New Facility, the warrants have been cancelled.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1996 and 1997, the net book value of equipment subject to
capital leases totaled $27.5 million and $17.9 million, respectively.
The carrying amounts of long-term debt and capital lease obligations
reflected in the consolidated balance sheets approximate fair value of such
instruments due to the variable rate nature of the long-term debt and the fixed
rates on the capital lease obligations which approximate market rates.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 11,490
1999........................................................ 188,412
2000........................................................ 63
2001........................................................ 69
2002........................................................ 76
Thereafter.................................................. 831
--------
$200,941
========
</TABLE>
9. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $22.4
million, $25.6 million, and $25.1 million for the years ended December 31, 1995,
1996 and 1997, respectively.
F-16
<PAGE> 52
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases
beginning in 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $25,103
1999........................................................ 21,697
2000........................................................ 15,261
2001........................................................ 8,413
2002........................................................ 7,003
Thereafter.................................................. 20,890
-------
$98,367
=======
</TABLE>
10. LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices") (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.
Although the precise scope of the California Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
billing and collection practices in the Designated Offices. No charges or claims
by the government have been made. Although the Company continues to believe that
the principal focus of the 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 will be resolved promptly, that additional subpoenas or
search warrants will not be received by Medaphis or MPSC or that the California
Investigation will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the
F-17
<PAGE> 53
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company may be required to return to clients its portion of fees previously
collected, and may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995, were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed to settle this action on a class-wide basis
for $4.75 million, subject to court approval (the "1995 Class Action
Settlement"). The 1995 Class Action Settlement included the related putative
class action lawsuit currently pending in the Superior Court of Cobb County,
Georgia, described more fully below. On October 29, 1997 the court certified a
class for settlement purposes, approved the settlement and entered final
judgment dismissing the action with prejudice. One of Medaphis' directors and
officers' liability insurance carriers has paid $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ended December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
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 government is investigating
allegations concerning the Company's wholly owned subsidiary, Gottlieb's
Financial Services, Inc. ("GFS") (the "GFS Investigation"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying with that request. Although the precise scope and subject matter of
the 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. There can
be no assurance that the GFS Investigation will be resolved promptly 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
F-18
<PAGE> 54
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). The
Consolidated Second Amended Complaint seeks compensatory and rescissory damages,
as well as fees, interest and other costs. On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
The parties 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 which were valued
at $22.3 million using an option pricing model. 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
recorded a $52.5 million charge in the quarter ended September 30, 1997 for this
settlement. Such amount has been reflected as a non-current liability as the
Company does not anticipate satisfying the obligation with current assets.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the
F-19
<PAGE> 55
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complaint. On February 11, 1997, the plaintiff filed an amended complaint adding
as defendants, additional current and former directors and officers of Medaphis.
On April 23, 1997, Medaphis and all other defendants filed a motion to dismiss
the amended complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatements of its fiscal 1995
financial statements, the Company may not be able to sustain a defense to strict
liability on certain claims under the 1933 Act, but the Company believes that it
has substantial defenses to the alleged damages relating to such 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100
F-20
<PAGE> 56
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million. Additionally, plaintiffs seek to void various non-compete covenants and
contract provisions between Medaphis and plaintiffs. Defendants have filed a
motion to dismiss the complaint. Discovery has been stayed pending resolution of
the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. The Company intends to cooperate fully with the Commission in its
investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
11. CAPITAL STOCK
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq National Market
rules), 20 million shares of one or more series of preferred stock (the
"Preferred Stock"), with such terms and for such consideration as the Board of
Directors may determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Company's Common Stock and non-voting common
stock (the "Non-voting Common Stock") with respect to dividends and liquidation
rights. Depending on the voting rights applicable to each series of Preferred
Stock, the issuance of shares of Preferred Stock could dilute the voting power
of the holders of the Common Stock.
F-21
<PAGE> 57
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 1, 1996, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation, thereby
increasing the number of authorized shares of the Company's voting common stock
from 100 million to 200 million shares.
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of common stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its Common Stock and 244,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
Prior to the BSG Merger, BSG had two classes of preferred stock
outstanding. Dividends were noncumulative and payable at 8% per year at the
discretion of BSG's Board of Directors. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of BSG, and
the preferred shareholders had the right to vote on an as converted basis. In
connection with the BSG Merger on May 6, 1996, all preferred shares were
converted into common shares of BSG which were subsequently exchanged for common
shares of the Company.
Prior to the Company's merger with HDS, HDS had three classes of preferred
stock outstanding. The preferred stock carried no guaranteed dividend features
and had no mandatory redemption features. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of HDS. In
connection with HDS's merger with the Company on June 29, 1996, all preferred
shares were converted into common shares of HDS which were subsequently
exchanged for common shares of the Company.
12. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies, a Non-Qualified Stock Option Plan for Non-executive Employees and
several stock option plans assumed as a result of the BSG Merger. Granted
options expire 10 to 11 years after the date of grant and generally vest over a
three-to-five-year period. In connection with the BSG Merger, the Company
offered to issue options under the Company's Non-Qualified Stock Option Plan for
Employees of Acquired Companies in exchange for options outstanding under the
BSG option plans.
The Company also has a Non-Employee Director Stock Option Plan ("Director
Plan") for non-employees who serve on the Company's Board of Directors. The plan
was approved by the Company's stockholders at the annual stockholders' meeting
in 1995. The Director Plan provides for an initial grant of 10,000 options at a
strike price corresponding to the date on which the non-employee director is
elected or appointed to the Board of Directors. Additionally, each non-employee
director receives an annual grant of 2,000 options at each subsequent annual
meeting in which the non-employee director is a member of the Board of
Directors. All options granted under the Director Plan vest over a five-year
period and expire 11 years from the date of grant.
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former executive officers to purchase up to an
aggregate of 550,746 shares of the Company's Common Stock at $2 per share. All
remaining options available for grant under this plan have been granted, expire
January 16, 2001 and are currently exercisable.
F-22
<PAGE> 58
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity related to all stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding as
of January 1.......... 6,446 $ 8.38 9,559 $12.27 11,214 $8.86
Granted................. 4,109 17.66 7,023 11.55 9,403 6.21
Exercised............... (557) 7.79 (1,536) 7.95 (1,303) 4.76
Canceled................ (439) 11.24 (3,832) 22.66 (10,135) 9.51
----- ------ -------
Options outstanding as
of December 31........ 9,559 $12.27 11,214 $ 8.86 9,179 $6.02
===== ====== =======
Options exercisable as
of December 31........ 2,613 $ 7.18 3,100 $ 7.53 2,903 $5.56
Weighted-average fair
value of options
granted during the
year.................. $8.78 $ 6.38 $ 3.05
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED- DECEMBER 31,
1997 CONTRACTUAL AVERAGE 1997 WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------ -------------- ----------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10 to $2.00.......... 569 4.69 $ 1.09 512 $ 1.15
$2.61 to $4.35.......... 822 7.18 3.88 541 3.94
$5.37 to $7.50.......... 6,380 9.30 5.55 1,300 5.47
$7.75 to $9.88.......... 920 7.81 9.07 415 9.11
$10.00 to $52.01........ 488 8.63 15.66 135 18.67
----- -----
0.10 to $52.01.......... 9,179 8.64 6.02 2,903 5.56
===== =====
</TABLE>
On October 25, 1996, the Company changed the exercise price to $9.875 on
approximately 2.0 million of its then outstanding stock options which had an
exercise price of $15 or greater. No other terms of these options were changed.
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which have an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of the Company were adjusted as part of such
option restrike, but no adjustments were made to any options held by directors
or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased attrition among its key employees and
that adjustment of the exercise price of the outstanding options would
significantly help to mitigate such risk.
F-23
<PAGE> 59
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's stockholders at
the annual stockholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value common stock to certain executive
officers who have since resigned from the Company. The restricted stock vests
ratably over a four-year period from the date of award. Seventy-five percent of
the awards made under the Restricted Plan have vested.
In 1996, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Reengineering, Consolidation and Business
Improvement Cash Incentive Plan ("Reengineering Incentive Plan") and the Company
granted 155,749 units pursuant to the provisions of the plan to certain key
employees of the Company. The Reengineering Incentive Plan provides for the
payment of cash bonuses to participants if certain performance goals related to
the Company's reengineering and consolidation project are achieved and certain
general business improvement milestones are satisfied. Awards under the plan are
based on units awarded to each participant. If the performance goals specified
in the Reengineering Incentive Plan are achieved and the awards vest, the value
of each unit will equal the average price of the Company's common stock during
the ten trading days immediately preceding such vesting date. At the point it
becomes probable that the performance goals and milestones will be met, the
Company will begin to accrue for the full amount of these bonuses. All awards
made under the Reengineering Incentive Plan, to the extent they remain unvested,
terminate on December 31, 1997. Due to the Company's decision to abandon the
reengineering program, certain of the performance goals and milestones were not
met prior to December 31, 1997, therefore all grants pursuant to the
Reengineering Incentive Plan have terminated.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted with an exercise price equal to the quoted market price of the
Company's common stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Expected life (years).................................. 5.66 4.88 4.33
Risk-free interest rate................................ 6.30% 6.25% 6.39%
Dividend rate.......................................... 0.00% 0.00% 0.00%
Expected volatility.................................... 26.68% 46.88% 54.09%
</TABLE>
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma basic loss per share would have increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net loss:
As reported.................................. $ (4,780) $(136,358) $(19,303)
Pro forma -- for SFAS No. 123................ $ (6,995) $(143,121) $(34,374)
Pro forma basic net loss per share:
As reported.................................. $ (0.09) $ (1.91) $ (0.26)
Pro forma -- for SFAS No. 123................ $ (0.13) $ (2.01) $ (0.47)
</TABLE>
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
F-24
<PAGE> 60
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 66 $ 635 $ --
State.............................................. 1,795 2,533 1,975
Deferred:
Federal............................................ (190) (67,993) (22,051)
State.............................................. (1,041) (9,221) (5,036)
Foreign............................................ -- 146 541
Valuation allowance.................................. 441 (189) 7,798
------ -------- --------
Income tax expense (benefit)......................... 1,071 (74,089) (16,773)
Income tax expense on extraordinary item............. -- -- 46,192
Cumulative effect of accounting change............... -- -- (1,629)
Pro forma tax adjustments............................ 2,636 (979) --
------ -------- --------
$3,707 $(75,068) $ 27,790
====== ======== ========
</TABLE>
In 1995 and 1996, the Company acquired Atwork, Consort, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior to
the mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired by BSG
prior to the BSG Merger had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma net income (loss) and pro forma net income (loss) per
common share are presented in the consolidated statements of operations as if
each of these entities had been a "C" corporation during the periods presented.
A reconciliation between the amount determined by applying the federal
statutory rate to income (loss) before income taxes and income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory
rate.............................................. $ (553) $(73,999) $(38,501)
State taxes, net of federal benefit................. 363 (7,347) (5,280)
Nondeductible goodwill amortization................. 1,298 2,666 3,241
Nondeductible deal costs of business combinations... 3,186 3,529 (38)
Nondeductible litigation settlement................. -- -- 13,097
Valuation allowance................................. 441 (189) 8,126
Foreign............................................. -- 146 541
Other............................................... (1,028) 126 2,041
------- -------- --------
$ 3,707 $(75,068) $(16,773)
======= ======== ========
</TABLE>
F-25
<PAGE> 61
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Net operating loss carryforwards.......................... $ 44,249 $ --
Accounts receivable, unbilled............................. (32,851) (37,537)
Acquisition accruals...................................... (10,259) (11,680)
Accrued expenses.......................................... 34,268 50,990
Other deferred tax liabilities............................ 770 (4,165)
-------- --------
$ 36,177 $ (2,392)
======== ========
Noncurrent:
Net operating loss carryforwards.......................... $ 78,175 $104,268
Valuation allowance....................................... (18,334) (26,460)
Depreciation and amortization............................. (12,226) (14,848)
Other deferred tax liabilities............................ (4,571) (2,103)
-------- --------
$ 43,044 $ 60,857
======== ========
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $258.6 million
which expire at various dates between 1998 and 2011. The Internal Revenue Code
of 1986, as amended, may impose substantial limitations on the use of NOLs upon
the occurrence of an "ownership change." The Company has experienced three
ownership changes which have established maximum annual limitations on taxable
income against which NOLs incurred prior to the ownership changes may be
utilized to offset. After determining the annual maximum limitation, the Company
has approximately $190.0 million in NOLs available as of December 31, 1997. In
future years, the currently unavailable NOLs (because of the limitation) may
become available to offset income prior to the date of their expiration. As of
December 31, 1997, the Company has recorded a net deferred tax asset of $77.8
million reflecting primarily the tax benefit of $104.3 million for NOLs offset
by a valuation allowance of $26.5 million. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that the deferred tax asset will be realized. The amount of
the deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward period are reduced.
The valuation allowance relates primarily to the uncertainty of the
realizability of net operating loss carryforwards assumed in certain business
combinations. The increase in the valuation allowance during 1997 is due to the
Company providing a full valuation allowance on these acquired NOLs.
14. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $3.3 million, $3.5 million, and $4.7 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
The Company maintains a noncontributory money purchase pension plan which
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan was $1.0 million in 1995, $1.2
million in 1996 and $0.9 million in 1997.
F-26
<PAGE> 62
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1996, the Company's stockholders approved the adoption of the
Company's Employee Stock Purchase Plan ("ESPP") in which eligible employees of
the Company can purchase shares of common stock at a price equal to the lessor
of 85% of the fair market value of the common stock on the first date of the
purchase period or the last date of the purchase period. The maximum number of
shares authorized by this plan is 300,000 of which 157,121 shares are remaining
after the first purchase on July 1, 1997. The ESPP requires shareholder approval
to increase the number of shares authorized under the plan.
15. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Liabilities assumed in acquisitions................. $28,321 $ 2,888 --
Additions to capital lease obligations.............. 17,646 15,705 --
Common stock issued in conjunction with
acquisitions..................................... 148,459 -- --
Conversion of subordinated debentures............... -- 63,375 --
Cash paid for:
Interest (net of amounts capitalized of $2,359 and
$4,092 for 1995 and 1996, respectively).......... 10,828 14,762 19,835
Income taxes........................................ 3,040 7,314 10,747
</TABLE>
16. SEGMENT REPORTING
Medaphis provides its services and products through its Healthcare Services
Group and Per-Se Technologies. The Healthcare Services Group provides business
management services to physicians and hospitals, including the collection of
clinical data, data input, medical coding, billing, cash collections and
accounts receivable management. The Healthcare Services Group consists of two
reportable segments based on the clients they serve: (i) Physician Services,
which is a leading provider of business management solutions and claims
processing to physicians in the United States; and (ii) Hospital Services, which
is a leading provider of business management services to hospitals in the United
States. 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. Per-Se is organized into two reportable segments based
on their different service offerings: (i) Product Operations, which provides
application software and system integration services; and (ii) Services
Operations, which provides full-service systems integration, information
technology consulting and tailored software development. HRI provides
subrogation and related recovery services primarily to healthcare payors. HRI
was sold on May 28, 1997.
Medaphis evaluates each segments' performance based on operating profit or
loss. The Company also accounts for intersegment sales as if the sales were to
third parties.
F-27
<PAGE> 63
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's reportable segments are strategic business units that offer
different products and services. Information concerning the operations in these
reportable segments is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Physician Services................................. $289,968 $ 294,406 $ 279,593
Hospital Services.................................. 69,689 89,715 98,067
HRI................................................ 22,667 31,419 14,720
Per-Se Product Operations.......................... 58,799 70,047 90,977
Per-Se Services Operations......................... 98,615 113,988 90,594
Corporate.......................................... (1,726) (2,861) (1,326)
-------- --------- ---------
$538,012 $ 596,714 $ 572,625
======== ========= =========
Operating profit (loss)(1):
Physician Services................................. $ 29,719 $ (13,054) $ (5,319)
Hospital Services.................................. 14,282 13,309 9,277
HRI................................................ 5,611 8,502 3,685
Per-Se Product Operations.......................... 13,302 14,050 20,915
Per-Se Services Operations......................... 5,249 (14,982) (4,902)
Corporate.......................................... (11,231) (27,350) (35,258)
-------- --------- ---------
$ 56,932 $ (19,525) $ (11,602)
-------- --------- ---------
Interest expense, net................................ 9,761 11,585 23,260
-------- --------- ---------
Restructuring and other charges (including litigation
settlement):
Physician Services................................. $ 38,800 $ 98,951 $ 7,394
Hospital Services.................................. -- 67 --
HRI................................................ 2,000 (778) --
Per-Se Product Operations.......................... 7,950 3,957 1,006
Per-Se Services Operations......................... -- 60,882 5,899
Corporate.......................................... -- 17,237 60,841
-------- --------- ---------
$ 48,750 $ 180,316 $ 75,140
-------- --------- ---------
Loss before income taxes............................. $ (1,579) $(211,426) $(110,002)
======== ========= =========
Depreciation and amortization:
Physician Services................................. $ 17,521 $ 32,428 $ 34,552
Hospital Services.................................. 3,499 4,884 6,032
HRI................................................ 695 883 401
Per-Se Product Operations.......................... 4,153 6,135 6,445
Per-Se Services Operations......................... 5,842 7,980 4,528
Corporate.......................................... 525 1,679 1,534
-------- --------- ---------
$ 32,235 $ 53,989 $ 53,492
======== ========= =========
</TABLE>
F-28
<PAGE> 64
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures:
Physician Services................................. $ 30,113 $ 23,607 $ 5,783
Hospital Services.................................. 3,391 6,377 8,068
HRI................................................ 1,278 1,448 108
Per-Se Product Operations.......................... 1,847 3,204 2,571
Per-Se Services Operations......................... 12,927 13,376 2,073
Corporate.......................................... 1,564 3,123 1,368
-------- --------- ---------
$ 51,120 $ 51,135 $ 19,971
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets:
Physician Services........................................ $602,984 $563,825
Hospital Services......................................... 97,626 106,479
HRI....................................................... 23,863 --
Per-Se Product Operations................................. 67,961 72,505
Per-Se Services Operations................................ 51,972 30,489
Corporate................................................. 92,448 100,729
-------- --------
$936,854 $874,027
======== ========
</TABLE>
- ---------------
(1) Excludes restructuring and other charges, litigation settlement and interest
expense.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenue........................................... $162,249 $160,768 $132,121 $ 141,576
Pro forma net income (loss)....................... 9,424 (9,931) (33,384) (102,467)
Pro forma basic net income (loss) per common
share........................................... $ 0.15 $ (0.14) $ (0.47) $ (1.43)
Weighted average shares outstanding............. 63,906 71,167 71,665 71,695
1997
Revenue........................................... $147,546 $150,967 $124,649 $ 149,463
Net loss before extraordinary item and cumulative
effect of accounting change..................... (3,064) (1,260) (81,209) (7,696)
Extraordinary item................................ -- 76,391 -- --
Cumulative effect of accounting change............ -- -- -- (2,465)
Net loss per common share before extraordinary
item and cumulative effect of accounting
change.......................................... (0.04) (0.02) (1.11) (0.11)
Extraordinary item per common share............... -- 1.06 -- --
Cumulative effect of accounting change per common
share........................................... -- -- -- (0.03)
Basic net loss per common share................... $ (0.04) $ 1.04 $ (1.11) $ (0.14)
Weighted average shares outstanding............. 72,235 72,443 72,942 73,171
</TABLE>
F-29
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Medaphis Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 27, 1998 appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 14(a) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Atlanta, Georgia
January 27, 1998
F-30
<PAGE> 66
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts.... $ 3,205 $ 6,718 $1,278(1) $ (4,976)(2) $ 6,225
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts.... $ 6,225 $24,156 $ 566(1) $ (9,622)(2) $21,325
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts.... $21,325 $13,949 $ -- $(14,614)(2) $20,660
</TABLE>
- ---------------
(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
F-31
<PAGE> 1
EXHIBIT 10.25
SECOND AMENDMENT
TO
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
THIS SECOND AMENDMENT (the "Second Amendment") is made effective as of
the 25th day of April, 1997, by MEDAPHIS CORPORATION, a Delaware corporation
(the "Company").
WITNESSETH
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees (the "Plan");
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "Board") and the Board have previously adopted a First Amendment
to the Plan, providing for an increase in the number of shares reserved for
issuance pursuant to the Plan to 1,025,000 shares from 925,000 shares; and
WHEREAS, the Compensation Committee and the Board have approved an
increase in the number of shares reserved for issuance pursuant to the Plan to
1,438,925 from 1,025,000 shares.
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
SECTION 3.
SHARES RESERVED UNDER THE PLAN
There shall be 1,438,925 shares of Stock reserved for
issuance under this Plan, and such shares of Stock
shall be reserved to the extent that the Company deems
appropriate from authorized but unissued shares of
Stock and from shares of Stock which have been
repurchased by the Company. Furthermore, any shares of
Stock subject to an Option that remain unissued after
the cancellation or expiration of such Option
thereafter shall again become available for use under
this Plan."
FURTHER, except as specifically amended by this Second Amendment, the
Plan shall remain in full force and effect as prior to this Second Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be
effective as of the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ David E. McDowell
-----------------------------------------
Name: David E. McDowell
---------------------------------------
Title: Chairman and Chief Executive Officer
--------------------------------------
ATTEST:
By: /s/ Peggy B. Sherman
-----------------------------
Name: Peggy B. Sherman
---------------------------
Title: Assistant Secretary
--------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.26
THIRD AMENDMENT
TO
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
THIS THIRD AMENDMENT (the "Third Amendment") is made effective as of the
21st day of May, 1997, by MEDAPHIS CORPORATION, a Delaware corporation (the
"Company").
W I T N E S S E T H
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees (the "Plan");
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "Board") and the Board have previously adopted a First Amendment
to the Plan, providing for an increase in the number of shares reserved for
issuance pursuant to the Plan to 1,025,000 shares from 925,000 shares;
WHEREAS, the Compensation Committee of the Board have previously adopted a
Second Amendment to the Plan, providing for an increase in the number of shares
reserved for issuance pursuant to the Plan to 1,438,925 from 1,025,000; and
WHEREAS, the Compensation Committee and the Board have approved an
increase in the number of shares reserved for issuance pursuant to the Plan to
1,510,200 from 1,438,925 shares.
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
SECTION 3.
SHARES RESERVED UNDER THE PLAN
There shall be 1,510,200 shares of Stock reserved for
issuance under this Plan, and such shares of Stock
shall be reserved to the extent that the Company deems
appropriate from authorized but unissued shares of
Stock and from shares of Stock which have been
repurchased by the Company. Furthermore, any shares of
Stock subject to an Option that remain unissued after
the cancellation or expiration of such Option
thereafter shall again become available for use under
this Plan."
FURTHER, except as specifically amended by this Third Amendment, the Plan
shall remain in full force and effect as prior to this Third Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this Third Amendment to be
effective as of the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ D. McDowell
----------------------------------------
Name: David E. McDowell
--------------------------------------
Title: Chairman and Chief Executive Officer
------------------------------------
ATTEST:
By: /s/ Peggy Sherman
-----------------------
Name: Peggy B. Sherman
---------------------
Title: Assistant Secretary
--------------------
-2-
<PAGE> 1
EXHIBIT 10.27
FOURTH AMENDMENT
TO
MEDAPHIS CORPORATION
NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
THIS FOURTH AMENDMENT (the "Fourth Amendment") is made effective as of the
26th day of June, 1997, by MEDAPHIS CORPORATION, a Delaware corporation (the
"Company").
WITNESSETH
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees (the "Plan");
WHEREAS, the Compensation Committee of the Board of Directors (the
"Board") and the Board previously adopted a First Amendment to the Plan,
providing for an increase in the number of shares reserved for issuance
pursuant to the Plan to 1,025,000 shares from 925,000 shares.
WHEREAS, the Compensation Committee and the Board have previously adopted
a Second Amendment to the Plan providing for an increase in the number of
shares reserved for issuance pursuant to the Plan to 1,438,925 from 1,025,000
shares;
WHEREAS, the Compensation Committee and the Board have previously adopted
a Third Amendment to the Plan providing for an increase in the number of shares
reserved for issuance pursuant to the Plan to 1,510,200 from 1,438,925 shares;
and
WHEREAS, the Compensation Committee and the Board have approved an
increase in the number of shares reserved for issuance pursuant to the Plan to
2,025,000 from 1,510,200 shares.
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
SECTION 3.
SHARES RESERVED UNDER THE PLAN
There shall be 2,025,000 shares of Stock reserved for
issuance under this Plan, and such shares of Stock
shall be reserved to the extent that the Company deems
appropriate from authorized but unissued shares of
Stock and from shares of Stock which have been
repurchased by the Company. Furthermore, any shares of
Stock subject to an Option that remain unissued after
the cancellation
<PAGE> 2
or expiration of such Option thereafter shall again
become available for use under this Plan."
FURTHER, except as specifically amended by this Fourth Amendment, the Plan
shall remain in full force and effect as prior to this Fourth Amendment.
IN WITNESS WHEREOF, the Company has caused this Fourth Amendment to be
effective as of the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ D. McDowell
------------------------------------------
Name: David E. McDowell
----------------------------------------
Title: Chairman and Chief Executive Officer
---------------------------------------
ATTEST:
By: /s/ Peggy Sherman
----------------------------
Name: Peggy B. Sherman
--------------------------
Title: Assistant Secretary
-------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.28
FIFTH AMENDMENT TO THE
MEDAPHIS CORPORATION NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EXECUTIVE EMPLOYEES
THIS FIFTH AMENDMENT (the "Fifth Amendment") is made effective as of
the 1st day of February, 1998, by MEDAPHIS CORPORATION, a Delaware corporation
(the "Company").
