<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
<TABLE>
<S> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 000-19480
---------------------
MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive
offices)
</TABLE>
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF CLASS AT AUGUST 8, 1997
- -------------- ------------------
<S> <C>
Common Stock $0.01 Par Value........................... 72,905,294 Shares
Non-voting Common Stock $0.01 Par Value................ 0 Shares
</TABLE>
================================================================================
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q/A
JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and
six months ended June 30, 1997 and 1996................ 3
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996...................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996........................... 5
Notes to Consolidated Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
Part II: OTHER INFORMATION
Legal Proceedings......................................... II-1
Changes in Securities..................................... II-4
Submission of Matters to a Vote of Security Holders....... II-5
Other Information......................................... II-5
Exhibits and Reports on Form 8-K.......................... II-6
Index to Exhibits......................................... II-9
</TABLE>
---------------------
THIS FORM 10-Q/A AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q/A, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
(AS RESTATED, (AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 7) SEE NOTE 7) SEE NOTE 7) SEE NOTE 7)
<S> <C> <C> <C> <C>
Revenue.................................... $150,967 $160,768 $298,513 $323,017
-------- -------- -------- --------
Salaries and wages......................... 92,386 95,222 185,964 186,952
Other operating expenses................... 37,781 39,889 78,023 79,224
Depreciation............................... 7,050 6,840 14,035 12,780
Amortization............................... 6,089 6,532 12,203 13,065
Interest expense, net...................... 6,056 2,630 12,171 4,735
Restructuring and other charges............ 2,824 16,889 2,824 17,195
-------- -------- -------- --------
Total expenses................... 152,186 168,002 305,220 313,951
Income (loss) before income taxes and
extraordinary item....................... (1,219) (7,234) (6,707) 9,066
Income tax (benefit) expense............... 41 2,697 (2,383) 9,927
-------- -------- -------- --------
Income (loss) before extraordinary item.... (1,260) (9,931) (4,324) (861)
Extraordinary income on sale of HRI, net of
tax...................................... 76,391 -- 76,391 --
-------- -------- -------- --------
Net income (loss)................ 75,131 (9,931) 72,067 (861)
Pro forma income tax adjustments........... -- -- -- 354
-------- -------- -------- --------
Pro forma net income (loss)...... $ 75,131 $ (9,931) $ 72,067 $ (507)
======== ======== ======== ========
Pro forma net income (loss) per common
share:
Pro forma net income (loss) before
extraordinary item.................... $ (0.02) $ (0.14) $ (0.06) $ (0.01)
Extraordinary income on sale of HRI...... 1.02 -- 1.02 --
-------- -------- -------- --------
Pro forma net income (loss).............. $ 1.00 $ (0.14) $ 0.96 $ (0.01)
======== ======== ======== ========
Weighted average shares outstanding........ 75,149 71,167 74,983 74,786
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 7) SEE NOTE 7)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 3,958 $ 7,631
Restricted cash........................................... 16,059 19,568
Accounts receivable, billed............................... 100,651 99,823
Accounts receivable, unbilled............................. 80,763 79,911
Deferred tax asset........................................ -- 36,177
Other..................................................... 12,086 12,129
-------- --------
Total current assets.............................. 213,517 255,239
Property and equipment...................................... 87,756 97,850
Deferred tax asset.......................................... 54,638 43,044
Intangible assets........................................... 527,165 539,151
Other....................................................... 2,510 1,570
-------- --------
$885,586 $936,854
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 11,880 $ 11,765
Accrued compensation...................................... 29,786 30,332
Accrued expenses.......................................... 81,979 100,675
Current portion of long-term debt......................... 150,224 55,975
Deferred tax liability.................................... 9,312 --
-------- --------
Total current liabilities......................... 283,181 198,747
Long-term debt.............................................. 8,993 215,752
Other obligations........................................... 8,215 13,830
-------- --------
Total liabilities................................. 300,389 428,329
-------- --------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1997;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1997 and 1996; issued and outstanding 72,503 in 1997
and 71,705 in 1996..................................... 725 717
Common stock, non voting, $0.01 par value, 600 authorized
in 1997 and 1996; none issued.......................... -- --
Paid-in capital........................................... 671,193 666,673
Accumulated deficit....................................... (86,721) (158,696)
-------- --------
585,197 508,694
Less treasury stock, at cost -- 16 shares in 1996......... -- (169)
-------- --------
Total stockholders' equity........................ 585,197 508,525
-------- --------
$885,586 $936,854
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1997 1996
------------- -------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 7) SEE NOTE 7)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 72,067 $ (861)
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization.......................... 26,238 25,845
Gain on sale of HRI.................................... (76,391) --
Impairment loss of property and equipment.............. 790 343
Deferred income taxes.................................. (1,516) 9,926
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash.......................... (10,449) (958)
Increase in accounts receivable, billed.............. (3,148) (27,513)
Decrease (increase) in accounts receivable,
unbilled............................................ 418 (9,491)
Increase (decrease) in accounts payable.............. 828 (16,190)
Increase in accrued compensation..................... 1,602 1,472
Decrease in accrued expenses......................... (13,016) (5,209)
Other, net........................................... (3,024) 1,172
-------- -------
Net cash used for operating activities............ (5,601) (21,464)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (5,768) (12,737)
Purchases of property and equipment....................... (7,692) (34,541)
Proceeds from sale of HRI, net............................ 126,375 --
Proceeds from sale of property and equipment.............. 3,644 18
Software development costs................................ (2,877) (26,382)
-------- -------
Net cash provided by (used for) investing
activities...................................... 113,682 (73,642)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 3,651 9,673
Proceeds from borrowings.................................. 42,492 96,749
Principal payments of long-term debt...................... (154,889) (25,612)
Other..................................................... (3,008) 3,813
-------- -------
Net cash (used for) provided by financing
activities...................................... (111,754) 84,623
-------- -------
CASH:
Net change................................................ (3,673) (10,483)
Balance at beginning of period............................ 7,631 18,979
-------- -------
Balance at end of period.................................. $ 3,958 $ 8,496
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest............................................... $ 7,128 $ 7,005
Income taxes........................................... 1,125 5,684
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... -- 2,700
Additions to capital lease obligations................. -- 12,620
Common stock issued upon conversion of subordinated
debentures............................................ -- 63,375
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q/A may wish to refer to the audited
consolidated financial statements of the Company for the fiscal years ended
December 31, 1996 and 1997 included in the Company's Annual Report on Form 10-K
filed February 2, 1998 ("Form 10-K").
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. On
March 31, 1997, the Company's independent auditors noted in a modifying fourth
paragraph to their unqualified independent report on the Company's financial
statements included in the Form 10-K that, because the Company's plans to divest
of certain assets to generate funds to meet scheduled 1997 amortization
requirements did not then include binding contracts to dispose of these assets,
and because no other contractual arrangements were in place to refinance or
raise additional funds to otherwise satisfy such required debt reduction,
substantial doubt was raised about the Company's ability to continue as a going
concern. As previously discussed in the Company's Form 10-K, the Company and its
current lenders contemplated that the contractual amortization of loan
commitments under the Second Amended and Restated Loan Facility (the "Second
Amended Facility") would be accomplished through asset divestitures or a
refinancing since operating cash flow was never intended to be utilized for this
purpose and would be insufficient to meet these obligations. On May 28, 1997,
Medaphis reduced the Company's loan commitment under the Second Amended Facility
to $170 million, which more than satisfied the required loan commitment
reduction for July 31, 1997.
