<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <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, 1998
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 7, 1998
-------------- ------------------
<S> <C>
Common Stock $0.01 Par Value................................ 78,634,836 Shares
Non-voting Common Stock $0.01 Par Value..................... 0 Shares
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements............................. 1
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997...................................... 1
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997................ 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997........................... 3
Notes to Consolidated Financial Statements................ 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
Part II: OTHER INFORMATION
Item 1: Legal Proceedings................................ 23
Item 4: Submission of Matters to a Vote of Security
Holders................................................ 29
Item 5: Other Information................................ 29
Item 6: Exhibits and Reports on Form 8-K................. 29
Index to Exhibits......................................... 33
</TABLE>
---------------------
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 3,302 $ 17,794
Restricted cash........................................... 7,939 5,576
Accounts receivable, billed............................... 104,084 100,813
Accounts receivable, unbilled............................. 76,013 75,888
Other..................................................... 12,714 12,365
--------- ---------
Total current assets.............................. 204,052 212,436
Property and equipment...................................... 75,728 72,763
Deferred income taxes....................................... 67,936 60,857
Intangible assets........................................... 499,724 515,939
Other....................................................... 13,878 12,032
--------- ---------
$ 861,318 $ 874,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 10,954 $ 12,256
Accrued compensation...................................... 27,278 36,506
Accrued expenses.......................................... 50,820 56,295
Current portion of long-term debt......................... 1,532 11,490
Deferred income taxes..................................... 2,392 2,392
--------- ---------
Total current liabilities......................... 92,976 118,939
Long-term debt.............................................. 222,146 189,451
Accrued litigation settlements.............................. 21,875 52,500
Other obligations........................................... 4,473 11,356
--------- ---------
Total liabilities................................. 341,470 372,246
--------- ---------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1998
and 1997; none issued.................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1998 and 1997; issued and outstanding 78,425 in 1998
and 73,204 in 1997..................................... 784 732
Common stock, non voting, $0.01 par value, 600 authorized
in 1998 and 1997; none issued.......................... -- --
Paid-in capital........................................... 737,517 678,998
Accumulated deficit....................................... (218,453) (177,949)
--------- ---------
Total stockholders' equity........................ 519,848 501,781
--------- ---------
$ 861,318 $ 874,027
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
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,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................................... $136,356 $150,967 $276,696 $298,513
-------- -------- -------- --------
Salaries and wages.................................... 87,124 92,386 175,322 185,964
Other operating expenses.............................. 35,808 37,781 75,147 78,023
Depreciation.......................................... 7,694 7,050 15,998 14,035
Amortization.......................................... 6,154 6,089 12,272 12,203
Interest expense, net................................. 5,844 6,056 12,219 12,171
Litigation settlements................................ 21,875 -- 21,875 --
Restructuring and other charges....................... 1,673 2,824 2,234 2,824
-------- -------- -------- --------
Total expenses.............................. 166,172 152,186 315,067 305,220
-------- -------- -------- --------
Loss before income taxes and extraordinary items...... (29,816) (1,219) (38,371) (6,707)
Income taxes.......................................... -- 41 (3,405) (2,383)
-------- -------- -------- --------
Loss before extraordinary items....................... (29,816) (1,260) (34,966) (4,324)
Extraordinary items, net of tax....................... -- 76,391 (5,557) 76,391
-------- -------- -------- --------
Net income (loss)........................... $(29,816) $ 75,131 $(40,523) $ 72,067
======== ======== ======== ========
Basic and diluted net income (loss) per common share:
Loss before extraordinary items..................... $ (0.39) $ (0.02) $ (0.46) $ (0.06)
Extraordinary items, net of tax..................... -- 1.02 (0.08) 1.02
-------- -------- -------- --------
Net income (loss)................................... $ (0.39) $ 1.00 $ (0.54) $ 0.96
======== ======== ======== ========
Weighted average shares outstanding................... 77,136 75,149 75,318 74,983
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (40,523) $ 72,067
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Depreciation and amortization............................. 28,270 26,238
Gain on sale of HRI, net of tax........................... -- (76,391)
Early extinguishment of debt.............................. 9,231 --
Deferred income taxes..................................... (7,079) (1,516)
Changes in assets and liabilities, excluding effects of
acquisitions:
Restricted cash......................................... (11) (10,449)
Accounts receivable, billed............................. (3,272) (3,148)
Accounts receivable, unbilled........................... (125) 418
Accounts payable........................................ (1,302) 828
Accrued compensation.................................... (9,133) 1,602
Accrued expenses........................................ (7,259) (13,016)
Accrued litigation settlements.......................... 21,875 --
Other, net.............................................. (77) (2,234)
--------- ---------
Net cash used for operating activities............. (9,405) (5,601)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (19,683) (7,692)
Software development costs.................................. (2,853) (2,877)
Proceeds from sale of HRI, net.............................. -- 126,375
Other....................................................... (10) (2,124)
--------- ---------
Net cash (used for) provided by investing
activities........................................ (22,546) 113,682
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 756 (128)
Proceeds from the exercise of employee stock options........ 5,068 3,779
Proceeds from borrowings.................................... 294,310 42,492
Principal payments of long-term debt........................ (270,707) (154,889)
Deferred financing costs.................................... (11,968) (3,008)
--------- ---------
Net cash provided by (used for) financing activities........ 17,459 (111,754)
--------- ---------
CASH:
Net change.................................................. (14,492) (3,673)
Balance at beginning of period.............................. 17,794 7,631
--------- ---------
Balance at end of period.................................... $ 3,302 $ 3,958
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 5,110 $ 7,128
Income taxes.............................................. 1,282 1,125
Non-cash investing and financing activities:
Additions to capital lease obligations.................... 42 --
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K filed
February 2, 1998 (as amended by Form 10-K/A filed June 22, 1998).
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.
NOTE 2 -- LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices") (the "California Investigation"). Medaphis
first became aware of the California Investigation on June 13, 1995 when search
warrants were executed on the Designated Offices and it and MPSC received grand
jury subpoenas. Medaphis received an additional grand jury subpoena on August
22, 1997, with which it has complied. The subpoena required, among other things,
records of any audit or investigative reports relating to the billing of payors
globally for radiological services during the period January 1, 1991 to date and
any refunds owed to or issued to payors with respect to such global billing
reports in the Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx) (the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an
4
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
order modifying its February 6, 1998 order to allow Medaphis to make public
disclosures concerning the Complaint and its contents to the extent that
Medaphis determined such disclosures were required by applicable securities
laws, provided that such disclosures did not reveal the Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes. The Complaint alleges overpayments of
approximately $20,500,000 together with treble damages and additional penalties
based on statutory civil penalties. The Complaint alleges that at least 50,000
separate false claims were filed under federal programs and at least 8,000
separate false claims were filed under state programs. The Complaint also
alleges unspecified compensatory, general and punitive damages on behalf of
Relator II on his or her employment claims. The allegations in the Complaint are
limited to the office of CompMed (acquired by Medaphis) in Culver City,
California. Medaphis believes that this Complaint relates to and concerns the
California Investigation. Medaphis is engaged in negotiations with both the
civil and criminal divisions of the U.S. Attorney's office to settle those
portions of the Complaint as to which the United States has indicated that it
intends to proceed and any criminal charges that the United States may intend to
pursue. The Company has also contacted the State of California concerning civil
settlement of the portions of the Complaint as to which California intends to
proceed. The Company has not yet initiated discussions with the Relators
concerning the other portions of the Complaint, but the Company is seeking to
reach a global civil settlement with the United States, the State of California
and the Relators. To facilitate further negotiations with the United States and
California governments, the Company has agreed with such governments to toll
applicable statutes of limitations through November 2, 1998.
Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995 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. Since the third quarter of 1995,
the Company has periodically adjusted the reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters, as such amounts are not currently estimable.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries, which impacts only certain managed care plans,
cannot be determined by the Company, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return
5
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
to clients its portion of fees previously collected, and may receive claims for
alleged damages as a result of the error. The Company is unable to estimate the
possible range of loss, if any.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of voting common stock ("Common
Stock") in April 1995, were named as defendants in putative shareholder class
action lawsuits filed in the United States District Court for the Northern
District of Georgia. In general, these lawsuits alleged violations of the
federal securities laws in connection with Medaphis' public statements and
filings under the federal securities acts, including the registration statement
filed in connection with Medaphis' public offering of Common Stock in April
1995. On October 13, 1995, the named plaintiffs in these lawsuits filed a
consolidated class action complaint (the "Consolidated Complaint"). On January
3, 1996, the court denied defendants' motion to dismiss the Consolidated
Complaint, which argued that the Consolidated Complaint failed to state a claim
upon which relief may be granted. On April 11, 1996, certain of the named
plaintiffs to the Consolidated Complaint voluntarily dismissed with prejudice
all of their claims. As a result of these dismissals, the Consolidated Complaint
no longer contained any claims based on the Securities Act and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. On
May 19, 1997, the plaintiffs and the defendants entered into a stipulation and
settlement agreement, pursuant to which the parties agreed to settle this action
on a class-wide basis for $4.75 million, subject to court approval (the "1995
Class Action Settlement"). The 1995 Class Action Settlement included the related
putative class action lawsuit filed in the Superior Court of Cobb County,
Georgia, described more fully below. On October 28, 1997, the court certified a
class for settlement purposes, approved the settlement and entered final
judgment dismissing the action with prejudice. One of Medaphis' directors' and
officers' liability insurance carriers has paid $3.7 million of the 1995 Class
Action Settlement directly for the benefit of the plaintiffs. The Company
accrued approximately $1.2 million in the quarter ended December 31, 1996 for
the anticipated balance of the 1995 Class Action Settlement and to pay certain
fees incident thereto. On November 6, 1997, the Company paid the remaining $1.05
million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. In 1993, Medaphis acquired GFS, an
emergency room physician billing company located in Jacksonville, Florida, which
had developed a computerized coding system. In 1994, Medaphis acquired and
merged into GFS another emergency room physician billing company, Physician
Billing, Inc., located in Grand Rapids, Michigan. For each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government has requested
that GFS voluntarily produce records, and GFS has complied with that request.
Although the precise scope and subject matter of the GFS Investigation are not
known to the Company, Medaphis believes that the GFS Investigation, which is
being participated in by federal law enforcement agencies having both civil and
criminal authority, involves GFS's billing procedures and the computerized
6
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
coding system used in Jacksonville and Grand Rapids to process claims and may
lead to claims of errors in billing. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company or that the GFS
Investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. The Company has recorded charges of
$2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million in the second quarter of 1998 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,
as such amounts can not be estimated.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleged violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint was brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserted claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). The
Consolidated Second Amended Complaint sought compensatory and rescissory
damages, as well as fees, interest and other costs. On February 14, 1997, the
defendants moved to dismiss the Consolidated Second Amended Complaint in its
entirety. On May 27, 1997, the court denied defendants' motion to dismiss.
The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") to settle the 1996 putative shareholder
class action litigation which is the subject of the Consolidated Second Amended
Complaint on a class-wide basis for $20 million in cash (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
shares of Medaphis Common Stock, and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Stipulation
included, 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 certain 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
contained other conditions including, but not limited to, consent and approval
of the Company's insurance carriers and the insurance carriers' payment of the
cash portion of the settlement, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company's
7
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
insurance carriers consented to the settlement and funded the $20 million cash
portion. On March 25, 1998, the Court granted final approval of the settlement
and entered final judgment dismissing the action.