W I T N E S S E T H :
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees (the "Plan");
WHEREAS, the Compensation Committee (the "Compensation Committee") of
the Board of Directors of the Company (the "Board") and the Board have
previously adopted a First Amendment to the Plan, providing for an increase in
the number of shares reserved for issuance pursuant to the Plan to 1,025,000
from 925,000 shares;
WHEREAS, the Compensation Committee and the Board have previously
adopted a Second Amendment to the Plan providing for an increase in the number
of shares reserved for issuance pursuant to the Plan to 1,438,925 from
1,025,000 shares;
WHEREAS, the Compensation Committee and the Board have previously
adopted a Third Amendment to the Plan providing for an increase in the number
of shares reserved for issuance pursuant to the Plan to 1,510,200 from
1,438,925 shares;
WHEREAS, the Compensation Committee and the Board have previously
adopted a Fourth Amendment to the Plan providing for an increase in the number
of shares reserved for issuance pursuant to the Plan to 2,025,000 from
1,510,200 shares; and
WHEREAS, the Compensation Committee and the Board have approved an
increase in the number of shares reserved for issuance pursuant to the Plan to
5,000,000 from 2,025,000 shares.
NOW, THEREFORE, Section 3 of the Plan is hereby amended by deleting
Section 3 of the Plan in its entirety and replacing it with the following:
SECTION 3.
SHARES RESERVED UNDER THE PLAN
"There shall be 5,000,000 shares of Stock
reserved for issuance under this Plan, and such
shares of Stock shall be reserved to the extent
that the Company deems appropriate from authorized
but unissued shares of Stock and from shares of
Stock which have been repurchased by the Company.
Furthermore, any shares of Stock subject to an
Option that remain unissued after the cancellation
or expiration of such Option thereafter shall again
become available for use under this Plan."
<PAGE> 2
FURTHER, except as specifically amended by this Fifth Amendment, the
Plan shall remain in full force and effect as prior to this Fifth Amendment.
IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to be
effective as of the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
ATTEST:
By: /s/ Randolph L. M. Hutto
-------------------------------
Randolph L. M. Hutto
Secretary
2
<PAGE> 1
EXHIBIT 10.32
SECOND AMENDMENT TO THE
MEDAPHIS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
THIS SECOND AMENDMENT is made effective as of the 19th day of May,
1997, by MEDAPHIS CORPORATION, a corporation duly organized and existing under
the laws of the State of Delaware (hereinafter called the "Primary Sponsor");
W I T N E S S E T H
WHEREAS, the Primary Sponsor adopted the Medaphis Corporation Employee
Stock Purchase Plan (the "Plan") by indenture dated June 27, 1996;
WHEREAS, the First Amendment to the Plan, which provided for two entry
dates on January 1st and July 1st, respectively, became effective as of October
24, 1996; and
WHEREAS, the Primary Sponsor desires to amend the Plan to allow for the
investment of funds held in participant accounts in common stock of Medaphis
Corporation in fractional share denominations.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan as
follows, effective as of the date first written above:
1. Section 6(a) of the Plan shall be amended by replacing Section 6(a)
with the following:
"As of the beginning of each Purchase Period during each
Enrollment Period, a Participant is granted an option to
purchase that number of shares of Common Stock as does not
exceed in value the result of dividing up to ten percent (10%)
of the Participant's Compensation for that Purchase Period by
the lesser of (i) eighty-five percent (85%) of the fair market
value of the Common Stock on the first business day of the
Purchase Period, or (ii) eighty-five percent (85%) of the fair
market value of the Common Stock on the last business day of
the Purchase Period."
2. Section 6(b) of the Plan shall be amended by replacing the first
sentence thereof with the following:
"On the last business day of each Purchase Period during an
Enrollment Period, each Participant will be deemed to have
exercised his option to the extent of the funds then held in
the Participant's Contribution Account and such funds will be
applied to the purchase of shares (including fractional
shares) of Common Stock; provided, however, the number of
shares purchased for a Participant shall not be less than 1
share."
<PAGE> 2
IN WITNESS WHEREOF, the Primary Sponsor has executed this Second
Amendment to the Plan as of the day and the year first above written.
MEDAPHIS CORPORATION
By: /s/ Daniel Connors
-------------------------------
Title: SRVP Personnel & Admin.
----------------------------
ATTEST:
By: /s/ Peggy Sherman
---------------------------------------
Title: VP, Assoc. Gen. Counsel & Ass't Sec.
------------------------------------
[CORPORATE SEAL]
-2-
<PAGE> 1
EXHIBIT 10.33
THIRD AMENDMENT TO THE
MEDAPHIS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
THIS THIRD AMENDMENT is made effective as of the 31st day of December,
1997, by MEDAPHIS CORPORATION, a corporation duly organized and existing under
the laws of the State of Delaware (hereinafter called the "Company");
W I T N E S S E T H:
WHEREAS, the Company has previously adopted the Medaphis Corporation
Employee Stock Purchase Plan (the "Plan");
WHEREAS, the Compensation Committee (the "Compensation Committee") of
the Board of Directors of the Company (the "Board") has previously approved a
First Amendment to the Plan, which allows eligible employees to become
participants in the Plan beginning on January 1st and July 1st of each calendar
year;
WHEREAS, the Compensation Committee has previously approved a Second
Amendment to the Plan, which allows for the sale under the Plan of fractional
shares of the common stock (the "Common Stock") of the Company;
WHEREAS, the Compensation Committee has approved an increase in the
number of shares of Common Stock available for sale under the Plan to 1,000,000
shares from 300,000 shares; and
WHEREAS, the Compensation Committee has approved the other changes to
the Plan set forth herein, which permit only whole shares of Common Stock to be
sold under the Plan, and which effectively rescind the Second Amendment to the
Plan.
NOW, THEREFORE, the Company does hereby amend the Plan as follows:
1. Section 7(a) of the Plan is amended, effective as of January 1, 1998,
and subject to the approval of the stockholders of the Company as required by
Section 13 of the Plan, by replacing the second sentence of Section 7(a) with
the following:
"The maximum number of Shares made available for
sale under the Plan shall be one million
(1,000,000), subject to adjustment upon changes
in capitalization of the Company as provided in
Paragraph 11."
If and in the event that the foregoing amendment of Section 7(a) of
the Plan is not approved by the stockholders of the Company within twelve (12)
months following the effective date of the amendment, then the foregoing
amendment of Section 7(a) of the Plan will be null and void.
<PAGE> 2
2. Section 6(a) of the Plan is amended, effective as of December 31,
1997, by replacing Section 6(a) with the following:
"As of the beginning of each Purchase Period
during each Enrollment Period, a Participant
is granted an option to purchase that whole
number of shares of Common Stock as does not
exceed in value the result of dividing up to
ten percent (10%) of the Participant's
Compensation for that Purchase Period by the
lesser of (i) eighty-five percent (85%) of the
fair market value of the Common Stock on the
first business day of the Purchase Period, or
(ii) eighty-five percent (85%) of the fair market
value of the Common Stock on the last business
day of the Purchase Period."
3. Section 6(b) of the Plan is amended, effective as of December 31,
1997, by replacing the first sentence thereof with the following:
"On the last business day of each Purchase
Period during an Enrollment Period, each
Participant will be deemed to have exercised
his option to the extent of the funds then
held in the Participant's Contribution Account
and such funds will be applied to the purchase
of whole shares of Common Stock; provided,
however, the number of shares purchased for
a Participant shall not be less than 1 share."
* * * * *
Except as specifically amended hereby, the Plan shall remain in full
force and effect as prior to this Amendment.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the Company has executed this Third Amendment to
the Plan as of the day and the year first above written.
MEDAPHIS CORPORATION
By: /s/ David E. McDowell
-------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
ATTEST:
By: /s/ Randolph L. M. Hutto
-----------------------------
Randolph L. M. Hutto
Secretary
<PAGE> 1
EXHIBIT 10.39
FOURTH AMENDMENT TO THE
MEDAPHIS EMPLOYEES' RETIREMENT SAVINGS PLAN
THIS AMENDMENT, made as of the 31st day of December, 1997, by MEDAPHIS
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware (hereinafter called the "Primary Sponsor").
W I T N E S S E T H:
WHEREAS, the Primary Sponsor adopted the Medaphis Employees'
Retirement Savings Plan (the "Plan") by indenture dated June 30, 1991;
WHEREAS, the Plan was last amended and restated by indenture effective
July 1, 1995;
WHEREAS, the Primary Sponsor desires to amend the Plan to adjust the
schedule by which participants in the Plan vest in matching contributions made
to the Plan on participants' behalf;
WHEREAS, on October 23, 1997, the Plan was amended to change the
participants' vesting schedules prior to January 1, 1998;
WHEREAS, the October 23, 1997 amendment to the Plan contained a
provision that automatically readjusted participants' vesting schedules
effective January 1, 1998;
WHEREAS, the Primary Sponsor desires to keep in place effective
January 1, 1998 the vesting schedules in effect immediately prior to January 1,
1998, without the automatic readjustment provided for in the October 23, 1997
amendment to the Plan; and
WHEREAS, the Primary Sponsor desires to amend the Plan to allow a
participant's investment elections to be changed at any time at the
participant's request, and to adjust the provisions for distributions to a
participant when the participant attains age 70 1/2.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan as
follows:
1. Section 10.3 of the Plan is amended, effective January 1, 1998, by
replacing the vesting schedule provided for in the last sentence thereof with
the following:
<TABLE>
<CAPTION>
"Full Years of Percentage
Service Vested
------- -----
<S> <C>
1 33 1/3%
2 66 2/3%
3 100%"
</TABLE>
<PAGE> 2
2. Section 5.1(a) of the Plan is amended, effective January 1, 1998, by
replacing such section with the following:
"(a) All investment directions shall be in multiples of 1% of
contributions being made at any time. Members may change the
investment of contributions to their accounts in accordance
with the procedures established by the Plan Administrator.
New investment directions shall be effective as of the date
that such directions are processed by the Plan Administrator in
accordance with the procedures established for such purpose."
3. Section 5.2 of the Plan is amended, effective January 1, 1998, by
replacing such section with the following:
"A Member may elect according to the procedures established
by the Plan Administrator, to transfer, in multiples of 1%
his Account between Individual Funds. An election under this
Section 5.2 shall be effective as of the date that such
directions are processed by the Plan Administrator in
accordance with the procedures established for such purpose."
4. Section 9.4(c) of the Plan is amended, effective January 1, 1997, by
replacing such section with the following:
"For purposes of this Section, the term "required beginning
date" means April 1 of the calendar year following the later
of the calendar year in which the Member attains age 70 1/2
or the calendar year in which the Member retires or otherwise
terminates employment; except with respect to a Member who
is a five percent (5%) owner (as described in Code Section
416(i)(1)(B)(i)) for the Plan Year ending in the calendar year
in which such Member attains age 70 1/2, in which case,
"required beginning date" means April 1 of the calendar year
following the calendar year in which the Member attains age
70 1/2. With respect to a Member (other than a five percent
(5%) owner) who attains age 70 1/2 prior to January 1, 1999,
such Member may elect in the form and manner prescribed by
the Plan Administrator to receive distributions under this
Section, in the manner described in this Section, commencing
no later than April 1 of the calendar year in which the
Member attains age 70 1/2."
* * * * *
Except as specifically amended hereby, the Plan shall remain in full force
and effect as prior to this Amendment.
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<PAGE> 3
IN WITNESS WHEREOF, the Primary Sponsor has executed this Amendment as of
the day and the year first above written.
MEDAPHIS CORPORATION
By: /s/ David E. McDowell
------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
ATTEST:
By: /s/ Randolph L. M. Hutto
----------------------------
Randolph L. M. Hutto
Secretary
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<PAGE> 1
EXHIBIT 10.68
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 9th day of April, 1997, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and Harvey Herscovitch, a resident of the State of
New Jersey (the "Employee").
Statement of Background Information
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services: (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The company also provides subrogation and related recovery services for
healthcare payors, including health maintenance organizations, indemnity
insurers, Blue Cross and Blue Shield organizations, third-party administrators,
self-funded employee health welfare benefit plans, and provider hospital
organizations (the "Subrogation Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and other
end users (collectively "Providers"), (i) strategic, operational and financial
information systems and services and decision support tools for healthcare
providers, (ii) software systems which provide claims and reimbursement services
and electronic claims processing, and (iii) software applications which assist
Providers with automated scheduling and resource management (the items discussed
in Sections (a)(i), (a)(ii) and (a)(iii) of this paragraph are referred to as
"Systems"), which Systems include, but are not limited to, nurse scheduling and
management information systems, operating room patient scheduling and surgery
information systems, enterprise wide patient scheduling and resource management
systems, enterprise-wide employee scheduling and management information systems
and related software interfaces to other information systems; and (b) provides
to Providers installation and support services related to the Company's Systems
(the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, design, documentation, and related
materials, and the development, design, deployment, and operation of local and
wide area computer networks, all in conjunction with the sale, design,
deployment, operation and maintenance of custom computer processing systems for
improvement of operational efficiency or functionality through the use of image
storage and processing, work flow technology, optical character recognition or
other related technologies (the "System Integration Business") (the Processing
Business, the Subrogation Business, the Systems
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Business, the Systems Integration Business and any other distinct business
segment in which the Company engages during Employee's employment are
collectively referred to as the "Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 7 and 8 of this Agreement,
"employment" shall mean any period of time during which the Company is
paying the Employee salary, wages, or any other amounts, whether or not
the Employee is currently performing services for the Company at the
time of such payment.