The Company's consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that may be necessary should the Company, contrary to plans and
expectations, be unable to continue as a going concern.
2. LONG-TERM DEBT
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. The Second
Amended Facility matures on June 30, 1998 and, as such, all amounts outstanding
under the Second Amended Facility have been classified as current in the
accompanying June 30, 1997 balance sheet. The Second Amended Facility may be
extended or otherwise amended pursuant to the agreement. Borrowings under the
Second Amended Facility are secured by substantially all of the Company's assets
and are guaranteed by substantially all of the Company's subsidiaries. The
Second Amended Facility effectively refinanced the loans outstanding under the
Company's previous senior credit facility and can be used to finance working
capital and other general corporate needs with restrictions on new acquisitions,
certain litigation settlement payments, capital expenditures and the Company's
ability to declare or pay cash dividends on its common stock. The Second Amended
Facility provides for "base rate" loans that bear interest equal to prime plus
1% as long as certain financial covenants are met. The Second Amended Facility
required mandatory loan commitment reductions to $200 million and $150 million
on July 31, 1997 and January 31,
6
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
1998, respectively. In developing its 1997 business plan, the Company did not
expect to generate sufficient cash flow from operations to meet the required
debt reduction and, therefore, management had adopted a plan to divest
Healthcare Recoveries, Inc. ("HRI") and to evaluate alternatives for its
client/server integration businesses (the "BSG Group"). On May 28, 1997, the
Company was successful in divesting HRI through an initial public offering of
100% of its stock. This sale generated approximately $117 million of net
proceeds that were used to reduce the Company's borrowings under the Second
Amended Facility and it also reduced the loan commitment under the Second
Amended Facility to $170 million, which more than satisfied the required
reduction for July 31, 1997. At June 30, 1997, the Company had $137 million in
borrowings outstanding under the Second Amended Facility that bore interest at
9.5%.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the voting common stock (the "Common
Stock") of the Company on each of January 1, 1998 and April 1, 1998, provided
that the Second Amended Facility has not been repaid and terminated prior to
such vesting dates. The Company has not allocated any value to these warrants
because the warrants only vest if amounts are outstanding or commitments are not
terminated under the Second Amended Facility on December 31, 1997. Management
believes the Company will generate sufficient cash flows from the refinancing of
the Second Amended Facility or from asset sales to repay all borrowings under
and terminate the Second Amended Facility by December 31, 1997.
3. LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Although the
precise scope of the investigation is not known to the Company at this time,
Medaphis believes that the U.S. Attorney's Office is investigating allegations
of billing fraud and that the inquiry is focused upon billing and collection
practices in the Designated Offices. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance that the
investigation will be resolved promptly, that additional subpoenas or search
warrants will not be received by Medaphis or MPSC or that the investigation will
not have a material adverse effect on the Company. The Company recorded charges
of $12 million in the third quarter of 1995 and $2 million in the fourth quarter
of 1996, solely for administrative fees, costs and expenses it anticipates
incurring in connection with the investigation and the putative class action
lawsuits described below which were filed in 1995 following the Company's
announcement of the investigation. The charges are intended to cover only the
anticipated expenses of the investigation and the related lawsuits and do not
include any provision for fines, penalties, damages, assessments, judgments or
sanctions that may arise out of such matters.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
7
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
"Consolidated Complaint"). On April 11, 1996, certain of the named plaintiffs to
the Consolidated Complaint voluntarily dismissed with prejudice all of their
claims. As a result of these dismissals, the Consolidated Complaint no longer
contains any claims based on the Securities Act of 1933, as amended (the "1933
Act"), and the Company's underwriters and outside directors are no longer named
as defendants. The plaintiffs and the defendants have reached an agreement to
settle this action on a class-wide basis for $4.75 million, subject to court
approval (the "1995 Class Action Settlement"). The 1995 Class Action Settlement
would also include the related putative class action lawsuit currently pending
in the Superior Court of Cobb County, Georgia, described more fully below. The
court conditionally has certified a class for settlement purposes and has
scheduled a hearing for October 6, 1997 to determine whether to approve the
settlement and enter final judgment dismissing the action with prejudice. The
Company has reached agreement with one of its directors and officers' liability
insurance carriers to fund $3.7 million of the 1995 Class Action Settlement. The
Company accrued approximately $1.2 million in the quarter ending December 31,
1996 to fund the anticipated balance of the 1995 Class Action Settlement and to
pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages and costs. To date, defendants have not been served with
this complaint. Pursuant to the consummation of the 1995 Class Action
Settlement, the claims in this state action also will be settled. Pursuant to
the settlement agreement, plaintiffs have filed a motion to dismiss this action
without prejudice.
As originally disclosed in the Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual revenue. During that year, GFS processed approximately 5.6
million claims, approximately 2 million of which were made to government
programs. The government has requested that GFS voluntarily produce records, and
GFS is complying with that request. Although the precise scope and subject
matter of the investigation are not known, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for administrative fees, costs and expenses in connection with the
investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consoli-
8
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
dated Second Amended Complaint alleges violations of the federal securities laws
in connection with Medaphis' filings under the federal securities acts and
public disclosures. The Consolidated Second Amended Complaint is brought on
behalf of a class of persons who purchased or otherwise acquired Medaphis Common
Stock between January 6, 1996 and October 21, 1996. The Consolidated Second
Amended Complaint also asserts claims on behalf of a sub-class of all persons
who acquired Medaphis Common Stock pursuant to the merger between Medaphis and
Health Data Sciences Corporation ("HDS"). On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. Discovery
currently is proceeding. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the 1933 Act, but the Company believes
that it has substantial defenses to the alleged damages relating to such 1933
Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (payable
by the Company's insurance carriers), 3,355,556 shares of Medaphis Common Stock,
and warrants to purchase 5,309,523 shares of Medaphis Common Stock at $12 per
share for a five-year period. The Memorandum of Understanding also includes: (i)
an obligation on the part of Medaphis to contribute up to 600,000 additional
shares of Common Stock to the settlement under certain conditions if the
aggregate value of the Medaphis Common Stock proposed to be issued in the
settlement falls below $30.2 million during a specified time period; and (ii)
certain anti-dilution rights to plaintiffs with respect to certain future
issuances of shares of Medaphis Common Stock or warrants or rights to acquire
Medaphis Common Stock to settle existing civil litigation and claims currently
pending against the Company, subject to a 5.0 million share basket below which
there will be no dilution adjustments. The Memorandum of Understanding also
contains other customary terms and conditions including, but not limited to,
consent and approval of the Company's insurance carriers and the insurance
carriers' payment of the cash portion of the settlement, the Company's receiving
assurances from its independent accountants that the treatment of class members
in connection with the proposed settlement will not jeopardize
pooling-of-interests accounting treatment on previous acquisitions, the
execution of mutually acceptable settlement papers and the approval of the
settlement by the court. While the Company is presently unable to determine
when, or if, the contingencies in the Memorandum of Understanding may be
resolved and a charge recorded, management presently anticipates that the
Memorandum of Understanding should not have a material adverse effect on: (i)
the Company's current efforts to refinance the Second Amended Facility; or (ii)
the Company's operating cash flow or liquidity position, provided that any such
charge, if and when recorded, does not then violate the covenants of the Second
Amended Facility or any then applicable debt facility or such covenant
violations, if any, are waived.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants
9
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
violated federal and California securities laws and common law by, among other
things, making material misstatements and omissions in public and private
disclosures in connection with the acquisition of HDS. Plaintiff seeks
rescissory, compensatory and punitive damages, rescission, injunctive relief and
costs. On January 10, 1997, the defendants filed a demurrer to the complaint.