The Company recorded a $52.5 million charge in the quarter ended September
30, 1997 in connection with the Stipulation. This charge is comprised of the
following: (i) $30.2 million representing the original 3,355,556 shares of
Common Stock valued at the fair value per share on the date that the material
terms of the agreement were reached or approximately $9 per share and (ii) $22.3
million representing the fair value of the warrants on the date the material
terms of the agreement were reached, valued using the Black-Scholes option
pricing model with the following assumptions: expected life -- 5 years, risk
free interest rate -- 6%, dividend rate -- 0% and expected volatility
factor -- 60%. No accounting recognition was required for the additional 600,000
shares to be issued pursuant to the agreement as these shares represent the
maximum number of contingent shares that were issuable based on certain stock
price contingencies during the ten day period prior to October 11, 1997. As a
result of the actual decline in the Company's stock price during such period,
the Stipulation required that the maximum number of contingent shares be
awarded; however, no additional accounting charge was required in connection
with the award of such contingent shares. The 3,955,556 shares were issued in
April 1998. Additionally, no accounting recognition was afforded the cash
portion of the Stipulation as this amount was the responsibility of the
insurance carriers. Such amount has been paid by the insurance carriers directly
to an escrow account for the benefit of the plaintiffs.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation (the "Derivative Suit"). The plaintiff seeks
unspecified compensatory damages and costs on behalf of the Company. On January
28, 1997, Medaphis and certain individual defendants filed a motion to dismiss
the complaint. On February 11, 1997, the plaintiff filed an amended complaint
adding as defendants, additional current and former directors and officers of
Medaphis. On April 23, 1997, Medaphis and all other defendants filed a motion to
dismiss the amended complaint, which motion was denied without prejudice. The
parties entered into a Stipulation and Settlement Agreement dated June 26, 1998
(the "Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). The
Derivative Stipulation is subject to certain conditions including, but not
limited to, consent and approval of the insurance carrier (which has been
requested by the Company), payment of the cash portion of the settlement by the
insurance carrier and final approval of the settlement by the court. On June 26,
1998, the court granted preliminary approval to the settlement. The court has
scheduled a final fairness hearing concerning the settlement for September 29,
1998.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages in excess of $100 million,
rescission, injunctive relief and costs. The Company is unable to estimate a
possible range of loss. On January 10, 1997, the defendants filed a demurrer to
the complaint. On February 5, 1997 the Court overruled defendants' demurrer. On
March 18, 1997, the court denied the plaintiff's motion for a preliminary
injunction. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former and
current officers of Medaphis. All of the newly added defendants have responded
to the amended
8
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the Securities Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such Securities Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. The Company is unable to estimate a possible range of loss. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
Securities Act and common law and new parties, including former officers of
Medaphis, Medaphis' former independent accountants and BSG. On or about October
29, 1997, all defendants filed motions to dismiss the amended complaint. On May
12, 1998, the court ruled in favor of defendants on the motions, dismissing all
of plaintiffs' claims with prejudice and without leave to amend. On May 15,
1998, the Judge signed an order to that effect. The plaintiffs filed a notice of
appeal of such order on June 25, 1998.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 August 31, 1998. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. The Company and the BSG
Principals have reached an agreement in principle to settle the claims made on
behalf of the former BSG shareholders in exchange for approximately 3.2 million
shares of Medaphis Common Stock, subject to negotiation and definitive
documentation of other terms and conditions of the settlement. There can be no
assurance that such settlement will be completed or that such settlement, if
completed, will be in accordance with the above mentioned terms. The Company
recorded a litigation settlement charge of $21.3 million in the quarter ended
June 30, 1998 in connection with this agreement in principle. The charge
reflects 3.2 million shares of Medaphis Common Stock valued at the fair value
per share on the date on which the material terms of the agreement in principle
was reached. The Company has classified the entire $21.3 million liability
associated with the proposed settlement as noncurrent since such obligation will
be settled with Common Stock rather than current assets and the exact timing of
the payments of claims pursuant to such settlement is not determinable.
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
9
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
complaint alleges both common law fraud and violations of the federal securities
laws in connection with the merger. In addition, the complaint alleges breaches
of contract relating to the merger agreement and a registration rights
agreement, as well as tortious interference with economic advantage. The
plaintiffs seek rescission of the merger agreement and the return of all MMS
shares, as well as damages in excess of $100 million. The Company is unable to
estimate a possible range of loss. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George D. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserts claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 52,252 shares of Medaphis Common Stock (based
on a price per share of Medaphis Common Stock of approximately $7). The Company
recorded a litigation settlement charge of approximately $0.4 million in the
quarter ended June 30, 1998 in connection with this agreement. The number of
shares of Medaphis Common Stock is subject to adjustment upward or downward by
up to 9,301 shares depending upon the average closing price of Medaphis Common
Stock for a specified period. Under the adjustment, the minimum number of shares
of Medaphis Common Stock to be issued pursuant to the Stickle Stipulation is
42,951 and the maximum number of shares is 61,553. The Stickle Stipulation is
subject to certain conditions including, but not limited to, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), payment of the cash portion of the settlement by the insurance
carrier, and final approval of the settlement by the court. On June 26, 1998,
the court entered an order substituting Peter Gladkin as lead plaintiff in lieu
of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. The court has
scheduled a final fairness hearing concerning the settlement for September 29,
1998.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the 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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company intends to cooperate fully with the
Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of
10
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the lawsuits, the written demands and the pending governmental investigations
will not have a material adverse effect upon the Company, including, without
limitation, the Company's results of operations, financial position and cash
flow. Because the Company is unable to estimate a range of loss with respect to
certain of the pending claims, the Company has not accrued any amounts for any
damages, settlements, penalties or awards with respect to such unsettled claims,
except as otherwise disclosed.
NOTE 3 -- RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring costs................................... $ 620 $ -- $ 620 $ --
Legal costs........................................... 690 2,000 690 2,000
Severance costs....................................... 363 824 924 824
------ ------ ------ ------
$1,673 $2,824 $2,234 $2,824
====== ====== ====== ======
</TABLE>
Restructuring Costs. During the three and six months ended June 30, 1998,
the Company recorded approximately $0.6 million of restructuring costs for the
consolidation of several corporate and operating division departments to
eliminate redundant activities. These costs relate to severance costs for
approximately 25 employees who had been notified of their termination and
related benefits.
The description of the type and amount of restructuring costs recorded and
applied against each reserve in the six months ended June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE
DECEMBER 31, RESERVE AGAINST JUNE 30,
1997 ADJUSTMENT RESERVE 1998
-------------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Lease termination costs...................... $8,015 $ -- $(1,340) $6,675
Severance.................................... 1,357 620 (1,269) 708
------ ---- ------- ------
$9,372 $620 $(2,609) $7,383
====== ==== ======= ======
</TABLE>
Legal Costs. In June 1998, the Company accrued an additional $0.3 million
and $0.9 million for the legal and administrative fees, costs and expenses
associated with the California Investigation and the 1996 Lawsuits,
respectively.
In June 1998 and 1997, the Company recorded a charge of $0.7 million and
$2.0 million, respectively, for the legal and administrative fees, costs and
expenses associated with the GFS Investigation.
Also in June 1998, the Company reduced its reserves for certain other
specific legal matters by $1.2 million.
Severance Costs. The Company recorded charges of $0.4 million and $0.9
million in the three and six months ended June 30, 1998, respectively, for
severance costs associated with former executive management. The Company had
recorded $0.8 million in June 1997 for severance costs associated with former
executive management.
11
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- LONG TERM DEBT
On February 20, 1998, the Company sold $175 million of senior notes (the
"Notes"). The Notes bear interest at the rate of 9 1/2% per annum, payable
semi-annually on February 15 and August 15 of each year, commencing on August
15, 1998. The Notes will mature on February 15, 2005. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the original
principal amount of the Notes at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more equity offerings; provided that at least $100 million aggregate principal
amount of the Notes remain outstanding immediately following any such
redemption.
Payment of principal, of premium, if any, and interest on the Notes will be
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are
inconsequential individually and in the aggregate to the consolidated financial
statements.
The Company also entered into a new $100 million credit facility (the
"Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the Credit Facility. LIBOR based
loans bear interest at LIBOR plus amounts ranging from 1.0% to 2.75% based on
the Company's leverage ratio, as defined in the Credit Facility. Base rate loans
bear interest at prime plus amounts ranging from 0.0% to 1.75% based on the
Company's leverage ratio, as defined. In addition the Company pays a quarterly
commitment fee on the unused portion of the Credit Facility ranging from 0.25%
to 0.75% per annum based on the Company's leverage ratio. The Credit Facility
contains financial and other restrictive covenants, including without limitation
those restricting the incurrence of additional indebtedness, the creation of
liens, the payment of dividends, sales of assets, capital expenditures, and
prepayment of the Notes and those requiring maintenance of minimum net worth,
minimum EBITDA (as defined), minimum interest coverage and maximum leverage.
Availability under the Credit Facility is determined by the Company's Borrowing
Base (as defined). Amounts outstanding under the Credit Facility will be due on
February 20, 2001. At June 30, 1998, the Company had $46 million in borrowings
outstanding under the Credit Facility at interest rates ranging from 8.1% to
10.0%.
The Company used the proceeds from the offering of the Notes, together with
the initial borrowing under the Credit Facility and available cash, to repay the
$210 million borrowings under the then-current loan facility plus accrued
interest. As a result of this early extinguishment of debt, the Company recorded
an extraordinary charge of $5.6 million, net of tax of $3.6 million, to
write-off the unamortized costs associated with the previous debt facility.
NOTE 5 -- NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition ("SOP 97-2"). SOP 97-2 is effective for transactions entered into in
the first quarter of 1998. In March 1998, the AICPA issued SOP 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2, "Software Revenue Recognition,"
("SOP 98-4"). SOP 98-4 defers for one year the application of certain passages
in SOP 97-2. The Company had historically recorded the revenue associated with
software licenses upon shipment of the product and when no significant
contractual obligations remained outstanding. The adoption of SOP 97-2 changes
the way the Company records revenue for its ULTICARE(R) software license sales
only from upon delivery to a percentage-of-
12
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
completion method over the life of the installation period. As of June 30, 1998,
the Company had not sold any ULTICARE licenses that required installation;
therefore, the adoption of SOP 97-2 has had no material impact on the Company's
operating results for the six months ended June 30, 1998. SOP 97-2 will not
materially impact the pattern of revenue recognition for all of the Company's
other software sales.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance on the accounting for the costs of computer software developed
or obtained for internal use and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not believe
that SOP 98-1 will have a material impact on the Company's results of
operations.
In June 1998, the AICPA issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes guidance on the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities and is effective for financial statements
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company does not believe that SFAS 133 will have a material impact on the
Company's results of operations.
NOTE 6 -- SEGMENT REPORTING
Medaphis provides its services and products through its Healthcare Services
Group and Per-Se Technologies. The Healthcare Services Group provides business
management services to physicians and hospitals, including the collection of
clinical data, data input, medical coding, billing, cash collections and
accounts receivable management. The Healthcare Services Group consists of two
reportable segments based on the clients they serve: (i) Physician Services,
which is a leading provider of business management solutions and claims
processing to physicians in the United States; and (ii) Hospital Services, which
is a leading provider of business management services to hospitals in the United
States. Per-Se Technologies ("Per-Se") provides application software and a broad
range of information technology and consulting services to healthcare and other
service-oriented markets. Per-Se is organized into two reportable segments based
on their different service offerings: (i) Application Software Products, which
provides application software and system integration services; and (ii) Impact
Innovations Group (formerly Per-Se Consulting Services), which provides
full-service systems integration, information technology consulting and tailored
software development. HRI provided subrogation and related recovery services
primarily to healthcare payors. HRI was sold on May 28, 1997.
Medaphis evaluates each segment's performance based on operating profit or
loss. The Company also accounts for inter-segment sales as if the sales were to
third parties.
The Company's reportable segments are strategic business units that offer
different products and services. Information concerning the operations in these
reportable segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Physician Services.......................... $ 69,560 $ 74,954 $139,659 $146,714
Hospital Services........................... 27,080 25,161 52,351 48,917
Per-Se Application Software................. 19,225 23,483 42,936 43,173
Impact Innovations Group.................... 20,948 21,888 42,654 45,698
HRI......................................... -- 5,804 -- 14,720
Eliminations................................ (457) (323) (904) (709)
-------- -------- -------- --------
$136,356 $150,967 $276,696 $298,513
======== ======== ======== ========
</TABLE>
13
<PAGE> 16
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating profit(1):
Physician Services.......................... $ 2,194 $ 4,738 $ 3,758 $ 5,979
Hospital Services........................... 2,732 3,919 4,506 6,402
Per-Se Application Software................. 735 8,374 3,329 11,192
Impact Innovations Group.................... 1,215 (765) 1,769 (491)
HRI......................................... -- 1,432 -- 3,685
Corporate................................... (7,300) (10,037) (15,405) (18,479)
-------- -------- -------- --------
$ (424) $ 7,661 $ (2,043) $ 8,288
======== ======== ======== ========
Interest expense, net....................... $ 5,844 $ 6,056 $ 12,219 $ 12,171
======== ======== ======== ========
Restructuring and other charges (including
litigation settlements):
Physician Services.......................... $ -- $ 2,000 $ -- $ 2,000
Hospital Services........................... 238 -- 238 --
Per-Se Application Software................. 162 -- 162 --
Impact Innovations Group.................... 389 -- 389 --
HRI......................................... -- -- -- --
Corporate................................... 22,759 824 23,320 824
-------- -------- -------- --------
$ 23,548 $ 2,824 $ 24,109 $ 2,824
======== ======== ======== ========
Income loss before income taxes............. $(29,816) $ (1,219) $(38,371) $ (6,707)
======== ======== ======== ========
Depreciation and amortization:
Physician Services.......................... $ 7,939 $ 8,899 $ 16,342 $ 17,393
Hospital Services........................... 1,825 1,325 3,623 2,603
Per-Se Application Software................. 2,083 1,259 4,245 2,969
Impact Innovations Group.................... 1,076 1,129 2,287 2,174
HRI......................................... -- 156 -- 401
Corporate................................... 925 371 1,773 698
-------- -------- -------- --------
$ 13,848 $ 13,139 $ 28,270 $ 26,238
======== ======== ======== ========
Capital expenditures:
Physician Services.......................... $ 859 $ 547 $ 12,793 $ 1,819
Hospital Services........................... 1,004 2,203 2,474 2,989
Per-Se Application Software................. 776 646 1,974 1,311
Impact Innovations Group.................... 407 487 628 1,096
HRI......................................... -- 57 -- 108
Corporate................................... 999 352 1,814 369
-------- -------- -------- --------
$ 4,045 $ 4,292 $ 19,683 $ 7,692
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets:
Physician Services........................................ $556,602 $563,825
Hospital Services......................................... 106,566 106,479
Per-Se Application Software............................... 70,641 72,505
Impact Innovations Group.................................. 29,445 30,489
HRI....................................................... -- --
Corporate................................................. 98,064 100,729
-------- --------
$861,318 $874,027
======== ========
</TABLE>
- ---------------
(1) Excludes restructuring and other charges, litigation settlements and
interest expense.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), is a leader in delivering
healthcare information and business management services, together with enabling
technologies in selected industries. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively.