2. Duties of Employee. Employee's title will be Senior Vice President,
Strategy and Organization. Employee agrees to perform and discharge
such other duties as may be assigned to Employee from time to time by
the Company to the reasonable satisfaction of the Company. Employee
also agrees to comply with all of the Company's policies, standards and
regulations and to follow the instructions and directives of Employee's
superiors within the Company, as promulgated by the officers of the
Company. Employee will devote Employee's full professional and
business-related time, skills and best efforts to such duties and will
not, during the term of this Agreement, be engaged (whether or not
during normal business hours) in any other business or professional
activity, whether or not such activity is pursued for gain, profit or
other pecuniary advantage, without the prior written consent of the
Chief Executive Officer of the Company, which consent will not be
unreasonably withheld. This Section will not be construed to prevent
Employee from (a) investing personal assets in businesses which do not
compete with the Company in such form or manner that will not require
any services on the part of Employee in the operation or the affairs of
the companies in which such investments are made and in which
Employee's participation is solely that of an investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market,
provided that Employee at no time owns, directly or indirectly, in
excess of one percent (1%) of the outstanding stock of any class of any
such corporation engaged in a business competitive with that of the
Company; or (c) participating in conferences, preparing and publishing
papers or books or teaching, so long as the Chief Executive Officer of
the Company approves such participation, preparation and publication or
teaching prior to Employee's engaging therein.
3. Term. The term of this Agreement will be for a two (2) year period of
time, commencing as of February 10, 1997 and expiring on February 10,
1999, subject to earlier termination as provided for in Section 4 of
this Agreement.
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<PAGE> 3
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate this Agreement and all of its obligations hereunder
immediately if any of the following events occur:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Employee's receipt from the
Company of written notice of such breach (notwithstanding the
foregoing, no cure period shall be applicable to breaches by
Employee of Sections 6, 7 or 8 of this Agreement);
(ii) Employee commits any other act materially detrimental to
the business or reputation of the Company;
(iii) Employee engages in dishonest or illegal activities or
commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Employee's duties under this Agreement. Without limiting the
generality of the foregoing, Employee's inability adequately
to perform services under this Agreement for a period of sixty
(60) consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless such
inability adequately to perform services under this Agreement
is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which case such
sixty (60)-day period shall be extended to a one hundred and
twenty (120)-day period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate Employee's employment pursuant to this Agreement
without cause upon at least thirty (30) days' prior written
notice to Employee. In the event Employee's employment with
the Company is terminated by the Company without cause, the
Company shall remain subject to its obligations hereunder as
if Employee remained employed hereunder for the balance of the
term hereof, as provided in Section 3 above.
(c) Change in Control. In the event there is a change in control
of Medaphis Corporation, Employee will be provided thirty (30)
days in which to decide whether Employee desires to remain
employed by the Company under the terms of this Agreement. In
the event Employee elects to continue his employment with the
Company following such a change in control, this Agreement
will remain in effect according to all of its terms. In the
event Employee decides to resign from the
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<PAGE> 4
Company following such a change in control, Employee will be
entitled to receive a severance payment equal to the greater
of (1) one year of salary continuation at Employee's then
current base salary, or (2) those payments due and owing to
Employee under the remaining term of this Agreement. For
purposes of this Agreement, a "change in control" of Medaphis
Corporation shall be deemed to occur upon any of the
following:
(i) a consolidation or merger of Medaphis Corporation with
or into any other corporation, or any other entity or person,
other than a wholly-owned subsidiary of Medaphis Corporation,
excluding any transaction in which stockholders of Medaphis
Corporation prior to the transaction will maintain voting
control or own at least 50% of the resulting entity after the
transaction;
(ii) any corporate reorganization, including an exchange
offer, in which Medaphis Corporation shall not be the
continuing or surviving entity resulting from such
reorganization, excluding any transaction in which
stockholders of the Medaphis Corporation prior to the
transaction will maintain voting control or own at least 50%
of the resulting entity after the transaction; or
(iii) the sale of a substantial portion of Medaphis
Corporation's assets, which shall be deemed to occur on the
date that any one person, or more than one person acting as a
group, acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such
person or persons) assets from Medaphis Corporation that (a)
have a total fair market value equal to more than 50% of the
total fair market value of all the assets of Medaphis
Corporation, immediately prior to such acquisition or
acquisitions, or (b) represents a majority of the common stock
of any (1) subsidiary of Medaphis Corporation, the revenues of
which, in the most recent fiscal year, represent more than 75%
of the consolidated gross revenues of Medaphis Corporation and
its subsidiaries. Notwithstanding the foregoing, a transfer of
assets or common stock in a subsidiary by Medaphis Corporation
will not be treated as a sale of a substantial portion of
Medaphis Corporation's assets if the assets are transferred to
an entity, 50% or more of the total value or voting power of
which is owned, directly or indirectly, by Medaphis
Corporation.
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Employee under this Agreement, the Company will
pay Employee a base salary of One Hundred Forty Thousand Dollars
($140,000.00) per annum in equal bi-weekly installments. Such annual
salary will be subject to adjustments by any increases given in the
normal course of business.
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<PAGE> 5
b) Incentive Compensation. Employee shall be eligible to participate in
the 1997 Medaphis Corporation and its Subsidiary Corporations Incentive
Compensation Plan at a participation category of 40% of Employee's base
salary, payable at the discretion of the Board of Directors of the
Company.
c) Stock Options. As soon as reasonably practicable after the signing
of this Agreement, and subject to the approval of the Compensation
Committee of the Board of Directors of Medaphis Corporation, the
Company will cause Medaphis to issue to Employee, effective as of the
date approved by the Compensation Committee of the Board of Directors
of Medaphis Corporation, options to purchase Forty Thousand (40,000)
shares of Medaphis Common Stock pursuant to the terms and conditions of
the Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan ("Stock Option Plan"), as amended. Such options will vest
at the rate of thirty-three and one-third percent (33.33%) per year for
a three-year period beginning on the starting date of this Agreement,
subject to the terms and conditions of the Stock Option Plan. Such
options shall vest in full immediately upon the occurrence of certain
change in control events outlined in the Stock Option Plan. Employee
shall be considered for additional grants of options to purchase shares
of Medaphis common stock in a manner which is consistent with other
senior officers of the Company. However, nothing in this Agreement
shall give rise to a contractual right to Employee to receive grants of
additional stock options of Medaphis. Further, Medaphis has no
obligation to Employee to create parity with any other Medaphis
executives with respect to any options granted to such other
executives.
d) Other Benefits. Employee will be entitled to such fringe benefits as
may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and
disability insurance, vacations and any other fringe benefits now or
hereafter provided by the Company to its employees, if and when
Employee meets the eligibility requirements for any such benefit. The
Company reserves the right to change or discontinue any employee
benefit plans or programs now being offered to its employees; provided,
however, that all benefits provided for employees of the same position
and status as Employee will be provided to Employee on an equal basis.
e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
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<PAGE> 6
g) Travel Expenses. Employee will be entitled to be reimbursed for
those expenses associated with Employee's returning to New Jersey from
Atlanta every other weekend during the first year of this Agreement.
h) Housing Allowance. Provided that Employee provides the Company with
adequate documentation, Employee will receive a housing allowance not
to exceed $2,600.00 per month during the duration of this Agreement.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and
all physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses. Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information,
Employee agrees that, except with respect to those duties assigned to
him by the Company, Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish
or otherwise disseminate any Proprietary Information, in whole or in
part, and will take no action causing, or fail to take any action
necessary to prevent causing, any Proprietary Information to lose its
character as Proprietary Information, nor will Employee make use of any
such information for Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, including, but not limited to, any technical or
nontechnical data, formula, pattern, compilation, program, device,
method, technique, drawing, process, financial data, financial plan,
product plan, list of actual or potential customers or suppliers, or
other information similar to any of the foregoing, which derives
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can derive economic value from its disclosure or use. For purposes
of this Agreement, the term "Trade Secrets" does not include
information that Employee can show by competent proof (i) was known to
Employee and reduced to writing prior to disclosure by the Company (but
only if Employee promptly notifies the Company of Employee's prior
knowledge); (ii) was generally known to the public at the time the
Company disclosed the information to Employee; (iii) became generally
known to the public after disclosure by the Company through no act or
omission of Employee; or (iv) was disclosed to Employee by a third
party having a bona fide right both to possess the information and to
disclose the information to Employee. The term "Confidential
Information" means any data or information of the Company, other than
trade secrets, which is valuable to the Company and not generally known
to competitors of the Company. The provisions of this Section 6 will
apply to Trade Secrets for so long as such information remains a trade
secret and to Confidential
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<PAGE> 7
Information during Employee's employment with the Company and for a
period of two (2) years following any termination of Employee's
employment with the Company for whatever reason.
7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of
a corporation listed on a national securities exchange or whose stock
is regularly traded in the over-the-counter market, provided that
Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation) any business which provides Business products or services.
For purposes of this Agreement, the term "Geographical Area" means the
territory located within a seventy-five (75) mile radius of each
facility for which Employee has management responsibility during
Employee's employment with the Company.
B. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or
in the service of or on behalf of any other individual or entity,
divert, solicit or attempt to solicit any individual or entity (i) who
is a client of the Company at any time during the six (6)-month period
prior to Employee's termination of employment with the Company
("Client"), or was actively sought by the Company as a prospective
client, and (ii) with whom Employee had material contact while employed
by the Company to provide Business services or products to such Clients
or prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below may,
if it chooses, sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions
of such Section to the remaining portion of the Geographical Area, the
client base or the prospective relationship or prospect list, or the
remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority may, if it chooses, replace each such severed
provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is
the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically
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<PAGE> 8
enforceable, the Company shall nevertheless be entitled to bring an
action to seek to recover monetary damages as a result of the breach of
such provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on behalf
of any other individual or entity, divert, solicit or hire away, or
attempt to divert, solicit or hire away, to or for any individual or
entity which is engaged in providing Business services or products, any
person employed by the Company for whom Employee had supervisory
responsibility or with whom Employee had material contact while
employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such
employee is employed pursuant to written agreement and whether or not
such employee is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, and any
other properties, files or documents obtained as a result of Employee's
employment with the Company, immediately upon the termination of
Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with the
Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works
of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the
Company's Business (the "Inventions"), whether or not subject to
copyright or patent protection, and which may or may not be considered
Proprietary Information. Employee acknowledges that all such Inventions
will be "works made for hire" under United States copyright law and
will remain the sole and exclusive property of the Company. Employee
also hereby assigns and agrees to assign to the Company, in perpetuity,
all right, title and interest Employee may have in and to such
Inventions, including without limitation, all
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<PAGE> 9
copyrights, and the right to apply for any form of patent, utility
model, industrial design or similar proprietary right recognized by any
state, country or jurisdiction. Employee further agrees, at the
Company's request and expense, to do all things and sign all documents
or instruments necessary, in the opinion of the Company, to eliminate
any ambiguity as to the ownership of, and rights of the Company to,
such Inventions, including filing copyright and patent registrations
and defending and enforcing in litigation or otherwise all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to
any business or activity in which the Company is or may reasonably be
expected to become engaged, except that Employee is so obligated if the
same relates to or is based on Proprietary Information to which
Employee will have had access during and by virtue of Employee's
employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which
may be wholly conceived by Employee after Employee leaves the employ of
the Company, except that Employee is so obligated if such Invention
involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any
Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was
conceived and reduced to practice by Employee prior to Employee's
employment with the Company.
12. Remedies. Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that
the remedy at law for any such violation or threatened violation
thereof would be inadequate, and that the Company will be entitled, in
addition to any other remedy, to temporary and permanent injunctive or
other equitable relief without the necessity of proving actual damages
or posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
2700 Cumberland Parkway Harvey Herscovitch
Suite 300 2700 Cumberland Parkway
Atlanta, GA 30339 Suite 300
Attn: General Counsel Atlanta, GA 30339
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement
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<PAGE> 10
will be construed as if such invalid or illegal or unenforceable
provision had never been contained herein. It is the intent of the
parties that this Agreement be enforced to the maximum extent permitted
by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
17. Assignment. This Agreement is one for personal services and will not be
assigned by Employee. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company has
its principal place of business and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment
in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either
of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified
exemplified copy of which shall be conclusive evidence of the fact and
amount of such judgment.
19. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ Daniel Connors /s/ Harvey Herscovitch
-------------------------------- -----------------------------------
Harvey Herscovitch
Title: SVP Personnel & Admin.
-----------------------------
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EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
/s/ H H
-----------------
Employee Initials
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<PAGE> 1
EXHIBIT 10.69
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 25th day of January, 1998, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and ALLEN RITCHIE, a resident of the State of
Georgia (the "Executive").