The demurrer was denied on February 5, 1997. On March 18, 1997, the court denied
the plaintiff's motion for a preliminary injunction. On July 16, 1997, plaintiff
filed an amended complaint adding several new parties, including current and
former directors and former officers of Medaphis. These newly added defendants
have not yet responded to the amended complaint. As a result of the Company's
restatement of its fiscal 1995 financial statements, the Company may not be able
to sustain a defense to strict liability on certain claims under the 1933 Act,
but the Company believes that it has substantial defenses to the alleged damages
relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). On April 18,
1997, the Medaphis defendants and BSG defendants filed motions to dismiss the
complaint. On or about July 3, 1997, in lieu of responding to these motions, the
plaintiffs filed an amended complaint, adding new claims under the 1933 Act and
new parties, including former officers of Medaphis. Defendants have not yet
responded to the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the
10
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Company's loss for the quarter ending September 30, 1996 and its restated
consolidated financial statements for the three months and year ending December
31, 1995 and its restated unaudited balance sheets as of March 31, 1996 and June
30, 1996. The Company intends to cooperate fully with the Commission in its
investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Restructuring charges......................... $ -- $ 4,250 $ -- $ 6,349
Legal costs................................... 2,000 -- 2,000 --
Pooling charges............................... -- 12,364 -- 10,571
Other......................................... 824 275 824 275
------ ------- ------ -------
$2,824 $16,889 $2,824 $17,195
====== ======= ====== =======
</TABLE>
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for the administrative fees, costs and expenses it has incurred and plans to
incur in connection with the federal inquiry of the billing procedures at GFS.
11
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Automation Atwork Companies............................... $ -- $ -- $ -- $ (408)
HRI....................................................... -- -- -- (765)
Consort Technologies, Inc................................. -- -- -- (526)
Intelligent Visual Computing, Inc. ("IVC")................ -- -- -- 200
Rapid Systems Solutions, Inc. ("Rapid Systems")........... -- 900 -- 900
BSG....................................................... -- 6,214 -- 6,214
HDS....................................................... -- 5,250 -- 5,250
Other..................................................... -- -- -- (294)
------- ------- ------- -------
$ -- $12,364 $ -- $10,571
======= ======= ======= =======
</TABLE>
A description of the type and amount of exit costs paid in the six months
ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
RESERVE PAID RESERVE
BALANCE THROUGH BALANCE
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease termination costs................................. $ 7,514 $(2,635) $4,879
Severance............................................... 2,748 (1,831) 917
Other................................................... 1,222 (876) 346
------- ------- ------
$11,484 $(5,342) $6,142
======= ======= ======
</TABLE>
5. INCOME TAXES
In 1996, Medaphis acquired IVC, Rapid Systems and BSG in merger
transactions, which were accounted for as pooling-of-interests. Prior to such
mergers, IVC, Rapid Systems and a company acquired by BSG prior to the BSG
merger had elected "S" corporation status for income tax purposes. As a result
of such mergers (or, in the case of the company acquired by BSG, its acquisition
by BSG), such entities terminated their "S" corporation elections. Pro forma net
loss and pro forma net loss per common share are presented as if the entities
had been "C" corporations during the six months ended June 30, 1996.
6. LINES OF BUSINESS
Medaphis has five reportable segments: Physician Services, Hospital
Services, HRI, HIT, and the BSG Group. Physician Services is a leading provider
of business management solutions and claims processing to physicians in the
United States. Hospital Services is a leading provider of business management
services to hospitals in the United States. HRI provider subrogation and related
recovery services primarily to healthcare payors. HRI was sold on May 28, 1997.
HIT provides application software and systems integration services to both
hospitals and physicians. The BSG Group provides full-service systems
integration, information technology consulting and tailored software development
to more than 100 clients in a variety of markets, including healthcare.
12
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies included in the Form 10-K.
Medaphis evaluated each segments' performance based on operating profit or loss.
The Company also accounts for intersegment sales as if the sales were to third
parties. Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30
1997 1996 1997 1997
------------ ------------ ---------- ----------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Revenue:
Physician Services.................... $ 74,954 $ 74,706 $146,714 $150,953
Hospital Services..................... 25,161 23,040 48,917 45,321
HRI................................... 5,804 8,650 14,720 15,326
HIT................................... 23,483 19,845 43,173 36,057
BSG Group............................. 21,888 35,376 45,698 76,639
Corporate and Eliminations............ (323) (849) (709) (1,279)
-------- -------- -------- --------
$150,967 $160,768 $298,513 $323,017
======== ======== ======== ========
Operating Profit(1):
Physician Services.................... $ 4,738 $ (2,023) $ 5,979 $ (2,291)
Hospital Services..................... 3,919 4,675 6,402 9,349
HRI................................... 1,432 3,097 3,685 4,485
HIT................................... 8,374 6,792 11,192 10,389
BSG Group............................. (765) 4,924 (491) 19,165
Corporate and Eliminations............ $(10,037) $ (5,180) $(18,480) $(10,101)
-------- -------- -------- --------
$ 7,661 $ 12,285 $ 8,287 $ 30,996
======== ======== ======== ========
Interest expense, net................. $ 6,056 $ 2,630 $ 12,171 $ 4,735
======== ======== ======== ========
Restructuring and Other Charges:
Physician Services.................... $ 2,000 $ 3,323 $ 2,000 $ 5,128
Hospital Services..................... -- -- -- --
HRI................................... -- -- -- (765)
HIT................................... -- 5,250 -- 4,316
BSG Group............................. -- 8,316 -- 8,516
Corporate............................. $ 824 $ -- $ 824 $ --
-------- -------- -------- --------
$ 2,824 $ 16,889 $ 2,824 $ 17,195
======== ======== ======== ========
Income (loss) before income taxes..... $ (1,219) $ (7,234) $ (6,708) $ 9,066
======== ======== ======== ========
Depreciation and Amortization:
Physician Services.................... $ 8,899 $ 8,286 $ 17,393 $ 15,801
Hospital Services..................... 1,325 1,189 2,603 2,389
HRI................................... 156 212 401 407
HIT................................... 1,259 1,358 2,969 2,844
BSG Group............................. 1,129 1,956 2,174 3,700
Corporate............................. $ 371 $ 371 $ 699 $ 704
-------- -------- -------- --------
$ 13,139 $ 13,372 $ 26,239 $ 25,845
======== ======== ======== ========
</TABLE>
13
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30
1997 1996 1997 1997
------------ ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital Expenditures:
Physician Services.................... $ 547 $ 5,874 $ 1,819 $ 18,661
Hospital Services..................... 2,203 2,046 2,989 3,528
HRI................................... 57 510 108 815
HIT................................... 646 897 1,311 1,863
BSG Group............................. 487 5,042 1,096 8,379
Corporate............................. $ 352 $ 705 $ 369 $ 1,295
-------- -------- -------- --------
$ 4,292 $ 15,074 $ 7,692 $ 34,541
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1997 1996
--------- -------------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C>
Identifiable Assets:
Physician Services........................................ $593,137 $610,150
Hospital Services......................................... 103,436 97,626
HRI....................................................... -- 23,863
HIT....................................................... 70,430 67,961
BSG Group................................................. 40,265 51,972
Corporate................................................. $ 78,319 $ 85,282
-------- --------
$885,587 $936,854
======== ========
</TABLE>
(1) Excludes restructuring and other charges, litigation settlement and interest
expense.
7. RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE- AND
SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed that
certain revenues and expenses may have been recorded incorrectly between certain
quarters during 1996. At the conclusion of the review, the Company determined
that there were certain accounting errors and irregularities and that its
interim financial statements for each fiscal quarter of 1996 required
restatement. These errors and irregularities consisted primarily of the
following: (1) incorrect quarterly recording of revenues and the related costs
and expenses for certain contracts; (2) incorrect quarterly recording of certain
liabilities for employee bonuses and related expenses; (3) certain costs and
expenses of certain acquired companies, which were later determined not to be
properly recordable, were recognized by those companies in periods prior to
their acquisitions, resulting in an overstatement of the Company's earnings
subsequent to those acquisitions; and (4) incorrect depreciation of certain
assets related to the Company's comprehensive reengineering and consolidation
project.
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
14
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
statements for years ended December 31, 1994, 1995 and 1996 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, the
predecessor accountants, 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.
Subsequent to the restatement related to HDS and in connection with the
reaudit of the Company's fiscal years ended December 31, 1995 and 1996 and the
audit of the Company's nine months ended September 30, 1997 by Price Waterhouse,
the Board of Directors of the Company determined, upon recommendation of the
Audit Committee of the Board, to restate the results of such periods to account
for the December 1995 acquisition of Medical Management Sciences, Inc. ("MMS")
on a purchase accounting basis. The MMS transaction had been accounted for as a
pooling of interest.
The Company has determined that all appropriate adjustments have been made
to its interim financial statements and that its consolidated financial
statements, taken as a whole, present fairly in all material respects the
Company's financial position, results of operations and cash flows for its
fiscal quarter ended June 30, 1996 and 1997 in conformity with generally
accepted accounting principles.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------------------------------- -------------------------------------------
AS ORIGINALLY AS PREVIOUSLY AS ORIGINALLY AS PREVIOUSLY
REPORTED RESTATED AS RESTATED REPORTED RESTATED AS RESTATED
------------- ------------- ----------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $175,193 $169,719 $160,768 $338,820 $331,968 $323,017
Salaries and wages......... 92,663 95,222 95,222 183,228 186,952 186,952
Other Operating expenses... 38,799 39,889 39,889 78,153 79,224 79,224
Depreciation............... 5,324 6,840 6,840 10,275 12,780 12,780
Amortization............... 4,826 5,108 6,532 9,735 10,217 13,065
Income before income
taxes.................... 13,776 3,141 (7,234) 35,369 21,229 9,066
Net income (loss).......... 3,337 (3,097) (9,931) 16,062 7,562 (861)
Pro forma net income
(loss)................... 3,337 (3,097) (9,931) 16,416 7,916 (507)
Pro forma net income (loss)
per common share......... $ 0.04 $ (0.04) $ (0.14) $ 0.22 $ 0.11 $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
----------------------- -----------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
----------- --------- ----------- ---------
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT PER SHARE DATA) EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.............................................. $147,970 $150,967 $295,516 $298,513
Salaries and wages................................... 92,386 92,386 185,964 185,964
Other operating expenses............................. 37,781 37,781 78,023 78,023
Depreciation......................................... 7,050 7,050 14,035 14,035
Amortization......................................... 4,665 6,089 9,355 12,203
Income (loss) before income taxes.................... (1,968) (1,219) (6,032) (6,707)
Income (loss) before extraordinary item.............. (248) (1,260) (2,087) (4,324)
Pro Forma net income (loss).......................... 76,143 75,131 74,304 72,067
Pro forma net income per common share................ $ 1.01 $ 1.00 $ 0.99 $ 0.96
</TABLE>
15
<PAGE> 16
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996
---------------------
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. 269,385 255,239
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>
<TABLE>
<CAPTION>
AS OF JUNE 30,
1997
---------------------
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. 223,163 213,517
Total Assets................................................ 765,537 885,586
Current Liabilities......................................... 277,954 283,181
Total Liabilities........................................... 295,162 300,389
Total Stockholders' Equity.................................. 470,375 585,197
</TABLE>
8. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 provides for new accounting principles used in the
calculation of earnings per share and shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This pronouncement cannot be adopted early. The following table presents basic
and diluted weighted average shares outstanding and a calculation of the pro
forma net income (loss) per share using the guidelines of SFAS No. 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding.............. 72,443 71,167 72,339 70,795
======= ======= ======= =======
Shares of common stock assumed issued upon exercise of
stock options using the treasury stock method as it
applies to the computation of diluted earnings per
share................................................ -- -- -- 3,991
------- ------- ------- -------
Diluted weighted average shares outstanding............ 72,443 71,167 72,339 74,786
======= ======= ======= =======
Pro forma net income (loss) before extraordinary
item................................................. $(1,260) $(9,931) $(4,324) $ (507)
Extraordinary income on sale of HRI.................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................ $75,131 $(9,931) $72,067 $ 507
======= ======= ======= =======
</TABLE>
16
<PAGE> 17
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.02) $ (0.14) $ (0.06) $ 0.01
Extraordinary income on sale of HRI............... 1.02 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.00 $ (0.14) $ 0.96 $ 0.01
======= ======= ======= =======
Diluted earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.02) $ (0.14) $ (0.06) $ 0.01
Extraordinary income on sale of HRI............... 1.02 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.00 $ (0.14) $ 0.96 $ 0.01
======= ======= ======= =======
</TABLE>
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company") provides business management
services and information products primarily to healthcare providers. Medaphis'
healthcare services are designed to assist its clients with the business
management functions associated with the delivery of healthcare services,
thereby permitting physicians and hospitals to focus on providing quality
medical services to their patients. Medaphis' healthcare information systems
include patient-centered clinical information management systems and
enterprise-wide patient and employee scheduling systems. These systems are
designed to improve efficiency and quality of care within hospitals and emerging
integrated healthcare delivery systems. Medaphis currently provides business
management systems and services to approximately 20,700 physicians and over
2,700 hospitals throughout the United States and systems integration and
services in the United States and abroad.
In February 1997, Medaphis announced the implementation of its 1997 fiscal
year business plan which is focused on Medaphis' core business and comprised of
the five following components: (1) exiting non-core businesses, such as
Healthcare Recoveries, Inc. ("HRI"), which Medaphis completed on May 28, 1997
through an initial public offering of 100% of HRI's stock; (2) achieving
improved predictability of results through enhanced management accountability
and controls; (3) reducing costs and increasing efficiencies; (4) emphasizing
customer service; and (5) implementing cross-selling initiatives.
Medaphis' business is impacted by, among other things, trends in the U.S.
healthcare industry. As healthcare expenditures have grown as a percentage of
the U.S. gross national product, public and private healthcare cost containment
measures have applied pressure to the margins of healthcare providers.
Historically, some healthcare payors have willingly paid the prices established
by providers while other healthcare payors, notably government agencies and
managed care companies, have paid far less than established prices (in many
cases less than the average cost of providing the services). As a consequence,
prices charged to healthcare payors willing to pay established prices have
increased in order to recover the cost of services purchased by government
agencies and others but not paid by them (i.e., "cost shifting"). The increasing
complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increased receivables and bad debt levels and higher business office costs.