Servicing approximately 20,000 physicians and 2,700 hospitals, predominantly in
North America, the Company's large client base and national presence further
support the Company's competitive position. Medaphis provides its services and
products through its Healthcare Services Group and Per-Se Technologies, its
Information Technology Group.
The Healthcare Services Group provides a range of business management
services to physicians and hospitals, including clinical data collection, data
input, medical coding, billing, cash collections and accounts receivable
management. These services are designed to assist customers with the business
management functions associated with the delivery of healthcare services,
allowing physicians and hospital staffs to focus on providing quality patient
care. These services also assist physicians and hospitals in improving cash
flows and reducing administrative costs and burdens. Per-Se Technologies
provides application software and a broad range of information technology and
consulting services to healthcare and other service-oriented markets such as
energy, communications and financial services.
Medaphis markets its services and products primarily to integrated
healthcare delivery networks, hospitals, physician practices, long-term care
facilities, home health providers and managed care providers.
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 ENDED
JUNE 30, JUNE 30,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue............................................. 100.0% 100.0% 100.0% 100.0%
Salaries and wages.................................. 63.9 61.2 63.4 62.3
Other operating expenses............................ 26.3 25.0 27.2 26.1
Depreciation........................................ 5.6 4.7 5.8 4.7
Amortization........................................ 4.5 4.0 4.4 4.1
Interest expense, net............................... 4.3 4.0 4.4 4.1
Litigation settlements.............................. 16.0 -- 7.9 --
Restructuring and other charges..................... 1.2 1.9 0.8 0.9
----- ----- ----- -----
Loss before income taxes and extraordinary items.... (21.8) (0.8) (13.9) (2.2)
Income taxes........................................ 0.0 0.0 (1.2) (0.8)
----- ----- ----- -----
Loss before extraordinary items..................... (21.8) (0.8) (12.7) (1.4)
Extraordinary items, net of tax..................... 0.0 50.6 (2.0) 25.6
----- ----- ----- -----
Net income (loss)................................... (21.8)% 49.8% (14.7)% 24.2%
===== ===== ===== =====
</TABLE>
15
<PAGE> 18
Three months ended June 30, 1998 compared to three months ended June 30, 1997
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $ 69,560 $ 74,954
Hospital Services........................................... 27,080 25,161
Per-Se Application Software................................. 19,225 23,483
Impact Innovations Group.................................... 20,948 21,888
HRI......................................................... -- 5,804
Eliminations................................................ (457) (323)
-------- --------
$136,356 $150,967
======== ========
</TABLE>
Physician Services' revenue decreased by 7.2% for the three month period
ended June 30, 1998 as compared with the three month period ended June 30, 1997.
The decrease is attributable to processing delays at Gottlieb's Financial
Services, Inc. ("GFS") related to the change to a manual coding process and an
increase in client losses which exceeded management's expectations. In addition,
the Physician Services segment continues to be affected by the revenue
pressures, which management believes will continue, on the physician accounts
receivable operations resulting from an increase in managed care.
The 7.6% increase in Hospital Services' revenue for the quarter ended June
30, 1998, as compared to the same period of the prior year, reflects growth in
the client base.
Per-Se Application Software's revenue decreased by 18.1% during the three
months ended June 30, 1998 as compared with the same period for the prior year.
The decrease is primarily a result of a slowdown in software license fees in the
patient scheduling product line. Management believes this is a temporary decline
due to certain technical problems with a release within the patient scheduling
product line. The Company believes it has corrected these problems.
The slight decrease in the Impact Innovations Group's revenue for the
quarter ended June 30, 1998 as compared to the same period in 1997 is primarily
a result of the Company's decision late in 1997 to downsize this segment which
created less billable hours in 1998. This segment was downsized in 1997
principally to obtain management efficiencies, but also to reduce unproductive
billable staff since growth in the business had not occurred as quickly as had
been planned. The decline in revenue is partly the result of disruption to the
business from previously-disclosed downsizing and is expected to be a temporary
situation.
Medaphis divested HRI in May 1997 through an initial public offering of
100% of its stock.
SALARIES AND WAGES. Salaries and wages decreased to $87.1 million (or
63.9% of revenue) in the second quarter of 1998 from $92.4 million (or 61.2% of
revenue) in the second quarter of 1997. The decrease is a direct result of the
Company's restructuring and cost containment initiatives implemented during the
third and fourth quarters of 1997 and the second quarter of 1998. However, the
increase in salaries and wages as a percentage of revenue is attributable to the
above mentioned revenue decreases and increase in the head count at GFS to
handle the conversion to a manual coding process.
OTHER OPERATING EXPENSES. Other operating expenses decreased to $35.8
million (or 26.3% of revenue) in the second quarter of 1998 compared to $37.8
million (or 25.0% of revenue) in the second quarter of 1997. The decrease in
other operating expenses for the three months ended June 30, 1998, as compared
with the same period in 1997, is primarily due to the reduction of professional
services. The impact of the reduction of professional services has been
partially offset by increased marketing costs associated with the Per-Se
Application Software segment. Other operating expenses are primarily comprised
of postage, facility and equipment rental, telecommunications, travel, office
supplies and legal, accounting and other professional services.
16
<PAGE> 19
DEPRECIATION. Depreciation expense was $7.7 million in the second quarter
of 1998 as compared with $7.1 million in the second quarter of 1997. This
increase reflects the Company's investment in property and equipment to support
its business. As a result of the Company's decision to outsource its payroll
processing function, depreciation expense will increase approximately $3.0
million in the third quarter of 1998 as the Company fully depreciates the
remaining cost of the current payroll processing system over its shortened
remaining useful life.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
has remained relatively flat for the three-month period ended June 30, 1998 from
the comparable period in 1997. Amortization expense was $6.2 million in the
second quarter of 1998 as compared with $6.1 million in the second quarter of
1997.
INTANGIBLE ASSETS. As of June 30, 1998, the Company's balance sheet
included approximately $500 million of unamortized intangible assets, which is
greater than 58% of the Company's total asset balance. The current amortization
rate on the unamortized intangible assets is in excess of $20 million per year.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant restructuring charges within the Physician Services segment and
(iii) absence of revenue growth within the Physician Services segment.
Therefore, in accordance with applicable accounting rules, management prepared a
40 year undiscounted cash flow analysis to determine if these intangible assets
were still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all instances, management
believes the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: revenue growth was forecasted at an average
rate of 3.4% and the EBITDA margin was forecasted at approximately 3.5
percentage points above the current level. Such analysis indicated that no
impairment of these intangible assets had occurred. However, the Company
recognizes that modest adjustments to the assumptions could have a material
impact on the analysis and related conclusions. For example, if the Physician
Services segment is unable to improve its EBITDA margin, revenue growth of at
least 4.1% would be required to allow for recoverability of these assets over
the 40 year life. As of June 30, 1998, the Physician Services segment has not
realized the revenue growth and EBITDA margin that was projected at December 31,
1997. Management continues to monitor its results of operations and other
developments within the industry to adjust its cash flow forecast as necessary.
If the projected undiscounted cash flows used in the Company's recoverability
analysis decreased to one dollar below the carrying value of the intangible
assets, the Company would be required to record a non-cash impairment charge
that may exceed $300 million to reduce the Physician Services segment's
intangible assets to their fair value, as determined by discounting the future
cash flows of this segment. Management still believes the current intangible
asset balance is recoverable.
INTEREST. Net interest expense was $5.8 million in the second quarter of
1998 as compared with $6.1 million in the second quarter of 1997. The decrease
is primarily related to lower levels of debt outstanding.
RESTRUCTURING AND OTHER CHARGES. During the second quarter of 1998 the
Company combined several corporate and operating division departments to
eliminate redundant costs. As a result of this restructuring
17
<PAGE> 20
plan, the Company recorded approximately $0.6 million of severance costs for
approximately 25 employees who had been notified of their termination and
advised of their benefits by June 30, 1998.
In addition to the restructuring charge, the Company incurred charges of
approximately $1.1 million and $2.8 million in the three-month period ended June
30, 1998 and 1997, respectively. The 1998 amounts included: (i) a net increase
of $0.7 million to the Company's legal reserves for the legal and administrative
fees, costs and expenses associated with various legal matters; and (ii) $0.4
million for severance costs associated with former executive management. The
1997 charges were comprised of the following amounts: (i) $2.0 million for legal
costs associated with the GFS Investigation; and (ii) $0.8 million associated
with severance costs associated with former executive management.
LITIGATION SETTLEMENTS. During the second quarter of 1998, the Company had
agreed, in principle, to the material terms to settle three outstanding legal
matters which aggregated $21.9 million. The Company has agreed, in principle, to
settle these matters primarily with Common Stock. The Company had no such
settlements in the prior year period. See footnote 2 of the Notes to
Consolidated Financial Statements where these settlements in principle are
discussed in detail.
INCOME TAXES. As of June 30, 1998, the Company had recorded a net deferred
tax asset of $67.9 million primarily reflecting a tax benefit of $104.3 million
for NOLs offset by a valuation allowance of $26.5 million. The valuation
allowance primarily reflects the Company's assessment of the uncertainty
associated with the realizability of NOLs assumed in certain business
combinations; a full valuation allowance has been provided on such amounts. With
respect to the deferred tax assets for which a valuation allowance has not been
provided, realizability of such amount is dependent on the Company generating
sufficient taxable income prior to the expiration of such NOLs. Currently, the
Company's NOLs are scheduled to expire in varying amounts from 1998 to 2011;
however, no material amounts are scheduled to expire prior to 2008. Although
realization is not assured, based on the Company's current analyses and
estimates, management believes it is more likely than not that the Company will
generate sufficient taxable income to fully realize the deferred tax asset prior
to the expiration of the carryforward period. In addition, if future taxable
income is not sufficient to fully utilize the deferred tax asset, other tax
planning strategies are available to the Company, which makes it more likely
than not that the Company will be able to utilize the deferred tax asset. As a
result of the litigation settlements accrued during the second quarter, the
Company has continued to incur substantial losses from continuing operations.
Based on the current period losses, and the losses recorded in the prior years,
management began to fully reserve all tax benefits generated during the second
quarter of 1998. Until the Company's operation results improve, management does
not believe it is more likely than not that these incremental tax benefits will
be realized within a reasonable period.
Effective income tax rates for the prior period presented vary from
statutory rates primarily as a result of nondeductible goodwill associated with
merger transactions consummated by the Company in previous years.
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. The Company recorded an extraordinary
gain on the sale of HRI of $76.4 million, net of tax of $46.2 million, in the
second quarter of 1997. Medaphis had acquired HRI on August 28, 1995 through a
business combination accounted for as a pooling-of-interests.
18
<PAGE> 21
Six months ended June 30, 1998 compared to six months ended June 30, 1997
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Physician Services........................................ $139,659 $146,714
Hospital Services......................................... 52,351 48,917
Per-Se Application Software............................... 42,936 43,173
Impact Innovations Group.................................. 42,654 45,698
HRI....................................................... -- 14,720
Eliminations.............................................. (904) (709)
-------- --------
$276,696 $298,513
======== ========
</TABLE>
Physician Services' revenue decreased 4.8% for the six-month period ended
June 30, 1998 as compared with the six-month period ended June 30, 1997. The
previously discussed processing delays at GFS and client losses attributed to
the decline in revenue.
The 7.0% increase in Hospital Services' revenue for the six months ended
June 30, 1998, as compared to the same periods of the prior year, reflects
internally generated volume growth.
Per-Se Application Software's revenue decreased slightly during the six
months ended June 30, 1998 as compared with the same period for the prior year.