Statement of Background Information
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services; (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and
other end users (collectively "Providers"), (i) strategic, operational and
financial information systems and services and decision support tools for
healthcare providers, (ii) software systems which provide claims and
reimbursement services and electronic claims processing, and (iii) software
applications which assist Providers with automated scheduling and resource
management (the items discussed in Sections (a)(i), (a)(ii) and (a)(iii) of
this paragraph are referred to as "Systems"), which Systems include, but are
not limited to, nurse scheduling and management information systems, operating
room patient scheduling and surgery information systems, enterprise wide
patient scheduling and resource management systems, enterprise-wide employee
scheduling and management information systems and related software interfaces
to other information systems; and (b) provides to Providers installation and
support services related to the Company's Systems (the "Systems Business").
The Company also renders professional services with respect to the
development of computer software, algorithms, design, documentation, and
related materials, and the development, design, deployment, and operation of
local and wide area computer networks, all in conjunction with the sale,
design, deployment, operation and maintenance of custom computer processing
systems for improvement of operational efficiency or functionality through the
use of image storage and processing, work flow technology, optical character
recognition or other related technologies (the "System Integration Business")
(the Processing Business, the Systems Business, the Systems Integration
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<PAGE> 2
Business and any other distinct business segment in which the Company engages
during Executive's employment are collectively referred to herein as the
"Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Executive and Executive hereby
accepts such employment upon the terms and conditions set forth in
this Agreement.
2. Duties of Executive. Executive's title will be Executive Vice
President and Chief Financial Officer of Medaphis Corporation and
Executive will report directly to the Chief Executive Officer of the
Company. Executive agrees to perform and discharge such other duties
as may be assigned to Executive from time to time by the Company to
the reasonable satisfaction of the Company, and such duties will be
consistent with those duties regularly and customarily assigned by the
Company to the position of Executive Vice President and Chief
Financial Officer of Medaphis Corporation. Executive also agrees to
comply with all of the Company's policies, standards and regulations
as promulgated by the officers of the Company, and to follow the
instructions and directives of the Board of Directors, the Chairman
and the Chief Executive Officer of the Company. Executive will devote
Executive's full professional and business-related time, skills and
best efforts to such duties and will not, during the term of this
Agreement, be engaged (whether or not during normal business hours) in
any other business or professional activity, whether or not such
activity is pursued for gain, profit or other pecuniary advantage,
without the prior written consent of the Chairman of the Company,
which consent will not be unreasonably withheld. This Section will not
be construed to prevent Executive from (a) investing personal assets
in businesses which do not compete with the Company in such form or
manner that will not require any services on the part of Executive in
the operation or the affairs of the companies in which such
investments are made and in which Executive's participation is solely
that of an investor; (b) purchasing securities in any corporation
whose securities are listed on a national securities exchange or
regularly traded in the over-the-counter market, provided that
Executive at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation engaged in a business competitive with that of the
Company; or (c) participating in conferences, preparing and publishing
papers or books or teaching, so long as the Chief Executive Officer of
the
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Company approves such participation, preparation and publication or
teaching prior to Executive's engaging therein.
3. Term. The term of this Agreement will be for a three (3) year period
of time, commencing as of January 25th, 1998 and expiring on
January 25th, 2001, subject to earlier termination as provided for in
Section 4 of this Agreement. This Agreement shall be automatically
renewed for successive one (1) year periods at the end of the initial
three-year term, unless either party gives notice to the other of its
intent to terminate this Agreement not less than sixty (60) days prior
to commencement of any such one-year renewal period. In the event such
notice to terminate is properly and timely given, this Agreement shall
terminate at the end of the initial term or the one-year renewal
period in which such notice is given.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate this
Agreement and all of its obligations hereunder immediately if any of
the following events occur:
(i) Executive materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten (10) days after Executive's receipt from
the Company of written notice of such breach (notwithstanding
the foregoing, no cure period shall be applicable to breaches
by Executive of Sections 6, 7 or 8 of this Agreement);
(ii) Executive commits any other act materially detrimental
to the business or reputation of the Company;
(iii) Executive commits or is convicted of any crime
involving fraud, deceit or moral turpitude; or
(iv) Executive dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Executive's duties under this Agreement. Without limiting the
generality of the foregoing, Executive's inability adequately
to perform services under this Agreement for a period of
sixty (60) consecutive days will be conclusive evidence of
such mental or physical incapacity or disability, unless such
inability adequately to perform services under this Agreement
is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which
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case such sixty (60)-day period shall be extended to a one
hundred and twenty (120)-day period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
Executive's employment pursuant to this Agreement without cause upon
at least thirty (30) days' prior written notice to Executive. In the
event Executive's employment with the Company is terminated by the
Company without cause, Executive shall be entitled to elect a
severance consideration equal to (i) two (2) years of salary and
benefit continuation (this severance consideration does not include
the right to receive any incentive bonus payments) at Executive's then
current salary and benefit levels, or (ii) Executive's then-current
monthly salary (this severance consideration does not include the
right to receive any incentive bonus payments) multiplied by the
number of months remaining in the initial term of this Agreement.
(c) Termination by Executive With Good Reason. Except as set forth in
Paragraph (d) below, in the event Executive elects to voluntarily
terminate his employment following the occurrence of events
constituting "Good Reason" for his voluntary termination of
employment, Executive will be entitled to elect a severance
consideration equal to (i) two (2) years of salary and benefit
continuation (this severance consideration does not include the right
to receive any incentive bonus payments) at Executive's then current
salary and benefit levels, or (ii) Executive's then-current monthly
salary (this severance consideration does not include the right to
receive any incentive bonus payments) multiplied by the number of
months remaining in the initial term of this Agreement. For purposes
of this Agreement, "Good Reason" is defined as (w) a material
reduction (greater than 10%) in Executive's annual base salary; (x) a
change in Executive's work location to a work location more than 50
miles from Executive's existing work location, except for required
travel on the Company's business to an extent consistent with
Executive's then present business travel obligations; (y) an
assignment to any duties inconsistent in any material adverse respect
with Executive's current position, duties or responsibilities, other
than an insubstantial and inadvertent act that is remedied by the
Company promptly after receipt of notice thereof given by Executive;
or (z) the failure by the Company to continue any material benefit or
compensation plan in which Executive is participating unless Executive
is provided with comparable benefits.
(d) Change in Control. In the event there is a Change in Control (as
defined herein) of Medaphis Corporation, Executive will be entitled to
receive a severance payment equal to two (2) years of salary and
benefits (including any bonus
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payment to which Executive would be entitled which will be calculated
by doubling the incentive bonus payment received by Executive during
the year immediately prior to the Change in Control), if (A)
Executive's employment is terminated by the Company without cause
within one (1) year following any such Change in Control; (B) if
Executive's employment is terminated by the Company at the request of
or pursuant to an agreement with a third party who has taken steps
reasonably calculated to effect a Change in Control; (C) if
Executive's employment is terminated by the Company in connection with
or in anticipation of a Change in Control; (D) if Executive
voluntarily terminates his employment for Good Reason (as defined
above in Paragraph (c)) within one (1) year following any such Change
in Control; or (E) if Executive voluntarily terminates his employment
for Good Reason within one (1) year following any action taken by the
Company at the request of or pursuant to an agreement with a third
party who has taken steps reasonably calculated to effect a Change in
Control or any action taken by the Company in connection with or in
anticipation of a Change in Control, in each case which action
constitutes Good Reason. For purposes of this Agreement, a "Change in
Control" of Medaphis Corporation shall be deemed to occur upon any of
the following:
(i) a consolidation or merger of Medaphis Corporation with
or into any other corporation, or any other entity or person,
other than a wholly-owned subsidiary of Medaphis Corporation,
excluding any transaction in which the shares of the
Company's common stock outstanding immediately prior to any
such consolidation or merger represents immediately
thereafter more than 50% of the combined voting power of the
resulting entity after the transaction;
(ii) any corporate reorganization, including an exchange
offer, in which Medaphis Corporation shall not be the
continuing or surviving entity resulting from such
reorganization, excluding any transaction in which the shares
of the Company's common stock outstanding immediately prior
to any such reorganization represents immediately thereafter
more than 50% of the combined voting power of the resulting
entity after the transaction; or
(iii) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board. For purposes of this Section 4
(d), the term "Board" shall mean the Board of Directors of
the Company and the term "Incumbent Board" shall mean the
members of the Board as of the date hereof and any person
becoming a
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member of the Board hereafter whose election or nomination is
by a vote of at least a majority of the directors then
comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election
contest relating to the election of the directors of the
Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Securities Exchange Act of 1934, as
amended).
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all
services rendered by Executive under this Agreement, the Company will
pay Executive a base salary of Three Hundred Thousand Dollars
($300,000.00) per annum to be paid in accordance with the Company's
regular payroll practices, provided, however, that such payments shall
be made no less frequently than in equal monthly installments. Such
annual salary will be subject to adjustments in the normal course of
business.
b) Incentive Compensation. Executive shall be eligible to participate
in the 1998 Medaphis Corporation and its Subsidiary Corporations
Incentive Compensation Plan (and any comparable future incentive
compensation plans during the term of this Agreement) at a
participation category of up to 80% of Executive's base salary,
payable at the discretion of the Board of Directors of the Company.
c) Stock Options. As soon as reasonably practicable after the signing
of this Agreement, and subject to the approval of the Compensation
Committee of the Board of Directors of Medaphis Corporation, the
Company will cause Medaphis to issue to Executive, effective as of the
date approved by the Compensation Committee of the Board of Directors
of Medaphis Corporation, options to purchase Three Hundred Thousand
(300,000) shares of Medaphis Common Stock pursuant to the terms and
conditions of the Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan ("Stock Option Plan"), as amended.
Such options will vest at the rate of thirty-three and one-third
percent (33.33%) per year for a three-year period beginning on the
starting date of this Agreement, subject to the terms and conditions
of the Stock Option Plan. Such options shall vest in full immediately
upon the occurrence of certain change in control events outlined in
the Stock Option Plan. Executive shall be considered for additional
grants of options to purchase shares of Medaphis common stock in a
manner which is consistent with other senior officers of the Company.
Except as expressly set forth herein, nothing in this Agreement shall
give rise to a contractual right to Executive to receive grants of
additional stock options of Medaphis. Further, Medaphis has no
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obligation to Executive to create parity with any other Medaphis
executives with respect to any options granted to such other
executives.
d) Other Benefits. Executive will be entitled to such fringe benefits
as may be provided from time-to-time by the Company to its Executives,
including, but not limited to, loan arrangements to facilitate the
purchase of common stock of the Company, financial counseling
services, group health insurance, life and disability insurance,
vacations and any other fringe benefits, is each case as now or
hereafter provided by the Company to its Executives, if and when
Executive meets the eligibility requirements for any such benefit. The
Company reserves the right to change or discontinue any employee
benefit plans or programs now being offered to its employees;
provided, however, that all benefits provided for Executives of the
same position and status as Executive will be provided to Executive on
an equal basis.
e) Business Expenses. Executive will be reimbursed for all reasonable
expenses incurred in the discharge of Executive's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Executive under this Agreement, state and federal income
taxes, FICA and other amounts normally withheld from compensation due
employees.
6. Non-Disclosure of Proprietary Information. Executive recognizes and
acknowledges that the Trade Secrets (as defined below) and
Confidential Information (as defined below) of the Company and its
affiliates and all physical embodiments thereof (as they may exist
from time-to-time, collectively, the "Proprietary Information") are
valuable, special and unique assets of the Company's and its
affiliates' businesses. Executive further acknowledges that access to
such Proprietary Information is essential to the performance of
Executive's duties under this Agreement. Therefore, in order to obtain
access to such Proprietary Information, Executive agrees that, except
in connection with performing duties assigned to him by the Company,
Executive shall hold in confidence all Proprietary Information and
will not reproduce, use, distribute, disclose, publish or otherwise
disseminate any Proprietary Information, in whole or in part, and will
take no action causing, or fail to take any action necessary to
prevent causing, any Proprietary Information to lose its character as
Proprietary Information, nor will Executive make use of any such
information for Executive's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company) under any circumstances.
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For purposes of this Agreement, the term "Trade Secrets" means
information, without regard to form, including, but not limited to,
any technical or nontechnical data, formula, pattern, compilation,
program, device, method, technique, drawing, process, financial data,
financial plan, product plan, list of actual or potential customers or
suppliers, or other information similar to any of the foregoing, which
is not commonly known by or available to the public and (i) derives
economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other
persons who can derive economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. For purposes of this Agreement,
the term "Trade Secrets" does not include information that Executive
can show by competent proof (i) was known to Executive and reduced to
writing prior to disclosure by the Company (but only if Executive
promptly notifies the Company of Executive's prior knowledge); (ii)
was generally known to the public at the time the Company disclosed
the information to Executive; (iii) became generally known to the
public after disclosure by the Company through no act or omission of
Executive; or (iv) was disclosed to Executive by a third party having
a bona fide right both to possess the information and to disclose the
information to Executive. The term "Confidential Information" means
any data or information of the Company, other than trade secrets,
which is valuable to the Company and not generally known to
competitors of the Company. The provisions of this Section 6 will
apply to Trade Secrets for so long as such information remains a trade
secret and to Confidential Information during Executive's employment
with the Company and for a period of two (2) years following any
termination of Executive's employment with the Company for whatever
reason.