Healthcare providers historically have addressed these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures, and by cost
shifting. Notwithstanding providers' responses to these pressures, management
believes that the revenue growth rate experienced by the Company's clients
continues to be adversely affected by increased managed care and other industry
factors impacting healthcare providers in the United States. At the same time,
the process of submitting healthcare claims for reimbursement to third party
payors in accordance with applicable industry and regulatory standards continues
to grow in complexity and to become more costly. Management believes that these
trends have and could continue to adversely affect the rate of the revenue
growth and profit margins of the Company's operations.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table presents certain items reflected in the Company's
statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue................................................ 100.0% 100.0% 100.0% 100.0%
Salaries and wages..................................... 61.2 59.2 62.3 57.9
Other operating expenses............................... 25.0 24.8 26.1 24.5
Depreciation........................................... 4.7 4.3 4.7 4.0
Amortization........................................... 4.0 4.1 4.1 4.0
Interest expense, net.................................. 4.0 1.6 4.1 1.5
Restructuring and other charges........................ 1.9 10.5 0.9 5.3
----- ----- ----- -----
Income (loss) before income taxes and extraordinary
item................................................. (0.8) (4.5) (2.2) 2.8
Income tax (benefit) expense........................... 0.0 1.7 (0.8) 3.1
----- ----- ----- -----
Income (loss) before extraordinary item................ (0.8) (6.2) (1.4) (0.3)
Extraordinary income on sale of HRI, net of tax........ 50.6 -- 25.6 --
----- ----- ----- -----
Net income (loss)...................................... 49.8 (6.2) 24.2 (0.3)
Pro forma adjustments.................................. -- -- -- 0.1
----- ----- ----- -----
Pro forma net income (loss)............................ 49.8% (6.2)% 24.2% (0.2)%
===== ===== ===== =====
</TABLE>
Revenue. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------ ------------ ---------- ----------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Revenue:
Physician Services.................... $ 74,954 $ 74,706 $146,714 $150,953
Hospital Services..................... 25,161 23,040 48,917 45,321
HRI................................... 5,804 8,650 14,720 15,326
HIT................................... 23,483 19,845 43,173 36,057
BSG Group............................. 21,888 35,376 45,698 76,639
Corporate and Eliminations............ (323) (849) (709) (1,279)
-------- -------- -------- --------
$150,967 $160,768 $298,513 $323,017
======== ======== ======== ========
</TABLE>
Physician Services and Hospital Services revenue for both the three- and
six-month periods ended June 30, 1997 has remained at relatively the same level
from the comparable periods in 1996 due to the industry conditions and revenue
pressures on the operations described above. The 1997 HRI amounts only include
the results through May 28, 1997, the date of the divestiture.
Services' revenue for both the three- and six-month periods ended June 30,
1997 has remained at relatively the same level from the comparable periods in
1996 due to the industry conditions and revenue pressures on the operations
described above. The 1997 Services amounts only include the results of HRI
through May 28, 1997, the date of the divestiture, thus negatively impacting the
1997 revenue amount by $3.4 million.
The 1996 client/server integration business (the "BSG Group") results
include the results of the Company's wholly owned operating subsidiary, Imonics
Corporation ("Imonics"), which was shut down at the end of 1996. Imonics
generated $5.8 million and $22.3 million of revenue during the three- and
six-month periods ended June 30, 1996, respectively. Excluding the Imonics
revenue, the BSG Group's revenue decreased 26.0% and 15.9% for the three- and
six-month periods ended June 30, 1997, as compared with the
19
<PAGE> 20
three- and six-month periods ended June 30, 1996, respectively. Over the past
year, the BSG Group has experienced higher than normal attrition and turnover
among its personnel. This attrition and turnover has hindered the BSG Group's
ability to sell new client/server system integration services as well as its
ability to provide their services in the most cost efficient manner.
HIT's revenue increased 18.3% and 19.7% for the three- and six-month
periods ended June 30, 1997, as compared with the three- and six-month periods
ended June 30, 1996, respectively. These increases are primarily the result of
increase in licensing agreements at Health Data Sciences, Inc. ("HDS") and
Automation Atwork Companies ("Atwork").
Salaries and Wages. Salaries and wages increased to 61.2% of revenue in
the second quarter of 1997 from 59.2% in the second quarter of 1996 and
increased to 62.3% of revenue in the six-month period ended June 30, 1997 from
57.9% in the same period of 1996. The increases in salaries and wages, as a
percentage of revenue, are primarily due to the decreases in the Company's
revenue. The Company has not reduced its employment levels to coincide with the
decrease in revenue growth because of a renewed emphasis on client service and
expected growth in its technology divisions.
Other Operating Expenses. Other operating expenses increased to 25.0% of
revenue in the second quarter of 1997 compared to 24.8% in the second quarter of
1996 and increased to 26.1% for the six-month period ended June 30, 1997 from
24.5% in the same period of 1996. The increase in other operating expenses as a
percentage of revenue for 1997, as compared with 1996, is due to the previously
mentioned decreases in the Company's revenue. These increases are also
attributable to professional fees the Company has incurred to assist with a
variety of operational and organizational projects undertaken by current
management. The Company anticipates it will continue to incur these professional
fees for the remainder of 1997, but at decreasing levels. Other operating
expenses are primarily comprised of postage, facility and equipment rental,
telecommunications, travel, outside consulting services and office supplies.
Depreciation. Depreciation expense was $7.1 million in the second quarter
of 1997 as compared with $6.8 million in the second quarter of 1996 and $14.0
million in the six-month period ended June 30, 1997 as compared with $12.8
million in the same period of 1996. These increases reflect the Company's
investment in property and equipment to support growth in its business.
Amortization. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $6.1 million in the second quarter of 1997 as compared with $6.5 million in
the second quarter of 1996 and $12.2 million in the six-month period ended June
30, 1997 as compared with $13.1 million in the same period of 1996. The
decreases are primarily due to the 1996 abandonment of the Company's internally
developed software associated with the Company's reengineering program and the
write-offs associated with the shut down of Imonics, which combined totaled
approximately $99 million.
Interest. Net interest expense was $6.1 million in the second quarter of
1997 as compared with $2.6 million in the second quarter of 1996 and $12.2
million in the six-month period ended June 30, 1997 as compared with $4.7
million in the same period of 1996. The increases in interest expense were due
to increased borrowing under the Company's credit facilities to fund the
Company's reengineering program in 1996, which was subsequently abandoned, and
its working capital needs in both 1996 and 1997, and increased interest rates.
Management expects to receive approximately $11 million in annualized interest
expense savings as a result of the pay down of the Second Amended Facility with
the net proceeds from the sale of HRI. Management also anticipates that interest
rate fluctuations and changes in the amount of borrowings under its Second
Amended and Restated Loan Facility (the "Second Amended Facility") will impact
future interest expense.
20
<PAGE> 21
Restructuring and Other Charges. Components of restructuring and other
charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Restructuring charges........................... $ -- $ 4,250 $ -- $ 6,349
Legal costs..................................... 2,000 -- 2,000 --
Pooling charges................................. -- 12,364 -- 10,571
Other........................................... -- 275 -- 275
------ ------- ------ -------
$2,000 $16,889 $2,000 $17,195
====== ======= ====== =======
</TABLE>
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for administrative fees, costs and expenses it has incurred and plans to incur
in connection with the federal inquiry of the billing procedures at the
Company's wholly owned operating subsidiary, Gottlieb's Financial Services.