The decrease is a result of a slowdown in software license fees in the patient
scheduling product line offset by an increase in the amount of revenue
associated with the Company's ULTICARE(R) software product. The patient
scheduling products have historically comprised a large portion of Per-Se
Application Software revenue. The Company experienced performance issues with a
release of the Company's patient scheduling software. Although these problems
were resolved in early 1998 and a new version was released, the performance
issues in the prior release had a more pronounced effect on the Company's sales
in the first half of 1998 than the Company anticipated. The Company has been
working diligently to ensure that our customers are satisfied with the
performance of the new version. Based on recent successful installations of the
new release, as well as being recognized as a market leader, management believes
sales of the patient scheduling product should return to levels expected in the
second half of 1998.
The 6.7% decrease in the Impact Innovations Group's revenue is primarily a
result of the Company's decision in late 1997 to downsize this segment which
created less billable hours in the six months ended June 30, 1998 as compared to
the same periods in 1997. This segment was downsized in 1997 principally to
obtain management efficiencies, but also to reduce unproductive billable staff
since growth in the business had not occurred as quickly as had been planned.
The decline in revenue is partly the result of disruption to the business from
previously-disclosed downsizing and is expected to be a temporary situation.
Medaphis divested HRI in May 1997 through an initial public offering of
100% of its stock.
SALARIES AND WAGES. Salaries and wages decreased to $175.3 million (or
63.4% of revenue) in the six-month period ended June 30, 1998 from $186.0
million (or 62.3% of revenue) in the same period of 1997. The decrease is a
direct result of the Company's restructuring and cost containment initiatives
implemented during the third and fourth quarters of 1997 and the second quarter
of 1998. However, the increase in the head count at GFS caused the increase in
salaries and wages as a percentage of revenue.
OTHER OPERATING EXPENSES. Other operating expenses decreased to $75.1
million (or 27.2% of revenue) in the six-month period ended June 30, 1998 from
$78.0 million (or 26.1% of revenue) in the same period of 1997. The decrease in
other operating expenses for the six months ended June 30, 1998, as compared
with 1997, is primarily due to the reduction of professional services. Other
operating expenses increased as a percentage of revenue due to third party
commission costs and increased marketing costs associated with the Per-Se
Application Software segment. Other operating expenses are primarily comprised
of postage,
19
<PAGE> 22
facility and equipment rental, telecommunications, travel, office supplies and
legal, accounting and other professional services.
DEPRECIATION. Depreciation expense was $16.0 in the six-month period ended
June 30, 1998 as compared with $14.0 in the same period of 1997. This increase
reflects the Company's investment in property and equipment to support its
business.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $12.3 million for the period ended June 30, 1998 as compared with $12.2
million in the same period of 1997.
INTEREST. Net interest expense was $12.2 million for both six-month
periods ended June 30, 1998 and 1997.
RESTRUCTURING AND OTHER CHARGES. During the second quarter of 1998, the
Company consolidated several corporate and operating division departments to
eliminate redundant costs. As a result of this restructuring plan, the Company
recorded approximately $0.6 million of severance costs for approximately 25
employees who had been notified of their termination by June 30, 1998.
In addition to the restructuring charge, the Company incurred charges of
approximately $1.6 million and $2.8 million in the six-month period ended June
30, 1998 and 1997, respectively. The 1998 amounts included: (i) a net increase
of $0.7 million to the Company's legal reserves for the legal and administrative
fees, costs and expenses associated with various legal matters; and (ii) $0.9
million for severance costs associated with former executive management. The
1997 charges were comprised of the following amounts: (i) $2.0 million for legal
costs associated with the GFS Investigation; and (ii) $0.8 million associated
with severance costs associated with former executive management.
LITIGATION SETTLEMENTS. During the second quarter of 1998, the Company had
agreed, in principle, to the material terms to settle three outstanding legal
matters which aggregated $21.9 million. The Company has agreed, in principle, to
settle these matters primarily with Common Stock. The Company had no such
settlements in the prior year period. See footnote 2 of the Notes to
Consolidated Financial Statements where these settlements in principle are
discussed in detail.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible goodwill associated
with merger transactions consummated by the Company in previous years.
EXTRAORDINARY ITEM. The Company used the proceeds from the February 1998
issuance of $175 million of senior notes and the new credit facility (the
"Credit Facility") to redeem the notes evidencing the Company's previous debt
facility. The Company recorded a charge of $5.6 million, net of tax of $3.6
million, to write-off the unamortized costs associated with the previous debt
facility.
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. The Company recorded an extraordinary gain on the sale of HRI of
$76.4 million, net of tax of $46.2 million, in the second quarter of 1997.
Medaphis had acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $111.1 million at June 30, 1998,
including $3.3 million of cash.
The Company's operating activities used $9.4 million of cash during the six
months ended June 30, 1998 as compared with $5.6 million during the six months
ended June 30, 1997. The decrease in the Company's operating cash flows resulted
primarily from the timing of payment and reduction of current liabilities.
Purchases of property and equipment were $17.7 million in the first half of
1998 compared to $7.7 million in the prior year comparable period. The increase
reflects the purchase for approximately $10 million of certain real property
that the Company was leasing.
20
<PAGE> 23
On February 20, 1998, the Company sold $175 million of 9 1/2% Senior Notes
due 2005 (the "Notes"). The Notes bear interest at the rate of 9 1/2% per annum,
payable semi-annually on February 15 and August 15 of each year, commencing on
August 15, 1998. The Notes will mature on February 15, 2005. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the original
principal amount of the Notes at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more equity offerings; provided that at least $100 million aggregate principal
amount of the Notes remain outstanding immediately following any such
redemption.
Payment of principal, of premium, if any, and interest on the Notes will be
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operation or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are insignificant
individually and in the aggregate to the consolidated financial statements.
The Company also entered into a new $100 million credit facility (the
"Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the Credit Facility. LIBOR based
loans bear interest at LIBOR plus amounts ranging from 1.0% to 2.75% based on
the Company's leverage ratio, as defined in the Credit Facility. Base rate loans
bear interest at prime plus amounts ranging from 0.0% to 1.75% based on the
Company's leverage ratio, as defined. In addition the Company pays a quarterly
commitment fee on the unused portion on the Credit Facility ranging from 0.25%
to 0.75% per annum based on the Company's leverage ratio. The Credit Facility
contains financial and other restrictive covenants, including without limitation
those restricting the incurrence of additional indebtedness, the creation of
liens, the payment of dividends, sales of assets, capital expenditures, and
prepayment of the Notes and those requiring maintenance of minimum net worth,
minimum EBITDA (as defined) and minimum interest coverage and limiting leverage.
Availability under the Credit Facility is determined by the Company's Borrowing
Base (as defined). Amounts outstanding under the Credit Facility will be due on
February 20, 2001. At June 30, 1998, the Company had $46 million in borrowing
outstanding under the Credit Facility at interest ranging from 8.1% to 10.0 %.
The Company recently decided to transition from a computerized coding
system used by GFS for emergency room physician billing to manual coding. The
Company does not expect to incur any material extraordinary charges as a result
of the transition from the computerized coding system. There can be no assurance
that any third party claims or lost business relating to transition from, or
modifications previously made to, the GFS coding system will not have a material
adverse effect on the Company, including, without limitation, on the Company's
revenue, results of operations, financial condition or cash flow.
The Company believes that its cash flow, together with available borrowings
under the Credit Facility, will be sufficient to permit the Company to meet its
operating expenses and to service its debt requirements as they become due in
the next twelve months and for the long term, however, there can be no assurance
that such results will be achieved. The Company is a party to legal actions and
government investigations as described in "Part II Item 1. Legal Proceedings."
There can be no assurance that these actions or investigations will not have a
disruptive effect upon the operations of the business or that the resolution of
these actions or investigations will not have a material adverse effect on the
Company's liquidity or financial position or that appropriate amendments to the
Credit Facility would not be required. 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, restricting 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.
21
<PAGE> 24
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purpose may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness thereby reducing the funds available to the
Company for its operations. In addition, the Credit Facility and the Indenture
for the Notes contain financial and other restrictive covenants, including
without limitation those restricting the incurrence of additional indebtedness,
the creation of liens, the payment of dividends, sales of assets, capital
expenditures, and prepayments of indebtedness and, with respect to the Credit
Facility only, those requiring maintenance of minimum net worth, minimum EBITDA
and minimum interest coverage and limiting leverage.
YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. GFS's computerized coding system is one of the legacy
systems from which the Company has determined to transition. The Company
believes that it is on target to have completed these system migration efforts
with respect to its Physician Services and Hospital Services businesses in the
first half of 1999. The detail planning and inventory for the majority of the
Company's legacy systems that are being modified for Year 2000 compatibility has
been completed and such systems are in remediation. Per-Se Technologies products
are scheduled to be Year 2000 compatible with releases due out in the third
quarter of 1998. Customers, vendors and resellers have been identified and
requests for information distributed regarding the Year 2000 readiness of such
parties. Responses are expected through the first quarter of 1999. The Company
will develop contingency plans during the fourth quarter of 1998 through the
second quarter of 1999 in response to assessments of the Year 2000 readiness of
customers, vendors and resellers. The estimated cost of the Company's Year 2000
efforts is $10 million to $15 million over 1998 and 1999, the majority of which
represents redirection of internal resources. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its computer
systems or those of its customers, vendors or resellers in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to identify and
address such problems, or the expenses or liabilities to which the Company may
become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenue. In addition, failure of the Company to identify and remedy
Year 2000 problems could put the Company at a competitive disadvantage relative
to companies that have corrected such problems.
22
<PAGE> 25
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") (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 has complied. The subpoena required, among other things,
records of any audit or investigative reports relating to the billing of payors
globally for radiological services during the period January 1, 1991 to date and
any refunds owed to or issued to payors with respect to such global billing
reports in the Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx) (the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosures did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes. The Complaint alleges overpayments of
approximately $20,500,000 together with treble damages and additional penalties
based on statutory civil penalties. The Complaint alleges that at least 50,000
separate false claims were filed under federal programs and at least 8,000
separate false claims were filed under state programs. The Complaint also
alleges unspecified compensatory, general and punitive damages on behalf of
Relator II on his or her employment claims. The allegations in the Complaint are
limited to the office of CompMed (acquired
23
<PAGE> 26
by Medaphis) in Culver City, California. Medaphis believes that this Complaint
relates to and concerns the California Investigation. Medaphis is engaged in
negotiations with both the civil and criminal divisions of the U.S. Attorney's
office to settle those portions of the Complaint as to which the United States
has indicated that it intends to proceed and any criminal charges that the
United States may intend to pursue. The Company has also contacted the State of
California concerning civil settlement of the portions of the Complaint as to
which California intends to proceed. The Company has not yet initiated
discussions with the Relators concerning the other portions of the Complaint,
but the Company is seeking to reach a global civil settlement with the United
States, the State of California and the Relators. To facilitate further
negotiations with the United States and California governments, the Company has
agreed with such governments to toll applicable statutes of limitations through
November 2, 1998.
Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995 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. Since the third quarter of 1995,
the Company has periodically adjusted the reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters, as such amounts are not currently estimable.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries, which impacts only certain managed care plans,
cannot be determined by the Company, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error. The Company is
unable to estimate the possible range of loss, if any.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of voting common stock ("Common
Stock") in April 1995, were named as defendants in putative shareholder class
action lawsuits filed in the United States District Court for the Northern
District of Georgia. In general, these lawsuits alleged violations of the
federal securities laws in connection with Medaphis' public statements and
filings under the federal securities acts, including the registration statement
filed in connection with Medaphis' public offering of Common Stock in April
1995. On October 13, 1995, the named plaintiffs in these lawsuits filed a
consolidated class action complaint (the "Consolidated Complaint"). On January
3, 1996, the court denied defendants' motion to dismiss the Consolidated
Complaint, which argued that the Consolidated Complaint failed to state a claim
upon which relief may be granted. On April 11, 1996, certain of the named
plaintiffs to the Consolidated Complaint voluntarily dismissed with prejudice
all of their claims. As a result of these dismissals, the Consolidated Complaint
no longer contained any claims based on the Securities Act and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. On
May 19, 1997, the plaintiffs and the defendants entered into a stipulation and
settlement agreement, pursuant to which the parties agreed to settle this action
on a class-wide basis for $4.75 million, subject to court approval (the "1995
Class Action Settlement"). The 1995 Class
24
<PAGE> 27
Action Settlement included the related putative class action lawsuit filed in
the Superior Court of Cobb County, Georgia, described more fully below. On
October 28, 1997, the court certified a class for settlement purposes, approved
the settlement and entered final judgment dismissing the action with prejudice.