7.A. Non-Competition Covenant. During Executive's employment by the Company
Executive will be a member of the Company's executive management team.
Executive agrees that during his employment and for a period of two
(2) years following any termination of Executive's employment for
whatever reason, Executive will not, directly or indirectly, on
Executive's own behalf or in the service of or on behalf of any other
individual or entity, compete with the Company within the Geographical
Area (as hereinafter defined). The term "compete" means to engage in,
have any equity or profit interest in, make any loan to or for the
benefit of, or render services of any marketing, management, sales,
administrative, supervisory or consulting nature, directly or
indirectly, on Executive's own behalf or in the service of or on
behalf of any other individual or entity, either as a proprietor,
employee, agent, independent contractor, consultant, director,
officer, partner or stockholder (other than a stockholder of a
corporation listed on a national securities exchange or whose stock is
regularly traded in the
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over-the-counter market, provided that Executive at no time owns,
directly or indirectly, in excess of one percent (1%) of the
outstanding stock of any class of any such corporation) any business
which provides Business products or services, provided that nothing in
this Agreement will preclude Executive from rendering legal services
in the role of outside counsel on behalf of any entity, including
those entities that compete with the Company, following the
termination of his employment with the Company. For purposes of this
Agreement, the term "Geographical Area" means the territory located
within a seventy-five (75) mile radius of any Company facility for
which Executive exercised managerial control or provided legal
services on behalf of the Company.
B. Non-Solicitation of Clients Covenant. Executive agrees that during
Executive's employment by the Company and for a period of two (2)
years following the termination of Executive's employment for whatever
reason, Executive will not, directly or indirectly, on Executive's own
behalf or in the service of or on behalf of any other individual or
entity, divert, solicit or attempt to divert or solicit any individual
or entity (i) who is a client of the Company at any time during the
six (6)-month period prior to Executive's termination of employment
with the Company ("Client"), or was actively sought by the Company as
a prospective client, and (ii) with whom Executive had material
contact while employed by the Company, to provide Business services or
products to such Clients or prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below
may, if it chooses, sever any portion of the Geographical Area, client
base, prospective relationship or prospect list or any prohibited
business activity from the coverage of such Section and to apply the
provisions of such Section to the remaining portion of the
Geographical Area, the client base or the prospective relationship or
prospect list, or the remaining business activities not so severed by
such judicial authority. In addition, it is the intent of the parties
that the judicial authority may, if it chooses, replace each such
severed provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It
is the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically enforceable,
the Company shall nevertheless be entitled to bring an action to seek
to recover monetary damages as a result of the breach of such
provision by Executive.
8. Non-Solicitation of Employees Covenant. Executive further agrees and
represents that during Executive's employment by the Company and for a
period of two (2)
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years following any termination of Executive's employment for whatever
reason, Executive will not, directly or indirectly, on Executive's own
behalf or in the service of, or on behalf of any other individual or
entity, divert or solicit, or attempt to divert or solicit, to or for
any individual or entity which is engaged in providing Business
services or products, any person employed by the Company, whether or
not such employee is a full-time employee or temporary employee of the
Company, whether or not such employee is employed pursuant to written
agreement and whether or not such employee is employed for a
determined period or at-will.
9. Existing Restrictive Covenants. Executive represents and warrants that
Executive's employment with the Company does not and will not breach
any agreement which Executive has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Executive will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Executive.
10. Return of Proprietary Information. Executive acknowledges that as a
result of Executive's employment with the Company, Executive may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Executive
acknowledges, warrants and agrees that Executive will return to the
Company all such items and any copies or excerpts thereof, in any form
or medium, and any other properties, files or documents obtained as a
result of Executive's employment with the Company, immediately upon
the termination of Executive's employment with the Company.
11. Proprietary Rights. During the course of Executive's employment with
the Company, Executive may make, develop or conceive of useful
processes, machines, compositions of matter, computer software,
algorithms, works of authorship expressing such algorithm, or any
other discovery, idea, concept, document or improvement which relates
to or is useful to the Company's Business (the "Inventions"), whether
or not subject to copyright or patent protection, and which may or may
not be considered Proprietary Information. Executive acknowledges that
all such Inventions will be "works made for hire" under United States
copyright law and will remain the sole and exclusive property of the
Company. Executive also hereby assigns and agrees to assign to the
Company, in perpetuity, all right, title and interest Executive may
have in and to such Inventions, including without limitation, all
copyrights, and the right to apply for any form of patent, utility
model, industrial design or similar proprietary right
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recognized by any state, country or jurisdiction. Executive further
agrees, at the Company's request and expense, to do all things and
sign all documents or instruments necessary, in the opinion of the
Company, to eliminate any ambiguity as to the ownership of, and rights
of the Company to, such Inventions, including filing copyright and
patent registrations and defending and enforcing in litigation or
otherwise all such rights.
Executive will not be obligated to assign to the Company any Invention
made by Executive while in the Company's employ which does not relate
to any business or activity in which the Company is or may reasonably
be expected to become engaged, except that Executive is so obligated
if the same relates to or is based on Proprietary Information to which
Executive will have had access during and by virtue of Executive's
employment or which arises out of work assigned to Executive by the
Company. Executive will not be obligated to assign any Invention which
may be wholly conceived by Executive after Executive leaves the employ
of the Company, except that Executive is so obligated if such
Invention involves the utilization of Proprietary Information obtained
while in the employ of the Company. Executive is not obligated to
assign any Invention which relates to or would be useful in any
business or activities in which the Company is engaged if such
Invention was conceived and reduced to practice by Executive prior to
Executive's employment with the Company.
12. Remedies. Executive agrees and acknowledges that the violation of any
of the covenants or agreements contained in Sections 6, 7, 8, 9, 10
and 11 of this Agreement would cause irreparable injury to the
Company, that the remedy at law for any such violation or threatened
violation thereof would be inadequate, and that the Company will be
entitled, in addition to any other remedy, to temporary and permanent
injunctive or other equitable relief without the necessity of proving
actual damages or posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Executive:
2700 Cumberland Parkway Allen Ritchie
Suite 300
Atlanta, GA 30339 ---------------
Attn: Chief Executive Officer
---------------
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or to such other address or agent as may be hereafter designated in
writing by either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as
if such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and
supersedes all prior agreements, oral or written, regarding the
subject matter hereof. No amendment or modification of this Agreement
will be valid or binding upon the parties unless made in writing and
signed by the parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
17. Assignment. This Agreement is one for personal services and will not
be assigned by Executive. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any federal court in the state where the Company
has its principal place of business and each of the parties hereto
hereby submits to the personal jurisdiction of any such court. The
foregoing shall not limit the rights of any party to obtain execution
of judgment in any other jurisdiction. The parties further agree, to
the extent permitted by law, that a final and unappealable judgment
against either of them in any action or proceeding contemplated above
shall be conclusive and may be enforced in any other jurisdiction
within or outside the United States by suit on the judgment, a
certified exemplified copy of which shall be conclusive evidence of
the fact and amount of such judgment.
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19. Indemnification. Executive shall be entitled to the indemnification
and exculpation offered through and set forth in the Company's Charter
and By-laws.
20. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EXECUTIVE:
By: /s/ Randolph L. M. Hutto /s/ Allen Ritchie
---------------------------------- --------------------------
Allen Ritchie
Title: EXECUTIVE VICE PRESIDENT
-------------------------------
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EXHIBIT A
INVENTIONS
Executive represents that there are no Inventions.
/s/ AWR
----------------------
Executive's Initials
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EXHIBIT 10.70
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 27th day of January, 1998, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and Kevin P. Castle, a resident of the State of
Georgia (the "Employee").
Statement of Background Information
The Company (a) develops, markets and licenses to physicians,
hospitals, integrated healthcare delivery systems, and other healthcare
providers and other end users (collectively "Providers") (i) strategic,
operational and financial information systems and services and decision support
tools for healthcare providers, (ii) software systems which provide claims and
reimbursement services and electronic claims processing, and (iii) software
applications which assist Providers with automated scheduling and resource
management (the items discussed in Sections (a)(i), (a)(ii) and (a)(iii) of
this paragraph are referred to as "Systems"), which Systems include, but are
not limited to, nurse scheduling and management information systems, operating
room patient scheduling and surgery information systems, enterprise wide
patient scheduling and resource management systems, enterprise wide employee
scheduling and management information systems and related software interfaces
to other information systems; and (b) provides to Providers installation and
support services related to the Company's Systems. The Company also renders
professional services with respect to (a) designing and supporting
client/server infrastructure and applications, including (i) design,
integration and network management; (ii) strategic systems engineering; (iii)
computer security; (iv) database design, modeling, development and migration;
and (v) graphical user interface design, development and implementation, and
(b) the development of computer software, algorithms, designs, documentation,
and related materials, and the development, design, deployment, and operation
of local and wide area computer networks, all in conjunction with the sale,
design, deployment, operation and maintenance of custom computer processing
systems for improvement of operational efficiency or functionality through the
use of image storage and processing, work flow technology, optical character
recognition or other related technologies (collectively, the activities
described in this Paragraph are referred to herein as the "Business").
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in
this Agreement. For purposes of Sections 7 and 8 of this Agreement,
"employment" shall mean any period of time during which the Company is
paying the Employee salary, wages, or any other amounts, whether or
not the Employee is currently performing services for the Company at
the time of such payment.
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<PAGE> 2
2. Duties of Employee. Employee's title will be Senior Vice President,
Human Resources of the Company's Per-Se Business Unit. Employee agrees
to perform and discharge such duties as may be assigned to Employee
from time to time by the Company to the reasonable satisfaction of the
Company. Employee also agrees to comply with all of the Company's
policies, standards and regulations and to follow the instructions and
directives of Employee's superiors within the Company, as promulgated
by the officers of the Company. Employee will devote Employee's full
professional and business-related time, skills and best efforts to
such duties and will not, during the term of this Agreement, be
engaged (whether or not during normal business hours) in any other
business or professional activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage, without the
prior written consent of Carl James Schaper, or his designee, which
consent will not be unreasonably withheld. This Section will not be
construed to prevent Employee from (a) investing personal assets in
businesses which do not compete with the Company in such form or
manner that will not require any services on the part of Employee in
the operation or the affairs of the companies in which such
investments are made and in which Employee's participation is solely
that of an investor; (b) purchasing securities in any corporation
whose securities are listed on a national securities exchange or
regularly traded in the over-the-counter market, provided that
Employee at no time owns, directly or indirectly, in excess of one
percent (1%) of the outstanding stock of any class of any such
corporation engaged in a business competitive with that of the
Company; or (c) participating in conferences, preparing and publishing
papers or books or teaching, so long as Carl James Schaper, or his
designee, approves such participation, preparation and publication or
teaching prior to Employee's engaging therein, which approval will not
be unreasonably withheld.
3. Term. The term of this Agreement will be for a two (2) year period of
time, commencing as of February 1, 1998 and expiring on January 31,
2000, subject to earlier termination as provided for in Section 4 of
this Agreement. Following the initial two (2) year term of this
Agreement, the terms of this Agreement will continue to remain in
effect provided that either party may terminate this Agreement upon
thirty (30) days' written notice.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate this Agreement and all of its obligations hereunder
immediately if any of the following events occur:
(i) Employee materially breaches any of the terms or conditions
set forth in this Agreement and fails to cure such breach within
ten (10) days after Employee's receipt from the Company of
written notice of such breach (notwithstanding the foregoing, no
cure period shall be applicable to breaches by Employee of
Sections 6, 7 or 8 of this Agreement);
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<PAGE> 3
(ii) Employee engages in dishonest or illegal activities or
commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or
(iii) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Employee's duties under this Agreement. Without limiting the
generality of the foregoing, Employee's inability to adequately
perform services under this Agreement for a period of sixty (60)
consecutive days will be conclusive evidence of such mental or
physical incapacity or disability, unless such inability to
adequately perform services under this Agreement is pursuant to
a mental or physical incapacity or disability covered by the
Family Medical Leave Act, in which case such sixty (60)-day
period shall be extended to a one hundred and twenty 120)-day
period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may
terminate Employee's employment pursuant to this Agreement
without cause upon at least thirty (30) days' prior written
notice to Employee. In the event Employee's employment with
the Company is terminated by the Company without cause, Employee
will be entitled to receive salary continuation (at the salary
level set forth below in Paragraph 5.a) for the balance of the
term of this Agreement. If Employee is terminated without cause
under this Paragraph of the Agreement, Employee will not be
entitled to any other consideration or be considered an employee
of the Company for any other purposes, including the vesting of
stock options, beyond the termination date.