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------
1997 1996 1997 1996
------------ ------- ------ -------
(IN THOUSANDS)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
Atwork....................................... $ -- $ -- $ -- $ (408)
HRI.......................................... -- -- -- (765)
Consort Technologies, Inc.................... -- -- -- (526)
Intelligent Visual Computing, Inc............ -- -- -- 200
Rapid Systems Solutions, Inc................. -- 900 -- 900
BSG Corporation.............................. -- 6,214 -- 6,214
HDS.......................................... -- 5,250 -- 5,250
Other........................................ -- -- -- (294)
------ ------- ------ -------
$ -- $12,364 $ -- $10,571
====== ======= ====== =======
</TABLE>
Income Taxes. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions. 1996 pro forma adjustments for income taxes have been
provided for companies, which had elected to be treated as "S" Corporations
under the Internal Revenue Code of 1986, as amended, prior to merging with the
Company.
Extraordinary Item. On May 28, 1997, Medaphis sold HRI through an initial
public offering of 100% of its stock, which generated net proceeds to the
Company of approximately $117 million. Medaphis had acquired HRI on August 28,
1995 through a business combination accounted for as a pooling-of-interests.
LIQUIDITY AND CAPITAL RESOURCES
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. The Second
Amended Facility matures on June 30, 1998 and may be extended or otherwise
amended pursuant to the agreement. Borrowings under the Second Amended Facility
are secured by substantially all of the Company's assets and are guaranteed by
substantially all of the Company's subsidiaries. The Second Amended Facility
effectively refinanced the loans outstanding under the Company's previous
21
<PAGE> 22
senior credit facility and can be used to finance working capital and other
general corporate needs with restrictions on new acquisitions, certain
litigation settlement payments, capital expenditures and the Company's ability
to declare or pay cash dividends on its common stock. The Second Amended
Facility provides for "base rate" loans that bear interest equal to prime plus
1% as long as certain financial covenants are met. The Second Amended Facility
required mandatory loan commitment reductions to $200 million and $150 million
on July 31, 1997 and January 31, 1998, respectively. In developing its 1997
business plan, the Company did not expect to generate sufficient cash flows from
operations to meet the required debt reduction and, therefore, management had
adopted a plan to divest HRI and it was seeking alternatives for the BSG Group.
On May 28, 1997, the Company was successful in divesting HRI through an initial
public offering of 100% of its stock. This sale generated approximately $115
million of net proceeds that were used to reduce the Company's borrowings under
the Second Amended Facility and it also reduced the loan commitment under the
Second Amended Facility to $170 million, which more than satisfied the required
reduction for July 31, 1997. At June 30, 1997, the Company had $137 million in
borrowings outstanding under the Second Amended Facility that bore interest at
9.5%.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the June 30, 1997 balance sheet. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $82 million of working capital,
which included $4.0 million of cash at June 30, 1997. Also at June 30, 1997, the
Company had approximately $33 million available under the Second Amended
Facility, which management believes is adequate to fund its current operating
cash requirements. The Company used $5.6 million of cash for operating
activities during the six months ended June 30, 1997 as compared with $21.5
million during the six months ended June 30, 1996. The increase in the Company's
operating cash flow resulted primarily from the collection of outstanding
receivables and management's cash control initiatives.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of Medaphis' voting common stock (the
"Common Stock") on each of January 1, 1998 and April 1, 1998, provided that the
Second Amended Facility has not been repaid and terminated prior to such vesting
dates. The Company has not allocated any value to these warrants because the
warrants only vest if amounts are outstanding or commitments are not terminated
under the Second Amended Facility on December 31, 1997. Although the Company can
give no assurance that it will be able to refinance or otherwise pay in full the
amounts owed under the Second Amended Facility, it is the Company's present
expectation to refinance the Second Amended Facility on or prior to December 31,
1997 in order to provide longer term liquidity on more customary market terms
and conditions and to assure that these warrants will not vest. If the Company
is unsuccessful in refinancing the Second Amended Facility, the Company will
attempt to generate the cash needed to reduce the borrowings under the Second
Amended Facility to zero by December 31, 1997 through the sale of one or more of
its assets.
If the Company is unable to obtain alternative debt financing or generate
sufficient net proceeds through the sale of one of its assets by January 31,
1998 or to otherwise satisfy the commitment reduction required by January 31,
1998 through various management cash control initiatives, the Company's lenders
can cause the borrowings under the Second Amended Facility to become immediately
due and payable.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. A consolidated class action
compliant was filed on November 22, 1996 and was amended on February 3, 1997. On
August 14, 1997, the parties entered into a memorandum of understanding (the
"Memorandum of Understanding") to settle this action on a class-wide basis for
$20 million in cash (payable by the Company's insurance carriers), 3,355,556
shares of Medaphis Common Stock and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Memorandum of
Understanding also contains other material provisions as well as conditions
including, but not limited to, consent of the Company's insurance carriers and
the insurance carriers' payment of the cash portion of the settlement, the
Company's receiving assurances from its independent accountants that the
22
<PAGE> 23
proposed settlement will not jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court.
While the Company is presently unable to determine when, or if, the
contingencies in the Memorandum of Understanding may be resolved and a charge
recorded, management presently anticipates that the proposed Memorandum of
Understanding should not have a material adverse effect on: (i) the Company's
current efforts to refinance the Second Amended Facility; or (ii) the Company's
operating cash flow or liquidity position, provided that any such charge, if and
when recorded, does not then violate the covenants of the Second Amended
Facility or any then applicable debt facility or such covenant violation, if
any, or waived.
OTHER MATTERS
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed that
certain revenues and expenses may have been recorded incorrectly between certain
quarters during 1996. At the conclusion of the review, the Company determined
that there were certain accounting errors and irregularities and that its
interim financial statements for each fiscal quarter of 1996 required
restatement as set forth herein. These errors and irregularities consisted
primarily of the following: (1) incorrect quarterly recording of revenues and
the related costs and expenses for certain contracts; (2) incorrect quarterly
recording of certain liabilities for employee bonuses and related expenses; (3)
certain costs and expenses of certain acquired companies, which were later
determined not to be properly recordable, were recognized by those companies in
periods prior to their acquisitions, resulting in an overstatement of the
Company's earnings subsequent to those acquisitions; and (4) incorrect
depreciation of certain assets related to the Company's comprehensive
reengineering and consolidation project.
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 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, the
predecessor accountants, 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 reaudit the Company's 1995 and 1996 fiscal
years and audit the Company's nine-month period ending September 30, 1997.
Subsequent to the restatement related to HDS and in connection with the
reaudit of the Company's fiscal years ended December 31, 1995 and 1996 and the
audit of the Company's nine months ended September 30, 1997 by Price Waterhouse,
the Board of Directors of the Company determined, upon recommendation of the
Audit Committee of the Board, to restate the results of such periods to account
for the December 1995 acquisition of Medical Management Sciences, Inc. ("MMS")
on a purchase accounting basis. The MMS transaction had been accounted for as a
pooling of interest.