One of Medaphis' directors' and officers' liability insurance carriers has paid
$3.7 million of the 1995 Class Action Settlement directly for the benefit of the
plaintiffs. The Company accrued approximately $1.2 million in the quarter ended
December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. In 1993, Medaphis acquired GFS, an
emergency room physician billing company located in Jacksonville, Florida, which
had developed a computerized coding system. In 1994, Medaphis acquired and
merged into GFS another emergency room physician billing company, Physician
Billing, Inc., located in Grand Rapids, Michigan. For each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government has requested
that GFS voluntarily produce records, and GFS has complied with that request.
Although the precise scope and subject matter of the GFS Investigation are not
known to the Company, Medaphis believes that the GFS Investigation, which is
being participated in by federal law enforcement agencies having both civil and
criminal authority, involves GFS's billing procedures and the computerized
coding system used in Jacksonville and Grand Rapids to process claims and may
lead to claims of errors in billing. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company or that the GFS
Investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. The Company has recorded charges of
$2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million in the second quarter of 1998 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,
as such amounts can not be estimated.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
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
25
<PAGE> 28
Consolidated Amended Class Action Complaint. On February 3, 1997, the plaintiffs
filed a Consolidated Second Amended Complaint (the "Consolidated Second Amended
Complaint"). In general, the Consolidated Second Amended Complaint alleged
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The Consolidated
Second Amended Complaint was brought on behalf of a class of persons who
purchased or otherwise acquired Medaphis Common Stock between February 6, 1996
and October 21, 1996. The Consolidated Second Amended Complaint also asserted
claims on behalf of a sub-class of all persons who acquired Medaphis Common
Stock pursuant to the merger between Medaphis and Health Data Sciences
Corporation ("HDS"). The Consolidated Second Amended Complaint sought
compensatory and rescissory damages, as well as fees, interest and other costs.
On February 14, 1997, the defendants moved to dismiss the Consolidated Second
Amended Complaint in its entirety. On May 27, 1997, the court denied defendants'
motion to dismiss.
The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") to settle the 1996 putative shareholder
class action litigation which is the subject of the Consolidated Second Amended
Complaint on a class-wide basis for $20 million in cash (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
shares of Medaphis Common Stock, and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Stipulation
included, 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 certain 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
contained other conditions including, but not limited to, consent and approval
of the Company's insurance carriers and the insurance carriers' payment of the
cash portion of the settlement, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company's insurance carriers consented to the settlement and funded the $20
million cash portion. On March 25, 1998, the Court granted final approval of the
settlement and entered final judgment dismissing the action.
The Company recorded a $52.5 million charge in the quarter ended September
30, 1997 in connection with the Stipulation. This charge is comprised of the
following: (i) $30.2 million representing the original 3,355,556 shares of
Common Stock valued at the fair value per share on the date that the material
terms of the agreement were reached or approximately $9 per share and (ii) $22.3
million representing the fair value of the warrants on the date the material
terms of the agreement were reached, valued using the Black-Scholes option
pricing model with the following assumptions: expected life -- 5 years, risk
free interest rate -- 6%, dividend rate -- 0% and expected volatility
factor -- 60%. No accounting recognition was required for the additional 600,000
shares to be issued pursuant to the agreement as these shares represent the
maximum number of contingent shares that were issuable based on certain stock
price contingencies during the ten day period prior to October 11, 1997. As a
result of the actual decline in the Company's stock price during such period,
the Stipulation required that the maximum number of contingent shares be
awarded; however, no additional accounting charge was required in connection
with the award of such contingent shares. The 3,955,556 shares were issued in
April 1998. Additionally, no accounting recognition was afforded the cash
portion of the Stipulation as this amount was the responsibility of the
insurance carriers. Such amount has been paid by the insurance carriers directly
to an escrow account for the benefit of the plaintiffs.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation (the "Derivative Suit"). The plaintiff seeks
unspecified compensatory damages and costs on behalf of the Company. On January
28, 1997, Medaphis and certain individual defendants filed a motion to dismiss
the complaint. On February 11, 1997, the plaintiff filed an amended complaint
adding as defendants, additional current and former directors and officers of
Medaphis. On
26
<PAGE> 29
April 23, 1997, Medaphis and all other defendants filed a motion to dismiss the
amended complaint, which motion was denied without prejudice. The parties
entered into a Stipulation and Settlement Agreement dated June 26, 1998 (the
"Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). The
Derivative Stipulation is subject to certain conditions including, but not
limited to, consent and approval of the insurance carrier (which has been
requested by the Company), payment of the cash portion of the settlement by the
insurance carrier and final approval of the settlement by the court. On June 26,
1998, the court granted preliminary approval to the settlement. The court has
scheduled a final fairness hearing concerning the settlement for September 29,
1998.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages in excess of $100 million,
rescission, injunctive relief and costs. The Company is unable to estimate a
possible range of loss. On January 10, 1997, the defendants filed a demurrer to
the complaint. On February 5, 1997 the Court overruled defendants' demurrer. On
March 18, 1997, the court denied the plaintiff's motion for a preliminary
injunction. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former and
current officers of Medaphis. All of the newly added defendants have responded
to the amended complaint. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the Securities Act, but the Company
believes that it has substantial defenses to the alleged damages relating to
such Securities Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. The Company is unable to estimate a possible range of loss. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
Securities Act and common law and new parties, including former officers of
Medaphis, Medaphis' former independent accountants and BSG. On or about October
29, 1997, all defendants filed motions to dismiss the amended complaint. On May
12, 1998, the court ruled in favor of defendants on the motions, dismissing all
of plaintiffs' claims with prejudice and without leave to amend. On May 15,
1998, the Judge signed an order to that effect. The plaintiffs filed a notice of
appeal of such order on June 25, 1998.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 August 31, 1998. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. The Company and the BSG
Principals have reached an
27
<PAGE> 30
agreement in principle to settle the claims made on behalf of the former BSG
shareholders in exchange for approximately 3.2 million shares of Medaphis Common
Stock, subject to negotiation and definitive documentation of other terms and
conditions of the settlement. There can be no assurance that such settlement
will be completed or that such settlement, if completed, will be in accordance
with the above mentioned terms. The Company recorded a litigation settlement
charge of $21.3 million in the quarter ended June 30, 1998 in connection with
this agreement in principle. The charge reflects 3.2 million shares of Medaphis
Common Stock valued at the fair value per share on the date on which the
material terms of the agreement in principle was reached. The Company has
classified the entire $21.3 million liability associated with the proposed
settlement as noncurrent since such obligation will be settled with Common Stock
rather than current assets and the exact timing of the payments of claims
pursuant to such settlement is not determinable.
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. The Company is unable to estimate a possible
range of loss. Additionally, plaintiffs seek to void various non-compete
covenants and contract provisions between Medaphis and plaintiffs. Defendants
have filed a motion to dismiss the complaint. Discovery has been stayed pending
resolution of the motion to dismiss.
On August 12, 1997, George D. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserts claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 52,252 shares of Medaphis Common Stock (based
on a price per share of Medaphis Common Stock of approximately $7). The Company
recorded a litigation settlement charge of approximately $0.4 million in the
quarter ended June 30, 1998 in connection with this agreement. The number of
shares of Medaphis Common Stock is subject to adjustment upward or downward by
up to 9,301 shares depending upon the average closing price of Medaphis Common
Stock for a specified period. Under the adjustment, the minimum number of shares
of Medaphis Common Stock to be issued pursuant to the Stickle Stipulation is
42,951 and the maximum number of shares is 61,553. The Stickle Stipulation is
subject to certain conditions including, but not limited to, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), payment of the cash portion of the settlement by the insurance
carrier, and final approval of the settlement by the court. On June 26, 1998,
the court entered an order substituting Peter Gladkin as lead plaintiff in lieu
of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. The court has
scheduled a final fairness hearing concerning the settlement for September 29,
1998.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading
28
<PAGE> 31
and other issues related to Medaphis' August 14, 1996 and October 22, 1996
announcements of the Company's loss for the quarter ended September 30, 1996 and
its restated consolidated financial statements for the three months and year
ended December 31, 1995 and its restated unaudited balance sheets as of March
31, 1996, and June 30, 1996. In addition, the Company believes that the
Commission is investigating the Company's restatement of its interim financial
statements for each quarter of 1996 and the November 19, 1997 and December 23,
1997 restatements of the Company's financial statements. The Company intends to
cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on April 30, 1998. 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 1998 60,147,402 -- 638,674
David R. Holbrooke, M.D........... Through 1998 60,145,557 -- 640,519
David E. McDowell................. Through 1998 60,140,958 -- 645,118
John C. Pope...................... Through 1998 60,121,800 -- 664,276
Dennis A. Pryor................... Through 1998 60,138,368 -- 647,708
C. Christopher Trower............. Through 1998 60,097,323 -- 688,753
</TABLE>
An amendment to the Company's Employee Stock Purchase Plan, as amended, to
increase the total number of shares of Common Stock available for sale under
such plan from three hundred thousand (300,000) shares to one million
(1,000,000) shares, also was voted upon at the Annual Meeting of Stockholders,
and was approved by the stockholders. Votes cast were 59,739,507 for, 833,377
against and 213,192 withheld.
ITEM 5. OTHER INFORMATION.
Effective August 10, 1998, Mr. Robert C. Bellas, Jr. resigned from the
Board of Directors of the Company, and its related committees, due to other
business commitments. Mr. Bellas initially was elected to the Board of Directors
in September 1987.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
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)
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
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
May 22, 1996)
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 -- Amended and Restated By-Laws of Registrant, as amended
4.1 -- Credit Agreement dated February 13, 1998, among Registrant,
as Borrower, various financial institutions from time to
time parties thereto, as the Lenders, DLJ Capital Funding,
Inc., as the Syndication Agent for the Lenders, and Wachovia
Bank, N.A., as the Administrative Agent for the Lenders
(including form of note) (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.2 -- Subsidiary Guaranty dated February 20, 1998, among the
domestic Subsidiaries of registrant and Wachovia Bank, N.A.,
as Administrative Agent (incorporated by reference to
Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.3 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.4 -- Registration Rights Agreement dated as of February 20, 1998,
Among Registrant, the Subsidiary Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation (incorporated by
reference to Exhibit 4.15 to registrants's Registration
Statement on Form S-4, File No. 333-47409)
10.1 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.28 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.2 -- Third Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.33 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.3 -- Fourth Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.39 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.4 -- Employment Agreement dated January 25, 1998 between
Registrant and Allen W. Ritchie (incorporated by reference
to Exhibit 10.69 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997)
10.5 -- Employment Agreement dated January 27, 1998 between
Registrant and Kevin P. Castle (incorporated by reference to
Exhibit 10.5 to Registrant's Quarter Report on Form 10-Q for
the quarter ended March 31, 1998)
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>
30
<PAGE> 33
(B) Reports on Form 8-K
The Company has filed the following report on Form 8-K during the quarter
ended June 30, 1998:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -------------
<S> <C> <C> <C>
Announcement of 1998 second quarter earnings
expectations and effectiveness of the
Registration Statement covering the $175
million of 9 1/2% Senior Notes due 2005..... No June 25, 1998 June 26, 1998
</TABLE>
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDAPHIS CORPORATION
(Registrant)
By: /s/ JAMES W. FITZGIBBONS
------------------------------------
James W. FitzGibbons
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 1998
32
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
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
May 22, 1996)
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 -- Amended and Restated By-Laws of Registrant, as amended
4.1 -- Credit Agreement dated February 13, 1998, among Registrant,
as Borrower, various financial institutions from time to
time parties thereto, as the Lenders, DLJ Capital Funding,
Inc., as the Syndication Agent for the Lenders, and Wachovia
Bank, N.A., as the Administrative Agent for the Lenders
(including form of note) (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.2 -- Subsidiary Guaranty dated February 20, 1998, among the
domestic Subsidiaries of registrant and Wachovia Bank, N.A.,
as Administrative Agent (incorporated by reference to
Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.3 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Registrant's Current Report on Form 8-K
filed on March 3, 1998)
4.4 -- Registration Rights Agreement dated as of February 20, 1998,
Among Registrant, the Subsidiary Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation (incorporated by
reference to Exhibit 4.15 to registrants's Registration
Statement on Form S-4, File No. 333-47409)
10.1 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.28 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.2 -- Third Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.33 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1977)
10.3 -- Fourth Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.39 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.4 -- Employment Agreement dated January 25, 1998 between
Registrant and Allen W. Ritchie (incorporated by reference
to Exhibit 10.69 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997)
10.5 -- Employment Agreement dated January 27, 1998 between
Registrant and Kevin P. Castle (incorporated by reference to
Exhibit 10.5 to Registrant's Quarter Report on Form 10-Q for
the quarter ended March 31, 1998)
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>
33
<PAGE> 1
EXHIBIT 3.5
================================================================================
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
----------------------------
Incorporated under the Laws of the
State of Delaware
----------------------------
Adopted as of June 30, 1991 and
Amended as of December 21, 1992
Amended and Restated as of March 24, 1997
Further Amended as of May 19, 1997
Further Amended as of July 29, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES................................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS...............................................................1
Section 1. Place of Meetings......................................................................1
Section 2. Annual Meeting.........................................................................1
Section 3. Special Meetings.......................................................................1
Section 4. Notice of Meetings.....................................................................1
Section 5. Notice of Stockholder Nominees.........................................................2
Section 6. Notice of Stockholder Business.........................................................3
Section 7. List of Stockholders...................................................................3
Section 8. Quorum.................................................................................3
Section 9. Voting.................................................................................4
Section 10. Proxies................................................................................4
Section 11. Inspectors of Elections................................................................4
Section 12. Action without a Meeting...............................................................4
ARTICLE III BOARD OF DIRECTORS.....................................................................5
Section 1. Powers.................................................................................5
Section 2. Election and Term......................................................................5
Section 3. Number.................................................................................5
Section 4. Quorum and Manner of Acting............................................................5
Section 5. Organization Meeting...................................................................5
Section 6. Regular Meetings.......................................................................6
Section 7. Special Meetings; Notice...............................................................6
Section 8. Removal of Directors...................................................................6
Section 9. Resignations...........................................................................6
Section 10. Vacancies..............................................................................6
Section 11. Compensation of Directors..............................................................7
Section 12. Action Without a Meeting...............................................................7
Section 13. Telephonic Participation in Meetings...................................................7
Section 14. Committees of the Board of Directors...................................................7
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV OFFICERS...............................................................................7
Section 1. Principal Officers.....................................................................7
Section 2. Election and Term of Office............................................................7
Section 3. Other Officers.........................................................................8
Section 4. Removal................................................................................8
Section 5. Resignations...........................................................................8
Section 6. Vacancies..............................................................................8
Section 7. Chairman of the Board..................................................................8
Section 8. Vice Chairmen..........................................................................8
Section 9. President..............................................................................8
Section 10. Vice Presidents........................................................................8
Section 11. Treasurer..............................................................................9
Section 12. Secretary..............................................................................9
Section 13. Salaries...............................................................................9
ARTICLE V SHARES AND THEIR TRANSFER..............................................................9
Section 1. Certificate for Stock..................................................................9
Section 2. Stock Certificate Signature............................................................9
Section 3. Stock Ledger..........................................................................10
Section 4. Cancellation..........................................................................10
Section 5. Registrations of Transfers of Stock...................................................10
Section 6. Regulations...........................................................................10
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates.....................................10
Section 8. Record Dates..........................................................................10
ARTICLE VI MISCELLANEOUS PROVISIONS..............................................................11
Section 1. Corporate Seal........................................................................11
Section 2. Voting of Stocks Owned by the Corporation.............................................11
Section 3. Dividends.............................................................................11
Section 4. Indemnification and Insurance.........................................................11
ARTICLE VII AMENDMENTS............................................................................12
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED BY-LAWS
OF
MEDAPHIS CORPORATION
(a Delaware corporation)
----------------------------
ARTICLE I
OFFICES
The registered office of the Corporation in the State of Delaware shall
be located in the City of Wilmington, County of New Castle. The Corporation may
establish or discontinue, from time to time, such other offices within or
without the State of Delaware as may be deemed proper for the conduct of the
Corporation's business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of stockholders shall be
held at such place or places, within or without the State of Delaware, as may
from time to time be fixed by the Board of Directors, or as shall be specified
in the respective notices, or waivers of notice, thereof.