5. Compensation and Benefits.
a) Annual Salary. During the term of this Agreement and for all services
rendered by Employee under this Agreement, the Company will pay Employee
a base salary of Two Hundred Thousand Dollars ($200,000.00) per annum in
equal bi-weekly installments. Such annual salary will be subject to
adjustments by any increases given in the normal course of business.
b) Incentive Compensation. Employee shall be eligible to participate in
the Medaphis Corporation and its Subsidiary Corporations Incentive
Compensation Plan at a participation category of fifty percent (50%) of
Employee's base salary, payable at the discretion of the Medaphis
Corporation Board of Directors.
c) Stock Options. As soon as reasonably practicable after the signing of
this Agreement, and subject to the approval of the Compensation Committee
of the Board of Directors of Medaphis Corporation, the Company will cause
Medaphis to issue to Employee, effective as of the date approved by the
Compensation Committee of the Board of Directors of Medaphis
-3-
<PAGE> 4
Corporation, options to purchase One Hundred Thousand (100,000) shares
of Medaphis Common Stock pursuant to the terms and conditions of the
Amended and Restated Medaphis Corporation Non-Qualified Stock Option
Plan ("Stock Option Plan"), as amended. Such options will vest at the
rate of thirty-three and one-third percent (33.33%) per year for a
three-year period beginning on the starting date of this Agreement,
subject to the terms and conditions of the Stock Option Plan. Such
options shall vest in full immediately upon the occurrence of certain
change in control events outlined in the Stock Option Plan. Employee
shall be considered for additional grants of options to purchase
shares of Medaphis common stock in a manner which is consistent with
other senior officers of the Company. However, nothing in this
Agreement shall give rise to a contractual right to Employee to
receive grants of additional stock options of Medaphis. Further,
Medaphis has no obligation to Employee to create parity with any other
Medaphis executives with respect to any options granted to such other
executives.
d) Other Benefits. Employee will be entitled to such fringe benefits
as may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and
disability insurance and any other fringe benefits now or hereafter
provided by the Company to its employees, if and when Employee meets
the eligibility requirements for any such benefit. The Company
reserves the right to change or discontinue any employee benefit plans
or programs now being offered to its employees; provided, however,
that all benefits provided for employees of the same position and
status as Employee will be provided to Employee on an equal basis.
e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due
employees.
g) Signing Bonus. Upon execution of this Agreement, the Company will
pay Employee a signing bonus in the amount of Twenty-Five Thousand
Dollars ($25,000.00). Employee will be eligible to receive an
additional Twenty-Five Thousand Dollars ($25,000.00) following the
first anniversary date of Employee's commencement of employment with
the Company, payable at the discretion of Carl James Schaper.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and
Confidential Information (as defined below) of the Company and its
affiliates and all physical embodiments thereof (as they may exist
from time-to-time, collectively, the "Proprietary Information") are
valuable, special and unique assets of the Company's and its
affiliates' businesses. Employee further acknowledges that access to
-4-
<PAGE> 5
such Proprietary Information is essential to the performance of
Employee's duties under this Agreement. Therefore, in order to obtain
access to such Proprietary Information, Employee agrees that, except
with respect to those duties assigned to him by the Company, Employee
shall hold in confidence all Proprietary Information and will not
reproduce, use, distribute, disclose, publish or otherwise disseminate
any Proprietary Information, in whole or in part, and will take no
action causing, or fail to take any action necessary to prevent
causing, any Proprietary Information to lose its character as
Proprietary Information, nor will Employee make use of any such
information for Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company and its affiliates) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means
information, including, but not limited to, any technical or
nontechnical data, formula, pattern, compilation, program, device,
method, technique, drawing, process, financial data, financial plan,
product plan, list of actual or potential customers or suppliers, or
other information similar to any of the foregoing, which derives
economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other
persons who can derive economic value from its disclosure or use. For
purposes of this Agreement, the term "Trade Secrets" does not include
information that Employee can show by competent proof (i) was known to
Employee and reduced to writing prior to disclosure by the Company
(but only if Employee promptly notifies the Company of Employee's
prior knowledge); (ii) was generally known to the public at the time
the Company disclosed the information to Employee; (iii) became
generally known to the public after disclosure by the Company through
no act or omission of Employee; or (iv) was disclosed to Employee by a
third party having a bona fide right both to possess the information
and to disclose the information to Employee. The term "Confidential
Information" means any data or information of the Company, other than
trade secrets, which is valuable to the Company and not generally
known to competitors of the Company. The provisions of this Section 6
will apply to Trade Secrets for so long as such information remains a
trade secret and to Confidential Information during Employee's
employment with the Company and for a period of two (2) years
following any termination of Employee's employment with the Company
for whatever reason.
7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of
a corporation listed on a national securities exchange or whose stock
is regularly traded in the
-5-
<PAGE> 6
over-the-counter market, provided that Employee at no time owns,
directly or indirectly, in excess of one percent (1%) of the
outstanding stock of any class of any such corporation) of any
business which provides Business products or services. For purposes of
this Agreement, the term "Geographical Area" means the territory
located within a seventy-five (75) mile radius of each facility for
which Employee has management responsibility during Employee's
employment with the Company.
B. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever
reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of or on behalf of any other individual or
entity, divert, solicit or attempt to solicit any individual or entity
(i) who is a client of the Company at any time during the six
(6)-month period prior to Employee's termination of employment with
the Company ("Client"), or was actively sought by the Company as a
prospective client, and (ii) with whom Employee had material contact
while employed by the Company to provide Business services or products
to such Clients or prospects.
C. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below
may, if it chooses, sever any portion of the Geographical Area, client
base, prospective relationship or prospect list or any prohibited
business activity from the coverage of such Section and to apply the
provisions of such Section to the remaining portion of the
Geographical Area, the client base or the prospective relationship or
prospect list, or the remaining business activities not so severed by
such judicial authority. In addition, it is the intent of the parties
that the judicial authority may, if it chooses, replace each such
severed provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It
is the intent of the parties that Sections 7 and 8 be enforced to the
maximum extent permitted by law. In the event that any provision of
either such Section is determined not to be specifically enforceable,
the Company shall nevertheless be entitled to bring an action to seek
to recover monetary damages as a result of the breach of such
provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on
behalf of any other individual or entity, divert, solicit or hire
away, or attempt to divert, solicit or hire away, to or for any
individual or entity which is engaged in providing Business services
or products, any person employed by the Company for whom Employee had
supervisory responsibility or with whom Employee had material contact
while employed by the Company, whether or not such employee is a
full-time employee or temporary employee of the Company, whether or
not such employee is employed pursuant to written agreement and
whether or not such employee is employed for a determined period or
at-will.
-6-
<PAGE> 7
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach
any agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on
its behalf any confidential information of any other party required to
be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the
Company all such items and any copies or excerpts thereof, and any
other properties, files or documents obtained as a result of
Employee's employment with the Company, immediately upon the
termination of Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with
the Company, Employee may make, develop or conceive of useful
processes, machines, compositions of matter, computer software,
algorithms, works of authorship expressing such algorithm, or any
other discovery, idea, concept, document or improvement which relates
to or is useful to the Company's Business (the "Inventions"), whether
or not subject to copyright or patent protection, and which may or may
not be considered Proprietary Information. Employee acknowledges that
all such Inventions will be "works made for hire" under United States
copyright law and will remain the sole and exclusive property of the
Company. Employee also hereby assigns and agrees to assign to the
Company, in perpetuity, all right, title and interest Employee may
have in and to such Inventions, including without limitation, all
copyrights, and the right to apply for any form of patent, utility
model, industrial design or similar proprietary right recognized by
any state, country or jurisdiction. Employee further agrees, at the
Company's request and expense, to do all things and sign all documents
or instruments necessary, in the opinion of the Company, to eliminate
any ambiguity as to the ownership of, and rights of the Company to,
such Inventions, including filing copyright and patent registrations
and defending and enforcing in litigation or otherwise all such
rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate
to any business or activity in which the Company is or may reasonably
be expected to become engaged, except that Employee is so obligated if
the same relates to or is based on Proprietary Information to which
Employee will have had access during and by virtue of Employee's
employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which
may be wholly conceived by Employee after Employee leaves the employ
of
-7-
<PAGE> 8
the Company, except that Employee is so obligated if such Invention
involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any
Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was
conceived and reduced to practice by Employee prior to Employee's
employment with the Company.
12. Remedies. Employee agrees and acknowledges that the violation of any
of the covenants or agreements contained in Sections 6, 7, 8, 9, 10
and 11 of this Agreement would cause irreparable injury to the
Company, that the remedy at law for any such violation or threatened
violation thereof would be inadequate, and that the Company will be
entitled, in addition to any other remedy, to temporary and permanent
injunctive or other equitable relief without the necessity of proving
actual damages or posting a bond.
13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
Medaphis Corporation
2700 Cumberland Parkway Kevin P. Castle
Suite 300
Atlanta, GA 30339
Attn: General Counsel
14. Severability. Subject to the application of Section 7(C) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the parties agree
that it is their intent that the same will not affect any other
provision in this Agreement, and this Agreement will be construed as
if such invalid or illegal or unenforceable provision had never been
contained herein. It is the intent of the parties that this Agreement
be enforced to the maximum extent permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and
supersedes all prior agreements, oral or written, regarding the
subject matter hereof. No amendment or modification of this Agreement
will be valid or binding upon the parties unless made in writing and
signed by the parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
-8-
<PAGE> 9
17. Assignment. This Agreement is one for personal services and will not
be assigned by Employee. The Company may assign this Agreement to its
parent company or to any of its subsidiaries or affiliated companies;
provided that the parent or any subsidiary or affiliate fulfills the
obligations of the Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this
Agreement shall be any court located in the geographical area
comprised by the United States District Court for the Northern
District of Georgia and each of the parties hereto hereby submits to
the personal jurisdiction of any such court. The foregoing shall not
limit the rights of any party to obtain execution of judgment in any
other jurisdiction. The parties further agree, to the extent permitted
by law, that a final and unappealable judgment against either of them
in any action or proceeding contemplated above shall be conclusive and
may be enforced in any other jurisdiction within or outside the United
States by suit on the judgment, a certified exemplified copy of which
shall be conclusive evidence of the fact and amount of such judgment.
19. Surviving Terms. Sections 6, 7, 8, 9, 10, 11 and 12 of this Agreement
shall survive termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ Randolph L. M. Hutto /s/ Kevin P. Castle
-------------------------------- ---------------------------------
Kevin P. Castle
Title: EXECUTIVE VICE PRESIDENT
-----------------------------
THIS AGREEMENT IS NOT VALID AND BINDING UPON THE COMPANY UNTIL SIGNED BY DAVID
E. MCDOWELL OR RANDOLPH L. M. HUTTO, ESQ.
-9-
<PAGE> 10
EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
/s/ KPC
-----------------
Employee Initials
-10-
<PAGE> 1
EXHIBIT 10.76
THIRD AMENDMENT TO THE
MEDAPHIS DEFERRED COMPENSATION PLAN
THIS AMENDMENT, made as of the 31st day of December, 1997, by MEDAPHIS
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware (hereinafter called the "Primary Sponsor").
W I T N E S S E T H:
WHEREAS, the Primary Sponsor adopted the Medaphis Deferred
Compensation Plan (the "Plan") by indenture dated April 1, 1995; and
WHEREAS, the Primary Sponsor desires to amend the Plan to allow
employees of BSG Corporation and BSG Alliance/IT, Inc., to be eligible to
participate in the Plan.
NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan,
effective January 1, 1997, as follows:
The final sentence of Section 1.14 of the Plan is deleted in its
entirety and replaced with the following:
"1.14 Eligible Employee means any person who
is (i) an "Eligible Employee" as that term is
used under the Savings Plan or who is eligible
to participate in the BSG Employees 401(k) Plan
and (ii) is a member of a select group of
management or highly compensated employees."
Except as specifically amended hereby, the Plan shall remain in full
force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Primary Sponsor has executed this Amendment as
of the day and the year first above written.
MEDAPHIS CORPORATION
ATTEST: By: /s/ David E. McDowell
-------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
By: /s/ Randolph L. M. Hutto
----------------------------
Randolph L. M. Hutto
Secretary
<PAGE> 1
EXHIBIT 10.80
FORM OF LETTER AGREEMENT
[DATE]
[NAME]
[ADDRESS]
[CITY, STATE]
Re: Bonus
Dear [NAME]:
In consideration of your value and contribution to our business, this
Letter Agreement sets forth the agreement of Medaphis Corporation to pay you a
special one time bonus for 1997 as follows: If you remain employed by [NAME OF
LEGAL ENTITY EMPLOYING INDIVIDUAL] on December 31, 1997, then you will be paid a
bonus in cash equal to seventy-five (75%) percent of your annual base salary
(which bonus amount will be $[AMOUNT]). Such amount will be paid to you on or by
January 31, 1998. Please sign where indicated below to acknowledge your
agreement and return this document to Peggy Sherman in the Legal Department.
Thank you for your continuing support in the growth of our Company.
Sincerely,
David E. McDowell
Chairman and Chief Executive Officer
DEM/mlf
Accepted and agreed to this ______
day of _________________, 1997.