23
<PAGE> 24
The Company has determined that all appropriate adjustments have been made
to its interim financial statements and that its consolidated financial
statements, taken as a whole, present fairly in all material respects the
Company's financial position, results of operations and cash flows for its
fiscal quarter ended June 30, 1996 and 1997 in conformity with generally
accepted accounting principles.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------------------------- ----------------------------------
AS AS AS AS
ORIGINALLY PREVIOUSLY AS ORIGINALLY PREVIOUSLY AS
REPORTED RESTATED RESTATED REPORTED RESTATED RESTATED
----------- ----------- --------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Revenue............................ $175,193 $169,719 $160,768 $338,820 $331,968 $323,017
Salaries and wages................. 92,663 95,222 95,222 183,228 186,952 186,952
Other Operating expenses........... 38,799 39,889 39,889 78,153 79,224 79,224
Depreciation....................... 5,324 6,840 6,840 10,275 12,780 12,780
Amortization....................... 4,826 5,108 6,532 9,735 10,217 13,065
Income before income taxes......... 13,776 3,141 (7,234) 35,369 21,229 9,066
Net income (loss).................. 3,337 (3,097) (9,931) 16,062 7,562 (861)
Pro forma net income (loss)........ 3,337 (3,097) (9,931) 16,416 7,916 (507)
Pro forma net income (loss) per
common share..................... $ 0.04 $ (0.04) $ (0.14) $ 0.22 $ 0.11 $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
--------------------- ---------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue............................................. $147,970 $150,967 $295,516 $298,513
Salaries and wages.................................. 92,386 92,386 185,964 185,964
Other operating expenses............................ 37,781 37,781 78,023 78,023
Depreciation........................................ 7,050 7,050 14,035 14,035
Amortization........................................ 4,665 6,089 9,355 12,203
Income (loss) before income taxes................... (1,968) (1,219) (6,032) (6,707)
Income (loss) before extraordinary item............. (248) (1,260) (2,087) (4,324)
Pro Forma net income (loss)......................... 76,143 75,131 74,304 72,067
Pro Forma net income per common share............... $ 1.01 $ 1.00 $ 0.99 $ 0.96
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996
---------------------
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. $269,385 $255,239
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>
24
<PAGE> 25
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. $223,163 $213,517
Total Assets................................................ 765,537 885,586
Current Liabilities......................................... 277,954 283,181
Total Liabilities........................................... 295,162 300,389
Total Stockholders' Equity.................................. 470,375 585,197
</TABLE>
25
<PAGE> 26
PART II:
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Although the
precise scope of the investigation is not known to the Company at this time,
Medaphis believes that the U.S. Attorney's Office is investigating allegations
of billing fraud and that the inquiry is focused upon billing and collection
practices in the Designated Offices. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance that the
investigation will be resolved promptly, that additional subpoenas or search
warrants will not be received by Medaphis or MPSC or that the investigation will
not have a material adverse effect on the Company. The Company recorded charges
of $12 million in the third quarter of 1995 and $2 million in the fourth quarter
of 1996, solely for administrative fees, costs and expenses it anticipates
incurring in connection with the investigation and the putative class action
lawsuits described below which were filed in 1995 following the Company's
announcement of the investigation. The charges are intended to cover only the
anticipated expenses of the investigation and the related lawsuits and do not
include any provision for fines, penalties, damages, assessments, judgments or
sanctions that may arise out of such matters.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of voting common stock (the "Common Stock") in April 1995. On October
13, 1995, the named plaintiffs in these lawsuits filed a consolidated class
action complaint (the "Consolidated Complaint"). On April 11, 1996, certain of
the named plaintiffs to the Consolidated Complaint voluntarily dismissed with
prejudice all of their claims. As a result of these dismissals, the Consolidated
Complaint no longer contains any claims based on the Securities Act of 1933, as
amended (the "1933 Act"), and the Company's underwriters and outside directors
are no longer named as defendants. The plaintiffs and the defendants have
reached an agreement to settle this action on a class-wide basis for $4.75
million, subject to court approval (the "1995 Class Action Settlement"). The
1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The court conditionally has certified a class for
settlement purposes and has scheduled a hearing for October 6, 1997 to determine
whether to approve the settlement and enter final judgment dismissing the action
with prejudice. The Company has reached agreement with one of its directors and
officers' liability insurance carriers to fund $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ending December 31, 1996 to fund the anticipated balance of the 1995 Class
Action Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages
II-1
<PAGE> 27
and costs. To date, defendants have not been served with this complaint.
Pursuant to the consummation of the 1995 Class Action Settlement, the claims in
this state action also will be settled. Pursuant to the settlement agreement,
plaintiffs have filed a motion to dismiss this action without prejudice.
As originally disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, filed March 31, 1997, the Company learned in March
1997 that the government is investigating allegations concerning the Company's
wholly owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993,
Medaphis acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual revenue. During that year, GFS processed approximately 5.6
million claims, approximately 2 million of which were made to government
programs. The government has requested that GFS voluntarily produce records, and
GFS is complying with that request. Although the precise scope and subject
matter of the investigation are not known, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for administrative fees, costs and expenses in connection with the
investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between January 6, 1996 and October 21, 1996. The
Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). On
February 14, 1997, the defendants moved to dismiss the Consolidated Second
Amended Complaint in its entirety. On May 27, 1997, the court denied defendants'
motion to dismiss. Discovery currently is proceeding. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (payable
by the Company's insurance carriers), 3,355,556 shares of Medaphis Common Stock,
and warrants to purchase 5,309,523 shares of Medaphis Common Stock at $12 per
share for a five-year period. The Memorandum of Understanding also includes: (i)
an obligation on the part of Medaphis to contribute up to 600,000 additional
shares of Common Stock to the settlement under certain conditions if the
aggregate value of the Medaphis Common Stock proposed to be issued in the
settlement falls below $30.2 million during a specified time period; and (ii)
certain anti-dilution rights to plaintiffs with respect to certain future
issuances of shares of
II-2
<PAGE> 28
Medaphis Common Stock or warrants or rights to acquire Medaphis Common Stock to
settle existing civil litigation and claims currently pending against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The Memorandum of Understanding also contains other
customary terms and conditions including, but not limited to, consent and
approval of the Company's insurance carriers and the insurance carriers' payment
of the cash portion of the settlement, the Company's receiving assurances from
its independent accountants that the treatment of class members in connection
with the proposed settlement will not jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court. While the
Company is presently unable to determine when, or if, the contingencies in the
Memorandum of Understanding may be resolved and a charge recorded, management
presently anticipates that the Memorandum of Understanding should not have a
material adverse effect on: (i) the Company's current efforts to refinance the
Second Amended Facility; or (ii) the Company's operating cash flow or liquidity
position, provided that any such charge, if and when recorded, does not then
violate the covenants of the Second Amended Facility or any then applicable debt
facility or such covenant violations, if any, are waived.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. The demurrer was denied on February 5, 1997. On March 18, 1997, the
court denied the plaintiff's motion for a preliminary injunction. On July 16,
1997, plaintiff filed an amended complaint adding several new parties, including
current and former directors and former officers of Medaphis. These newly added
defendants have not yet responded to the amended complaint. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). On April 18,
1997, the Medaphis defendants and BSG defendants filed motions to dismiss the
complaint. On or about July 3, 1997, in lieu of responding to these motions, the
plaintiffs filed an amended complaint, adding new claims under the 1933 Act and
new parties, including former officers of Medaphis. Defendants have not yet
responded to the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its
II-3
<PAGE> 29
acquisition of BSG in May 1996. The indemnification demand claims damages of $35
million (the maximum damages payable by Medaphis under the indemnification
agreement) for the alleged breach by Medaphis of its representations and
warranties made in the merger agreement between Medaphis and BSG.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
ITEM 2. CHANGES IN SECURITIES.