Section 2. Annual Meeting. The annual meeting of stockholders for the
election of Directors and the transaction of other business shall be held on
such date and at such time and place as may be designated by the Board of
Directors. At each annual meeting, the stockholders entitled to vote shall elect
a Board of Directors and may transact such other proper business as may come
before the meeting.
Section 3. Special Meetings. A special meeting of the stockholders, or
of any class thereof entitled to vote, for any purpose or purposes, may be
called at any time by the Chairman of the Board, if any, or the President or by
order of the Board of Directors and shall be called by the President or the
Secretary upon the written request of stockholders holding of record at least
50% of the outstanding shares of stock of the Corporation entitled to vote at
such meeting. Such written request shall state the purpose or purposes for which
such meeting is to be called.
Section 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, whether annual or special,
stating the place, date and hour of the meeting shall be given not less than ten
days nor more than sixty days before the date on which the meeting
<PAGE> 5
is to be held to each stockholder of record entitled to vote thereat by
delivering a notice thereof to him personally or by mailing such notice in a
postage prepaid envelope directed to him at his address as it appears on the
records of the Corporation, unless he shall have filed with the Secretary of the
Corporation a written request that notices intended for him be directed to
another address, in which case such notice shall be directed to him at the
address designated in such request. Notice shall not be required to be given to
any stockholder who shall waive such notice in writing, whether prior to or
after such meeting, or who shall attend such meeting in person or by proxy
unless such attendance is for the express purpose of objecting, at the beginning
of such meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Every notice of a special meeting of the
stockholders shall also state the purpose or purposes for which it is called.
Section 5. Notice of Stockholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in this Section 5 shall be
eligible for election as Directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of stockholders
by or at the direction of the Board of Directors or by any stockholder of the
Corporation entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Section 5. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or reelection as a Director, (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the Corporation
which are beneficially owned by such person, and (D) any other information
relating to such person that is required to be disclosed in solicitation of
proxies for election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including without limitation such person's written consent to being named in
the proxy statement as a nominee and to serving as a Director if elected), and
(ii) as to the stockholder giving the notice (A) the name and address, as they
appear on the Corporation's books, of such stockholder and (B) the class and
number of shares of the Corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
By-laws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
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<PAGE> 6
Section 6. Notice of Stockholder Business. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (i) specified in the notice of the meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (iii) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business. Notwithstanding anything in the By-laws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 6. The Chairman of the
annual meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this Section 6, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Section 7. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of the stock ledger to
prepare and make, at least ten days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in his name. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or, if not so specified, at the place
where the meeting is to be held. The list shall be kept and produced at the time
and place of the meeting during the whole time thereof and subject to the
inspection of any stockholder who may be present. The original or duplicate
ledger shall be the only evidence as to who are the stockholders entitled to
examine such list or the books of the Corporation or to vote in person or by
proxy at such meeting.
Section 8. Quorum. At each meeting of the stockholders, the holders of
record of a majority of the issued and outstanding stock of the Corporation
entitled to vote at such meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business, except as otherwise
provided by law, the Certificate of Incorporation or these By-laws. In the
absence of a quorum, any
-3-
<PAGE> 7
officer entitled to preside at, or act as Secretary of, such meeting shall have
the power to adjourn the meeting from time to time until a quorum shall be
constituted.
Section 9. Voting. Every stockholder of record who is entitled to vote
shall, at every meeting of the stockholders, be entitled to one vote for each
share of stock held by him on the record date; except, however, that shares of
its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held by the Corporation, shall neither be entitled to vote
nor counted for quorum purposes. Nothing in this Section shall be construed as
limiting the right of the Corporation to vote its own stock held by it in a
fiduciary capacity. At all meetings of the stockholders, a quorum being present,
all matters shall be decided by majority vote of the shares of stock entitled to
vote held by stockholders present in person or by proxy, except as otherwise
required by law or the Certificate of Incorporation. Unless demanded by a
stockholder of the Corporation present in person or by proxy at any meeting of
the stockholders and entitled to vote thereat or so directed by the chairman of
the meeting or required by law, the vote thereat on any question need not be by
written ballot. On a vote by written ballot, each ballot shall be signed by the
stockholder voting, or in his name by his proxy, if there be such proxy, and
shall state the number of shares voted by him and the number of votes to which
each share is entitled.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. A proxy
acting for any stockholder shall be duly appointed by an instrument in writing
subscribed by such stockholder. No proxy shall be valid after the expiration of
three years from the date thereof unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation.
Section 11. Inspectors of Elections. The Board of Directors, in advance
of any stockholder meeting, shall appoint an inspector of elections to act at
such meeting, and any adjournment thereof, and make a written report thereof. In
case any person appointed fails to appear or act, the vacancy may be filled by
an alternate appointed by the Board in advance of the meeting or at the meeting
by the person presiding thereat. The inspector, before entering upon discharge
of his duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
Section 12. Action without a Meeting. Any action required to be taken
at any annual or special meeting of stockholders or any action which may be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing
setting forth the action so taken shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action
-4-
<PAGE> 8
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by law or in the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed under the direction of the Board of Directors.
Section 2. Election and Term. Except as otherwise provided by law,
Directors shall be elected at the annual meeting of stockholders and shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified, or until they sooner die, resign or are removed. At
each annual meeting of stockholders, at which a quorum is present, the persons
receiving a plurality of the votes cast shall be the Directors. Acceptance of
the office of Director may be expressed orally or in writing, and attendance at
the organization meeting shall constitute such acceptance.
Section 3. Number. The number of Directors shall be such number as
shall be determined from time to time by the Board of Directors, but shall not
be less than three nor more than ten.
Section 4. Quorum and Manner of Acting. Unless otherwise provided by
law, the presence of 50% of the whole Board of Directors shall be necessary to
constitute a quorum for the transaction of business. In the absence of a quorum,
a majority of the Directors present may adjourn the meeting from time to time
until a quorum shall be present. Notice of any adjourned meeting need not be
given. At all meetings of Directors, a quorum being present, all matters shall
be decided by the affirmative vote of a majority of the Directors present,
except as otherwise required by law, the Certificate of Incorporation or these
By-laws. The Board of Directors may hold its meetings at such place or places
within or without the State of Delaware as the Board of Directors may from time
to time determine or as shall be specified in the respective notices, or waivers
of notice, thereof.
Section 5. Organization Meeting. Immediately after each annual meeting
of stockholders for the election of Directors, the Board of Directors shall meet
at the place of the annual meeting of stockholders for the purpose of
organization, the election of officers and the transaction of other business.
Notice of such meeting need not be given. If such meeting is held at any other
time or place, notice thereof must be given as hereinafter provided for special
meetings of the Board of Directors, subject to the execution of a waiver of the
notice thereof signed by, or the attendance at such meeting of, all Directors
who may not have received such notice.
-5-
<PAGE> 9
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held at such time and place, within or without the State of Delaware, as
shall from time to time be determined by the Board of Directors. After there has
been such determination, and notice thereof has been once given to each member
of the Board of Directors as hereinafter provided for special meetings, regular
meetings may be held without further notice being given.
Section 7. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any,
the President or by a majority of the Directors. Notice of each such meeting
shall be mailed to each Director, addressed to him at his residence or usual
place of business, at least five days before the date on which the meeting is to
be held, or shall be sent to him at such place by facsimile, telegraph or cable,
or be delivered personally or by telephone, not later than the day before the
day on which such meeting is to be held. Each such notice shall state the time
and place of the meeting and, as may be required, the purposes thereof. Notice
of any meeting of the Board of Directors need not be given to any Director if he
shall sign a written waiver thereof either before or after the time stated
therein for such meeting, or if he shall be present at the meeting. Unless
limited by law, the Certificate of Incorporation, these By-laws or the terms of
the notice thereof, any and all business may be transacted at any meeting
without the notice thereof having specifically identified the matters to be
acted upon.
Section 8. Removal of Directors. Any Director or the entire Board of
Directors may be removed, with or without cause, at any time, by action of the
holders of record of a majority of the issued and outstanding stock of the
Corporation entitled to vote thereon (i) present in person or by proxy at a
meeting of such stockholders or (ii) by a consent in writing in the manner
contemplated in Section 12 of Article II, and the vacancy or vacancies in the
Board of Directors caused by any such removal may be filled by action of such a
majority at such meeting or at any subsequent meeting or by consent.
Section 9. Resignations. Any Director of the Corporation may resign at
any time by giving written notice to the Chairman of the Board, if any, the
President or the Secretary of the Corporation. The resignation of any Director
shall take effect upon receipt of notice thereof or at such later time as shall
be specified in such notice; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 10. Vacancies. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining Directors
though less than a quorum of the Board of Directors, or by the sole remaining
Director, as the case may be, or if the vacancy is not so filled, or if no
Director remains, by the affirmative vote of a majority of the stockholders
entitled to vote thereon. A Director elected to fill a vacancy shall serve the
unexpired term of his predecessor in office, or, if such vacancy occurs by
reason of an amendment to these By-laws increasing the number of Directors,
until the next election of Directors by the stockholders, and until his
successor has been elected and qualified, or until he sooner dies, resigns or is
removed.
-6-
<PAGE> 10
Section 11. Compensation of Directors. Directors, as such, shall not
receive any stated salary for their services, but, by resolution of the Board, a
specific sum fixed by the Board plus expenses may be allowed for attendance at
each regular or special meeting of the Board; provided, however, that nothing
herein contained shall be construed to preclude any Director from serving the
Corporation or any parent or subsidiary corporation thereof in any other
capacity and receiving compensation therefore.