- --------------------------------
[NAME OF INDIVIDUAL]
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF BASIC PRO FORMA EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands except per share data)
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
- ---------------------------------------------- ------- --------- --------
<S> <C> <C> <C>
Weighted average shares outstanding
during the period 52,591 71,225 72,679
Total weighted average common stock
and common stock equivalents outstanding
during the period 52,591 71,225 72,679
======= ========= ========
Pro forma net income $(4,780) $(136,358) $(19,303)
======= ========= ========
Pro forma basic net income per common share(1) $ (0.09) $ (1.91) $ (0.26)
======= ========= ========
</TABLE>
(1) Diluted net income per common share is not presented because the
calculation is antidilutive due to the Company reporting net losses in 1995,
1996 and 1997.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
<S> <C>
Assetcare, Inc. (1) Georgia
Automation Atwork (2) California
BSG Alliance/IT, Inc. (3) Delaware
BSG Corporation (3) Delaware
BSG Government Solutions, Inc. (3) Maryland
Consort Technologies, Inc. (4) Georgia
Gottlieb's Financial Services, Inc. Georgia
Health Data Sciences Corporation (4) Delaware
Medaphis Healthcare Information Technology Georgia
Company (4)
Medaphis Physician Services Corporation (5) Georgia
Medaphis Services Corporation Georgia
Medical Management Sciences, Inc. Maryland
National Healthcare Technologies, Inc. Indiana
</TABLE>
(1) Assetcare, Inc. also does business as:
1. Stanford Health Services (used in Western Region) (not registered)
2. Patient Billing Services (to be used as MSC d/b/a)
3. Credit Consultants, Inc. (registered d/b/a in Ohio only)
4. Nationwide Collections, Inc. (registered d/b/a in Michigan)
5. Northwest Financial Control (used in Western Region) (not registered)
(2) Automation Atwork also does business as Atwork, Atwork International, and
Per Se Technologies.
(3) These companies also do business as:
1. BSG Consulting
2. BSG Cary
3. Business Systems Group
4. BSG ALLIANCE/IT (used in Delaware and in all states where qualified to do
business)
5. BSG Corporation (Delaware)
6. Enterprise Frameworks (Florida)
7. Client/Server University
8. C/S Universe-ity
9. BSG Education (Delaware)
10. BSG Educational Services (Delaware)
11. Per-Se Technologies
12. Per-Se
(4) These companies also do business as Per-Se Technologies or Per-Se
(5) Medaphis Physician Services Corporation also does business as:
1. MEDICO Billing Services (used in the St. Louis, MO, office).
2. TRI-State Collection Services (used in Richardson, TX, office).
3. Medical Management, Inc. (MMI) (used in Montgomery, AL, office).
4. Billing and Professional Services (used in the Tucker, GA, office).
5. Anescor (used in the Los Angeles and Orange, CA, offices).
6. Medical Office Consultants (MOC) (used in Los Angeles, CA, office).
7. Medical Management of New England (NE)
8. CompMed, Inc.
9. Computers Diversified, Inc.
10. The Halley Exchange
11. Medaphis Transaction Services Group
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-4 (No. 33301800) of
Medaphis Corporation of our report dated January 27, 1998, appearing in Medaphis
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
We also consent to the incorporation by reference of our report on the Financial
Statement Schedule in this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, GA
January 30,1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33326289, 33326291, 33326113, 33307627, 33307201,
33307203, 33303213, 3395742, 3395746, 3395748, 3390874, 3390876, 3388444,
3388442, 3371556, 3367752, 3364952, 3346847) of Medaphis Corporation of our
report dated January 27, 1998, appearing in the Annual Report to Shareholders
which is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedules in
this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, GA
January 30,1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,794
<SECURITIES> 0
<RECEIVABLES> 176,701
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 212,436
<PP&E> 72,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 874,027
<CURRENT-LIABILITIES> 118,939
<BONDS> 0
0
0
<COMMON> 732
<OTHER-SE> 501,049
<TOTAL-LIABILITY-AND-EQUITY> 874,027
<SALES> 572,625
<TOTAL-REVENUES> 572,625
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 659,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,260
<INCOME-PRETAX> (110,002)
<INCOME-TAX> (16,773)
<INCOME-CONTINUING> (93,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,391
<CHANGES> (2,465)
<NET-INCOME> (19,303)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Medaphis Corporation ("Medaphis" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Medaphis undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Annual Report on Form 10-K
to which this statement is appended as an exhibit and also include the
following:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. The Company's ability to make payments on its 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. 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, 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 Company's existing indebtedness
contains, and future financings are expected to 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, prepayment and those requiring
maintenance of minimum net worth, minimum EBITDA, minimum interest coverage and
maximum leverage requirements; (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
<PAGE> 2
Company's level of indebtedness, its financial capacity to respond to market
conditions, extraordinary capital needs and other factors may be limited.
LITIGATION AND GOVERNMENT INVESTIGATIONS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices") (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.
Although the precise scope of the California Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
billing and collection practices in the Designated Offices. No charges or claims
by the government have been made. Although the Company continues to believe that
the principal focus of the 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 will be resolved promptly, that additional subpoenas or
search warrants will not be received by Medaphis or MPSC or that the California
Investigation will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995, were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which
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relief may be granted. On April 11, 1996, certain of the named plaintiffs to the
Consolidated Complaint voluntarily dismissed with prejudice all of their claims.
As a result of these dismissals, the Consolidated Complaint no longer contained
any claims based on the Securities Act of 1933, as amended (the "1933 Act"), and
the Company's underwriters and outside directors were no longer named as
defendants. On June 26, 1996, the court denied plaintiffs' motion to certify
plaintiffs' class. The plaintiffs and the defendants agreed to settle this
action on a class-wide basis for $4.75 million, subject to court approval (the
"1995 Class Action Settlement"). The 1995 Class Action Settlement included the
related putative class action lawsuit currently pending in the Superior Court of
Cobb County, Georgia, described more fully below. On October 29, 1997 the court
certified a class for settlement purposes, approved the settlement and entered
final judgment dismissing the action with prejudice. One of Medaphis' directors
and officers' liability insurance carriers has paid $3.7 million of the 1995
Class Action Settlement. The Company accrued approximately $1.2 million in the
quarter ended December 31, 1996 for the anticipated balance of the 1995 Class
Action Settlement and to pay certain fees incident thereto. On November 6, 1997,
the Company paid the remaining $1.05 million balance of the settlement.
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 government is investigating
allegations concerning the Company's wholly owned subsidiary, Gottlieb's
Financial Services, Inc. ("GFS") (the "GFS Investigation"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying with that request. Although the precise scope and subject matter of
the 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. There can
be no assurance that the GFS Investigation will be resolved promptly 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.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common
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Stock between February 6, 1996 and October 21, 1996. The Consolidated Second
Amended Complaint also asserts claims on behalf of a sub-class of all persons
who acquired Medaphis Common Stock pursuant to the merger between Medaphis and
Health Data Sciences Corporation ("HDS"). The Consolidated Second Amended
Complaint seeks compensatory and rescissory damages, as well as fees, interest
and other costs. On February 14, 1997, the defendants moved to dismiss the
Consolidated Second Amended Complaint in its entirety. On May 27, 1997, the
court denied defendants' motion to dismiss. As a result of the Company's
restatement of its fiscal 1995 financial statements, the Company may not be able
to sustain a defense to strict liability on certain claims under the 1933 Act,
but the Company believes that it has substantial defenses to the alleged damages
relating to such 1933 Act claims.
The parties 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 which were valued
at $22.3 million using an option pricing model. 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
recorded a $52.5 million charge in the quarter ended September 30, 1997 for this
settlement. Such amount has been reflected as a non-current liability as the
Company does not anticipate satisfying the obligation with current assets.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants, additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatements of its fiscal 1995
financial statements, the Company may not be able to sustain a defense to strict
liability on certain claims under the 1933 Act, but the Company believes that it
has substantial defenses to the alleged damages relating to such 1933 Act
claims.
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A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the
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Company's loss for the quarter ending September 30, 1996 and its restated
consolidated financial statements for the three months and year ending December
31, 1995 and its restated unaudited balance sheets as of March 31, 1996, and
June 30, 1996. In addition, the Company believes that the Commission is
investigating the Company's restatement of its interim financial statements for
each quarter of 1996. The Company intends to cooperate fully with the Commission
in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
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 Medaphis Physicians Services Corporation ("MPSC") (the "California
Investigation"), and (b) the billing procedures and computerized coding system
used in Gottlieb's Financial Services, Inc. ("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 discontinuance 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 turnaround situation, the
Company faces certain challenges more specific to its operations, including: (i)
integrating several recent acquisitions into its ongoing operations; (ii)
shifting its strategic focus from acquiring compatible businesses to running its
existing businesses efficiently and profitably; (iii) successfully completing
the combination of the operations of BSG Corporation ("BSG") and Healthcare
Information Technologies ("HIT") under the Per-Se name, following the
reorganization of its Imonics Corporation ("Imonics"), BSG and BSG Government
Solutions, Inc. (formerly Rapid Systems Solutions, Inc.) ("BSG Government")
subsidiaries and the shutdown of Imonics; (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) combating employee turnover, particularly in light of declines in
the market value of the Company's common stock (the value of which often plays a
role in compensation of employees); (vi) reducing costs and increasing
efficiencies; and (vii) reevaluating the efficiency of its operations following
the Company's 1996 abandonment of its reengineering initiative to develop a
unified billing and information hardware and software system across all of its
operating platforms, the costs of which were subsequently determined to outweigh
the benefits.
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 failure with respect to the foregoing could have a material
adverse effect on the Company.
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.
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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 previously deemed immaterial amounts, resulted in an aggregate
reduction to net income for the quarter and year ended December 31, 1995 of $5.1
million.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the issuance of Deloitte & Touche's audit report dated March 31,
1997 on the Company's financial statements for the year ended December 31, 1996,
the Company recorded all adjustments to its interim financial statements deemed
appropriate 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 recommended by the Audit Committee of the Company's Board of
Directors, and the Board approved such change on June 27, 1997. On July 9, 1997,
the Company engaged Price Waterhouse LLP ("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 which was acquired by the Company in a merger transaction in June
1996 that was 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 restatements, 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
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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. 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. 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 are being filed by the Company
as an exhibit to the Annual Report on Form 10-K to which this exhibit is
appended. Such financial statements were audited by Price Waterhouse and
accompanied by their audit opinion which was unqualified and was not subject to
any modifying paragraphs.
While the Company restated its 1994 financial statements, it has not
reaudited such financial statements. Consequently, the Company may not be in
full compliance with the reporting requirements of applicable securities laws.
There can be no assurances that any such failure to be in compliance will not
have a material adverse consequence for the Company.
In addition, the Company received a subpoena from the Securities and
Exchange Commission (the "Commission") in connection with an on-going 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.
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. 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
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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. 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 revenues. 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 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,
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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 sections 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 Clinton Administration has
proposed alternate measures to reduce, to a lesser extent, projected increases
in Medicare and Medicaid expenditures. Neither proposal has become law and
Medaphis anticipates that both the Clinton Administration and the Republican
majorities in Congress will introduce legislation in 1998 designed to reduce
projected increases in Medicare and Medicaid expenditures and to make other
changes in the Medicare and Medicaid programs. Medaphis anticipates that such
proposed legislation would, if adopted, change aspects of the present methods of
paying physicians under such programs and provide incentives for Medicare and
Medicaid beneficiaries to enroll in health maintenance organizations and other
managed care plans. Medaphis cannot predict the effect of any such legislation,
if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market, 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.
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
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from participation in Medicare, Medicaid and other federally funded healthcare
programs. Specifically, the Federal False Claims Act allows a private person to
bring suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and for such person to share in any amounts paid to
the government in damages and civil penalties. Successful plaintiffs can receive
up to 25-30% of the total recovery from the defendant. Such qui tam actions or
"whistle-blower" lawsuits have increased significantly in recent years and have
increased the risk that a company engaged in the healthcare industry, such as
Medaphis and many of its customers, may become the subject of a federal or state
investigation, 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 there can be no assurance that Medaphis will not be the
subject of false claims or qui tam proceedings relating to its billing and
collection activities or that Medaphis will not be the subject of further
government scrutiny or investigations relating to its billing and accounts
receivable management services operations. Any such proceeding or investigation
could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. 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 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.
NASD ACTIONS. There can be no assurances that the NASD will not suspend
trading in the Company's common stock or de-list the Company's Common Stock as a
result of either the restatements described in this Form 10-K or the withdrawal
by Deloitte & Touche LLP of its opinions in respect of the financial statements
for the Company's 1994, 1995 and 1996 fiscal years.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the investigation of the billing practices of certain offices of
MPSC by the United States Attorney's Office for the Central District of
California, the Company's liquidity and financial resources, divestiture of
businesses, the ongoing governmental investigations, putative class action
lawsuits, other lawsuits or demands, healthcare reform measures and
quarter-to-quarter and year-to-year variations in financial results could cause
the market price of Medaphis Common Stock to fluctuate substantially. Any
adverse announcement with respect to such matters or any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
material adverse effect on the trading price of Medaphis Common Stock in any
given period. As a result, the market for Medaphis Common Stock may experience
material adverse price and volume fluctuations and an investment in the
Company's Common Stock is not suitable for any investor who is unwilling to
assume the risk associated with any such price and volume fluctuations.
This Safe Harbor Statement supersedes the Safe Harbor Statements filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 and as Exhibit 99.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
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