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq National Market
rules), 20 million shares of one or more series of preferred stock (the
"Preferred Stock"), with such terms and for such consideration as the Board of
Directors may determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Company's Common Stock and non-voting common
stock (the "Non-voting Common Stock") with respect to dividends and liquidation
rights. Depending on the voting rights applicable to each series of Preferred
Stock, the issuance of shares of Preferred Stock could dilute the voting power
of the holders of the Common Stock.
II-4
<PAGE> 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 19, 1997. The
following directors were elected at such meeting:
<TABLE>
<CAPTION>
NOMINEE BOARD TERM VOTES FOR VOTES AGAINST VOTES WITHHELD
------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Robert C. Bellas, Jr..................... Through 1997 51,433,791 -- 1,220,856
David R. Holbrooke, M.D.................. Through 1997 51,459,845 -- 1,194,802
David E. McDowell........................ Through 1997 51,459,567 -- 1,195,080
John C. Pope............................. Through 1997 51,406,073 -- 1,248,574
Dennis A. Pryor.......................... Through 1997 51,477,267 -- 1,177,380
</TABLE>
No other matters were voted upon at the Annual Meeting of Stockholders on
May 19, 1997; however, the meeting was adjourned until 10:00 a.m. on June 17,
1997, at which time the stockholders approved an amendment of the Company's
Amended and Restated Certificate of Incorporation to provide that the aggregate
number of shares of all classes of stock which the Company has authority to
issue is 220,600,000, consisting of 200,000,000 shares of Common Stock, 600,000
shares of Non-voting Common Stock, and 20,000,000 shares of Preferred Stock,
which Preferred Stock may be issued by the Board of Directors at any time with
such rights, designations and preferences as the Board of Directors may
determine. Votes cast were 38,838,042 for, 3,432,391 against and 243,064
withheld.
ITEM 5. OTHER INFORMATION.
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which have an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of the Company were adjusted as part of such
option restrike, but no adjustments were made to any options held by directors
or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased attrition among its key employees and
that adjustment of the exercise price of the outstanding options would
significantly help to mitigate such risk.
On May 19, 1997, in accordance with the Company's Amended and Restated
By-laws, the Board of Directors took action to expand the size of the Board to
six members and to fill the vacancy created thereby through the appointment of
C. Christopher Trower. Mr. Trower is a former partner of the Atlanta law firm,
Sutherland, Asbill & Brennan. Mr. Trower has wide-ranging experience with both
public and private companies in corporate, partnership, and tax matters,
including acquisitions/divestitures, securities offerings, and tax planning and
tax disputes.
II-5
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<C> <C> <S>
2.1 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, file No. 333-2506).
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form 8-A/A, filed on
March 28, 1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8, File
No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant.
3.6 -- Amended and Restated By-Laws of Registrant.
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480).
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480).
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.5 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File No. 333-2506).
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996 (incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480).
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996.
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996.
11 -- Statement regarding Computation of Earnings Per Share.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
</TABLE>
II-6
<PAGE> 32
- ---------------
* Previously filed with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
(b) Reports on Form 8-K.
The Company has filed the following reports on Form 8-K or 8-K/A during the
quarter ended June 30, 1997:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -----------
<S> <C> <C> <C>
Amendment of 1996 Year end press release, second
amended and restated loan agreement........... Yes(1) December 31, 1996 April 28, 1997
Press release of SEC effectiveness on IPO of
Healthcare Recoveries, Inc.................... No May 21, 1997 May 22, 1997
</TABLE>
- ---------------
(1) Consolidated statement of operations for the three months and year ended
December 31, 1996, condensed consolidated balance sheets as of December 31,
1996 and 1995 and supplemented consolidated segment data for the quarterly
periods ended March 31, June 30, September 30 and December 31, 1996 and
1995.
II-7
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDAPHIS CORPORATION
By: /s/ ALLEN W. RITCHIE
------------------------------------
Allen W. Ritchie
Executive Vice President, and
Chief Financial Officer
By: /s/ MARK P. COLONNESE
------------------------------------
Mark P. Colonnese
Vice President, and
Corporate Controller
(Principal Accounting Officer)
Date: February 2, 1998
II-8
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <C> <S> <C>
2.1 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, file No. 333-2506)
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480)
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216)
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 of
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1993)
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form 8-A/A, filed on
March 28, 1995)
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8, File
No. 333-03213)
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant
3.6 -- Amended and Restated By-Laws of Registrant
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480)
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480)
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)
10.5 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File No. 333-2506)
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996(incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480)
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996
11 -- Statement regarding Computation of Earnings Per Share
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
</TABLE>
- ---------------
* Previously filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
II-9
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
DESCRIPTION 1997 1996 1997 1996
- ----------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE NUMBER)
(AS RESTATED, SEE NOTE 7)
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding during the period..... 72,443 71,167 72,339 70,795
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method............................................ 2,706 -- 2,644 3,991
------- ------- ------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period............... 75,149 71,167 74,983 74,786
======= ======= ======= =======
Pro forma net income (loss) before extraordinary item..... $(1,260) $(9,931) $(4,324) $ (507)
Extraordinary income on sale of HRI....................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................... $75,131 $(9,931) $72,067 $ (507)
======= ======= ======= =======
Pro forma net income (loss) per common share:
Pro forma net income (loss) before extraordinary
item............................................... $ (0.02) $ (0.14) $ (0.06) $ (0.01)
Extraordinary income on sale of HRI.................. 1.02 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss).......................... $ 1.00 $ (0.14) $ 0.96 $ (0.01)
======= ======= ======= =======
FULLY DILUTED
Weighted average shares outstanding during the period..... 72,443 71,167 72,339 70,795
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method............................................ 3,612 -- 2,869 3,993
------- ------- ------- -------
Total weighted average common stock and common stock
equivalents outstanding during the period............... 76,055 71,167 75,208 74,788
======= ======= ======= =======
Pro forma net income (loss) before extraordinary item..... $(1,260) $(9,931) $(4,324) $ (507)
Extraordinary income on sale of HRI....................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................... $75,131 $(9,931) $72,067 $ (507)
======= ======= ======= =======
Pro forma net income (loss) per common share:
Pro forma net income (loss) before extraordinary
item............................................... $ (0.02) $ (0.04) $ (0.06) $ (0.01)
Extraordinary income on sale of HRI.................. 1.00 -- 1.02 --
------- ------- ------- -------
Pro forma net income (loss).......................... $ 0.98 $ (0.04) $ 0.96 $ (0.01)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE SIX MONTH PERIOD ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,958
<SECURITIES> 0
<RECEIVABLES> 181,414
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 213,517
<PP&E> 87,756
<DEPRECIATION> 0
<TOTAL-ASSETS> 885,586
<CURRENT-LIABILITIES> 283,181
<BONDS> 0
0
0
<COMMON> 725
<OTHER-SE> 585,197
<TOTAL-LIABILITY-AND-EQUITY> 885,586
<SALES> 0
<TOTAL-REVENUES> 298,513
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 293,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,171
<INCOME-PRETAX> (6,707)
<INCOME-TAX> (2,383)
<INCOME-CONTINUING> (4,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,391
<CHANGES> 0
<NET-INCOME> 72,067
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 323,017
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 309,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,735
<INCOME-PRETAX> 9,066
<INCOME-TAX> 9,927
<INCOME-CONTINUING> (861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</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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<PAGE> 4
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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