Section 12. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting if a written consent thereto is signed by all members of the Board, and
such written consent is filed with the minutes or proceedings of the Board.
Section 13. Telephonic Participation in Meetings. Members of the Board
of Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
Section 14. Committees of the Board of Directors. The Board of
Directors, by resolution adopted by a majority of the full Board of Directors,
may designate from among its members an executive committee and one or more
other committees, each consisting of one or more directors. Except as prohibited
by law, each committee shall have the authority set forth in the resolution of
the Board of Directors establishing such committee. Unless the Board of
Directors otherwise provides, each committee designated by the Board of
Directors may make, alter and repeal rules for the conduct of its business. In
the absence of such rules each committee shall conduct its business in the same
manner as the Board of Directors conducts its business pursuant to Article III
of these By-laws.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The Board of Directors shall elect a
President, a Secretary and a Treasurer, and may in addition elect a Chairman of
the Board, one or more Vice Chairmen of the Board, one or more Vice-Presidents
and such other officers as it deems fit; the President, the Secretary, the
Treasurer, the Chairman of the Board, if any, the Vice Chairmen of the Board, if
any, and the Vice Presidents, if any, being the principal officers of the
Corporation. One person may hold, and perform the duties of, any two or more of
said offices; provided, however, that the offices of President and Secretary
shall not be held by one person coincidentally.
Section 2. Election and Term of Office. The principal officers of the
Corporation shall be elected annually by the Board of Directors at the
organization meeting thereof. Each such officer shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal.
-7-
<PAGE> 11
Section 3. Other Officers. In addition, the Board may elect, or the
Chairman of the Board, if any, or the President may appoint, such other officers
as they deem fit. Any such other officers chosen by the Board of Directors shall
be subordinate officers and shall hold office for such period, have such
authority and perform such duties as the Board of Directors, the Chairman of the
Board, if any, or the President may from time to time determine.
Section 4. Removal. Any officer may be removed, either with or without
cause, at any time, by resolution adopted by the Board of Directors at any
regular meeting of the Board, or at any special meeting of the Board called for
that purpose, at which a quorum is present.
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Chairman of the Board, if any, the President, the
Secretary or the Board of Directors. Any such resignation shall take effect upon
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 6. Vacancies. A vacancy in any office may be filled for the
unexpired portion of the term in the manner prescribed in these By-laws for
election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board of
Directors, if elected, shall preside, if present, at all meetings of the Board
of Directors and meetings of the stockholders, if present thereat, and shall
have and perform such other duties as from time to time may be assigned by the
Board of Directors.
Section 8. Vice Chairmen. Each Vice Chairman shall have the general
powers and duties as shall be delegated to him by the Chairman of the Board of
Directors or as shall be established by resolution of the Board of Directors.
Section 9. President. The President shall be the chief executive
officer of the Corporation, and shall have the general powers and duties of
supervision and management usually vested in the office of the President and
Chief Executive Officer of a corporation. He shall preside, in the absence or
non-election of the Chairman of the Board of Directors, at all meetings of the
stockholders and the Board of Directors, and shall have general supervision,
direction and control of the business of the Corporation. Except as the Board of
Directors shall authorize the execution thereof in some other manner, he shall
execute bonds, mortgages, and other contracts on behalf of the Corporation, and
shall cause the seal to be affixed to any instrument requiring it and when so
affixed the seal shall be attested by the signature of the Secretary or the
Treasurer.
Section 10. Vice Presidents. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the Board of
Directors or the President.
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<PAGE> 12
Section 11. Treasurer. The Treasurer shall have charge and custody of,
and be responsible for, all funds and securities of the Corporation. He shall
exhibit at all reasonable times his books of account and records to any of the
Directors of the Corporation upon application during business hours at the
office of the Corporation where such books and records shall be kept; when
requested by the Board of Directors, he shall render a statement of the
condition of the finances of the Corporation at any meeting of the Board or at
the annual meeting of stockholders; he shall receive, and give receipt for,
moneys due and payable to the Corporation from any source whatsoever; in
general, he shall perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him by the Board of
Directors or the President. The Treasurer shall give such bond, if any, for the
faithful discharge of his duties as the Board of Directors may require.
Section 12. Secretary. The Secretary, if present, shall act as
secretary at all meetings of the Board of Directors and of the stockholders and
keep the minutes thereof in a book or books to be provided for that purpose; he
shall see that all notices required to be given by the Corporation are duly
given and served; he shall have charge of the stock records of the Corporation;
he shall see that all reports, statements and other documents required by law
are properly kept and filed; and in general he shall perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him by the Board of Directors or the President.
Section 13. Salaries. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors or an authorized committee
thereof, and the salaries of any other officers may be fixed by the President.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 15. Certificate for Stock. Every stockholder of the Corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number of shares of the
capital stock of the Corporation owned by him. No certificate shall be issued
for partly paid shares.
Section 16. Stock Certificate Signature. The certificates for such
stock shall be numbered in the order in which they shall be issued and shall be
signed by the Chairman of the Board, if any, or the President and the Secretary
or Treasurer of the Corporation and its seal shall be affixed thereto. If such
certificate is countersigned (i) by a transfer agent other than the Corporation
or its employee, or (ii) by a registrar other than the Corporation or its
employee, the signatures of such officers of the Corporation may be facsimiles.
In case any officer of the Corporation who has signed, or whose facsimile
signature has been placed upon, any such certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
-9-
<PAGE> 13
Section 17. Stock Ledger. A record shall be kept by the Secretary or by
any other officer, employee or agent designated by the Board of Directors, of
the name of each person, firm or corporation holding capital stock of the
Corporation, the number of shares represented by, and the respective dates of,
each certificate for such capital stock, and in case of cancellation of any such
certificate, the respective dates of cancellation.
Section 18. Cancellation. Every certificate surrendered to the
Corporation for exchange or registration of transfer shall be cancelled, and no
new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so cancelled,
except, subject to Section 7 of this Article V, in cases provided for by
applicable law.
Section 19. Registrations of Transfers of Stock. Registrations of
transfers of shares of the capital stock of the Corporation shall be made on the
books of the Corporation on surrender of the certificate or certificates for
such shares properly endorsed and the payment of all taxes thereon. The person
in whose name shares of stock stand on the books of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation; provided,
however, that whenever any transfer of shares shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to do
so.
Section 20. Regulations. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with the Certificate of
Incorporation or these By-laws, concerning the issue, transfer and registration
of certificates for shares of the stock of the Corporation. It may appoint, or
authorize any principal officer or officers to appoint, one or more transfer
clerks or one or more transfer agents and one or more registrars, and may
require all certificates of stock to bear the signature or signatures of any of
them.
Section 21. Lost, Stolen, Destroyed or Mutilated Certificates. Before
any certificates for stock of the Corporation shall be issued in exchange for
certificates which shall become mutilated or shall be lost, stolen or destroyed,
proper evidence of such loss, theft, mutilation or destruction shall be procured
for the Board of Directors, if it so requires.
Section 22. Record Dates. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a date as a
record date for any such determination of stockholders. Such record date shall
not more than sixty (60) days and, in the case of a meeting of stockholders, not
less than ten (10) days prior to the date on which the particular action,
requiring such determination of stockholders, is to be taken.
-10-
<PAGE> 14
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 23. Corporate Seal. The Board of Directors shall provide a
corporate seal, which shall be in the form of a circle and shall bear the name
of the Corporation and words and figures showing that it was incorporated in the
State of Delaware in the year 1985. The Secretary shall be the custodian of the
seal. The Board of Directors may authorize a duplicate seal to be kept and used
by any other officer.
Section 24. Voting of Stocks Owned by the Corporation. The Board of
Directors may authorize any person on behalf of the Corporation to attend, vote
and grant proxies to be used at any meeting of stockholders of any corporation
(except the Corporation) in which the Corporation may hold stock. Nothing in
this Section shall be construed as limiting the right of the Corporation to vote
its own stock held by it in a fiduciary capacity.
Section 25. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the Corporation available
for dividends such sum or sums as the Directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Board of Directors shall deem conducive to the interests of the Corporation.
Section 26. Indemnification and Insurance.
(a) Right to Indemnification. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by the Delaware General Corporation
Law as it presently exists or may hereafter be amended, any person who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses reasonably incurred by such person. The Corporation shall be required
to indemnify a person in connection with a proceeding initiated by such person
only if the proceeding was authorized by the Board of Directors of the
Corporation. The right provided in this Section 4(a) is a contract right.
(b) Prepayment of Expenses. The Corporation shall pay the expenses
incurred by an officer or director in defending or investigating any proceeding
in advance of its final disposition; provided, however, that, if required by the
Delaware General Corporation Law, the payment of expenses incurred by a director
or officer in advance of the final disposition of the proceeding shall
-11-
<PAGE> 15
be made only upon receipt of an undertaking by the director or officer to repay
all amounts advanced if it should ultimately be determined that the director or
officer is not entitled to be indemnified under this Section or otherwise. The
right provided in this Section 4(b) is a contract right.
(c) Claims. If a claim for indemnification or payment of expenses under
this Section is not paid in full within sixty days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action, the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
(d) Non-Exclusivity of Rights. The rights conferred on any person by
this Section shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
(e) Other Indemnification. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or non-profit entity shall be reduced by any amount such
person may collect as indemnification from such other corporation, partnership,
joint venture, trust, enterprise or non-profit enterprise.
(f) Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the Delaware General Corporation Law.
(g) Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Section shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE VII
AMENDMENTS
These By-laws of the Corporation may be altered, amended or repealed by
the Board of Directors at any regular or special meeting of the Board of
Directors or by the affirmative vote of the holders of record of a majority of
the issued and outstanding stock of the Corporation entitled to vote thereon (i)
present in person or by proxy at a meeting of holders of such stock or (ii) by a
consent
-12-
<PAGE> 16
in writing in the manner contemplated in Section 12 of Article II, provided,
however, that notice of the proposed alteration, amendment or repeal is
contained in the notice of such meeting. By-laws, whether made or altered by the
stockholders or by the Board of Directors, shall be subject to alteration or
repeal by the stockholders as in this Article VII above provided.
-13-
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
DESCRIPTION 1998 1997 1998 1997
- ----------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE NUMBER)
<S> <C> <C> <C> <C>
Weighted average shares outstanding during the
period............................................... 77,136 72,443 75,318 72,339
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method......................................... -- 2,706 -- 2,644
-------- ------- -------- -------
Total weighted average common stock and
common stock equivalents outstanding during
the period................................. 77,136 75,149 75,318 74,983
======== ======= ======== =======
Net loss before extraordinary item..................... $(29,816) $(1,260) $(34,966) $(4,324)
Extraordinary items, net of tax........................ -- 76,391 (5,557) 76,391
-------- ------- -------- -------
Net income (loss)............................ $(29,816) $75,131 $(40,523) $72,067
======== ======= ======== =======
Net income (loss) per common share:
Net loss before extraordinary item................... $ (0.39) $ (0.02) $ (0.46) $ (0.06)
Extraordinary items, net of tax...................... -- 1.02 (0.08) 1.02
-------- ------- -------- -------
Net income (loss)............................ $ (0.39) $ 1.00 $ (0.54) $ 0.96
======== ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,302
<SECURITIES> 0
<RECEIVABLES> 180,097
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 204,052
<PP&E> 75,728
<DEPRECIATION> 0
<TOTAL-ASSETS> 861,318
<CURRENT-LIABILITIES> 92,976
<BONDS> 222,146
0
0
<COMMON> 784
<OTHER-SE> 519,064
<TOTAL-LIABILITY-AND-EQUITY> 861,318
<SALES> 0
<TOTAL-REVENUES> 276,696
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 302,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,219
<INCOME-PRETAX> (38,371)
<INCOME-TAX> (3,405)
<INCOME-CONTINUING> (34,966)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,557)
<CHANGES> 0
<NET-INCOME> (40,523)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Medaphis Corporation ("Medaphis" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Medaphis undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Quarterly Report on Form
10-Q to which this statement is appended as an exhibit and also include the
following:
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, and prepayment of indebtedness
and those requiring maintenance of minimum net worth, minimum EBITDA and minimum
interest coverage and limiting leverage; (iv) certain of the Company's
borrowings are and will continue to be at variable rates of interest which
expose the Company to the risk of increases in interest rates; and (v) the
Company may be more leveraged than certain of it 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
<PAGE> 2
conditions. As a result of the 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 has complied. The subpoena required, among other things,
records of any audit or investigative reports relating to the billing of payors
globally for radiological services during the period January 1, 1991 to date and
any refunds owed to or issued to payors with respect to such global billing
reports in the Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx) (the
"Complaint"). On February 11, 1998, the United States provided Medaphis with a
copy of the Complaint, Substitution of Attorney, and Order which prohibited the
Company from making any use of the Complaint, including any public disclosure,
other than for the purposes of settlement negotiations, without further order of
the Court. On February 12, 1998, upon the joint application of Medaphis and the
United States, the Court issued an order modifying its February 6, 1998 order to
allow Medaphis to make public disclosures concerning the Complaint and its
contents to the extent that Medaphis determined such disclosures were required
by applicable securities laws, provided that such disclosures did not reveal the
Relators' identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs.
The Complaint includes causes of action under the Federal False Claims Act, 31
U.S.C. sec 3729 et seq., and the California False Claims Act, Cal. Gov't Code
sec. 12650 et seq. The Complaint also includes causes of action relating to
Medaphis' termination of Relator II, including a count under the state and
federal whistleblower protection statutes. The Complaint alleges overpayments of
approximately $20,500,000 together with treble damages and additional penalties
based on statutory civil penalties. The Complaint alleges that at least 50,000
separate false claims were filed under federal programs and at least 8,000
separate false claims were filed under state programs. The Complaint also
alleges unspecified compensatory, general and punitive damages on behalf of
Relator II on his or her employment claims. The allegations in the Complaint are
limited to the office of CompMed (acquired by Medaphis) in Culver City,
California. Medaphis believes that this Complaint relates to and concerns the
2
<PAGE> 3
California Investigation. Medaphis is engaged in negotiations with both the
civil and criminal divisions of the U.S. Attorney's office to settle those
portions of the Complaint as to which the United States has indicated that it
intends to proceed and any criminal charges that the United States may intend to
pursue. The Company has also contacted the State of California concerning civil
settlement of the portions of the Complaint as to which California intends to
proceed. The Company has not yet initiated discussions with the Relators
concerning the other portions of the Complaint, but the Company is seeking to
reach a global civil settlement with the United States, the State of California
and the Relators. To facilitate further negotiations with the United States and
California governments, the Company has agreed with such governments to toll
applicable statutes of limitations through November 2, 1998.
Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995 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. Since the third quarter of 1995,
the Company has periodically adjusted the reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters, as such amounts are not currently estimable.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries, which impacts only certain managed care plans,
cannot be determined by the Company, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error. The Company is
unable to estimate the possible range of loss, if any.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of voting common stock ("Common
Stock") in April 1995, were named as defendants in putative shareholder class
action lawsuits filed in the United States District Court for the Northern
District of Georgia. In general, these lawsuits alleged violations of the
federal securities laws in connection with Medaphis' public statements and
filings under the federal securities acts, including the registration statement
filed in connection with Medaphis' public offering of Common Stock in April
1995. On October 13, 1995, the named plaintiffs in these lawsuits filed a
consolidated class action complaint (the "Consolidated Complaint"). On January
3, 1996, the court denied defendants' motion to dismiss the Consolidated
Complaint, which argued that the Consolidated Complaint failed to state a claim
upon which relief may be granted. On April 11, 1996, certain of the named
plaintiffs to the Consolidated Complaint voluntarily dismissed with prejudice
all of their claims. As a result of these dismissals, the Consolidated Complaint
no longer contained any claims based on the Securities Act and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. On
May 19, 1997, the plaintiffs and the defendants entered into a stipulation and
settlement agreement, pursuant to which the parties agreed to settle this action
on a class-wide basis for $4.75 million, subject to court approval (the "1995
Class Action Settlement"). The 1995 Class Action Settlement included the related
putative class action lawsuit filed in the Superior Court of Cobb
3
<PAGE> 4
County, Georgia, described more fully below. On October 28, 1997, the court
certified a class for settlement purposes, approved the settlement and entered
final judgment dismissing the action with prejudice. One of Medaphis' directors'
and officers' liability insurance carriers has paid $3.7 million of the 1995
Class Action Settlement directly for the benefit of the plaintiffs. The Company
accrued approximately $1.2 million in the quarter ended December 31, 1996 for
the anticipated balance of the 1995 Class Action Settlement and to pay certain
fees incident thereto. On November 6, 1997, the Company paid the remaining $1.05
million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. In 1993, Medaphis acquired GFS, an
emergency room physician billing company located in Jacksonville, Florida, which
had developed a computerized coding system. In 1994, Medaphis acquired and
merged into GFS another emergency room physician billing company, Physician
Billing, Inc., located in Grand Rapids, Michigan. For each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government has requested
that GFS voluntarily produce records, and GFS has complied with that request.
Although the precise scope and subject matter of the GFS Investigation are not
known to the Company, Medaphis believes that the GFS Investigation, which is
being participated in by federal law enforcement agencies having both civil and
criminal authority, involves GFS's billing procedures and the computerized
coding system used in Jacksonville and Grand Rapids to process claims and may
lead to claims of errors in billing. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company or that the GFS
Investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. The Company has recorded charges of
$2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million in the second quarter of 1998 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,
as such amounts cannot be estimated.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
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
4
<PAGE> 5
Second Amended Complaint (the "Consolidated Second Amended Complaint"). In
general, the Consolidated Second Amended Complaint alleged violations of the
federal securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint was brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserted claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Services Corporation ("HDS"). The
Consolidated Second Amended Complaint sought compensatory and rescissory
damages, as well as fees, interest and other costs. On February 14, 1997, the
defendants moved to dismiss the Consolidated Second Amended Complaint in its
entirety. On May 27, 1997, the court denied defendants' motion to dismiss.
The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") to settle the 1996 putative shareholder
class action litigation which is the subject of the Consolidated Second Amended
Complaint on a class-wide basis for $20 million in cash (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
shares of Medaphis Common Stock, and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Stipulation
included, 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 certain 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
contained other conditions including, but not limited to, consent and approval
of the Company's insurance carriers and the insurance carriers' payment of the
cash portion of the settlement, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company's insurance carriers consented to the settlement and funded the $20
million cash portion. On March 25, 1998, the Court granted final approval of the
settlement and entered final judgment dismissing the action.
The Company recorded a $52.5 million charge in the quarter ended September
30, 1997 in connection with the Stipulation. This charge is comprised of the
following: (i) $30.2 million representing the original 3,355,556 shares of
Common Stock valued at the fair value per share on the date that the material
terms of the agreement were reached or approximately $9 per share and (ii) $22.3
million representing the fair value of the warrants on the date the material
terms of the agreement were reached, valued using the Black-Scholes option
pricing model with the following assumptions: expected life -- 5 years, risk
free interest rate -- 6%, dividend rate -- 0% and expected volatility
factor -- 60%. No accounting recognition was required for the additional 600,000
shares to be issued pursuant to the agreement as these shares represent the
maximum number of contingent shares that were issuable based on certain stock
price contingencies during the ten day period prior to October 11, 1997. As a
result of the actual decline in the Company's stock price during such period,
the Stipulation required that the maximum number of contingent shares be
awarded; however, no additional accounting charge was required in connection
with the award of such contingent shares. The 3,955,556 shares were issued in
April 1998. Additionally, no accounting recognition was afforded the cash
portion of the Stipulation as this amount is the responsibility of the insurance
carriers. Such amount has been paid by the insurance carriers directly to an
escrow account for the benefit of the plaintiffs.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation (the "Derivative Suit"). The plaintiff seeks
unspecified compensatory damages and costs on behalf of the Company. On January
28, 1997, Medaphis and certain individual defendants filed a motion to dismiss
the complaint. On February 11, 1997, the plaintiff filed an amended complaint
adding as defendants, additional current and former directors and officers of
Medaphis. On April 23, 1997, Medaphis and all other defendants filed a motion to
dismiss the amended complaint, which
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motion was denied without prejudice. The parties entered into a Stipulation and
Settlement Agreement dated June 26, 1998 (the "Derivative Stipulation") to
settle the Derivative Suit. The Derivative Stipulation provides for the
enactment of procedures for governance of the Audit Committee of the Board of
Directors and for such attorney's fees and expenses as may be awarded by the
court in an amount not to exceed $250,000 (to be paid by the Company's
directors' and officers' liability insurance carrier). The Derivative
Stipulation is subject to certain conditions including, but not limited to,
consent and approval of the insurance carrier (which has been requested by the
Company), payment of the cash portion of the settlement by the insurance carrier
and final approval of the settlement by the court. On June 26, 1998, the court
granted preliminary approval to the settlement. The court has scheduled a final
fairness hearing concerning the settlement for September 29, 1998.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages in excess of $100 million,
rescission, injunctive relief and costs. The Company is unable to estimate a
possible range of loss. On January 10, 1997, the defendants filed a demurrer to
the complaint. On February 5, 1997 the Court overruled defendants' demurrer. On
March 18, 1997, the court denied the plaintiff's motion for a preliminary
injunction. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former and
current officers of Medaphis. All of the newly added defendants have responded
to the amended complaint. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the Securities Act, but the Company
believes that it has substantial defenses to the alleged damages relating to
such Securities Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. The Company is unable to estimate a possible range of loss. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
Securities Act and common law and new parties, including former officers of
Medaphis, Medaphis' former independent accountants and BSG. On or about October
29, 1997, all defendants filed motions to dismiss the amended complaint. On May
12, 1998, the court ruled in favor of defendants on the motions, dismissing all
of plaintiffs' claims with prejudice and without leave to amend. On May 15,
1998, the Judge signed an order to that effect. The plaintiffs filed a notice of
appeal of such order on June 25, 1998.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 August 31, 1998. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. The Company and the BSG
Principals have reached an
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agreement in principle to settle the claims made on behalf of the former BSG
shareholders in exchange for approximately 3.2 million shares of Medaphis Common
Stock, subject to negotiation and definitive documentation of other terms and
conditions of the settlement. There can be no assurance that such settlement
will be completed or that such settlement, if completed, will be in accordance
with the above mentioned terms. The Company recorded a litigation settlement
charge of $21.3 million in the quarter ended June 30, 1998 in connection with
this agreement in principle. The charge reflects 3.2 million shares of Medaphis
Common Stock valued at the fair value per share on the date on which the
material terms of the agreement in principle was reached. The Company has
classified the entire $21.3 million liability associated with the proposed
settlement as noncurrent since such obligation will be settled with Common Stock
rather than current assets, and the exact timing of the payment of claims
pursuant to such settlement is not determinable.
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. The Company is unable to estimate a possible
range of loss. Additionally, plaintiffs seek to void various non-compete
covenants and contract provisions between Medaphis and plaintiffs. Defendants
have filed a motion to dismiss the complaint. Discovery has been stayed pending
resolution of the motion to dismiss.
On August 12, 1997, George D. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserts claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 52,252 shares of Medaphis Common Stock (based
on a price per share of Medaphis Common Stock of approximately $7). The Company
recorded a litigation settlement charge of approximately $0.4 million in the
quarter ended June 30, 1998 in connection with this agreement. The number of
shares of Medaphis Common Stock is subject to adjustment upward or downward by
up to 9,301 shares depending upon the average closing price of Medaphis Common
Stock for a specified period. Under the adjustment, the minimum number of shares
of Medaphis Common Stock to be issued pursuant to the Stickle Stipulation is
42,951 and the maximum number of shares is 61,553. The Stickle Stipulation is
subject to certain conditions including, but not limited to, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), payment of the cash portion of the settlement by the insurance
carrier, and final approval of the settlement by the court. On June 26, 1998,
the court entered an order substituting Peter Gladkin as lead plaintiff in lieu
of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. The court has
scheduled a final fairness hearing concerning the settlement for September 29,
1998.
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.
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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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company intends to cooperate fully with the
Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
PRIOR PERIOD LOSSES
The Company has had net losses in each of 1995, 1996, 1997 and the first
half of 1998. Such losses have resulted in substantial part from restructuring
and other charges and litigation settlements and to a lesser extent from
amortization relating to acquisitions. There can be no assurance when or if the
Company will generate net income in the future.
INTANGIBLE ASSETS
As of June 30, 1998, the Company's balance sheet included approximately
$500 million of unamortized intangible assets, which is greater than 58% and 96%
of the Company's total assets and stockholders' equity, respectively. The
current amortization rate on the unamortized intangible assets is in excess of
$20 million per year.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of net identifiable assets. GAAP requires goodwill and other
intangibles to be amortized over the period benefited, which management has
determined to be no less than 40 years.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant restructuring charges within the Physician Services segment and
(iii) absence of revenue growth within the Physician Services segment.
Therefore, in accordance with applicable accounting rules, management prepared a
40 year undiscounted cash flow analysis to determine if these intangible assets
were still recoverable.
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Management prepared the analysis with assumptions that reflected its current
outlook on the business. In all instances, management believes the assumptions
inherent in the analysis were reasonable and supportable. The following key
assumptions were used in management's undiscounted cash flow analysis: revenue
growth was forecasted at an average rate of 3.4% and the EBITDA margin was
forecasted at approximately 3.5 percentage points above the current level. Such
analysis indicated that no impairment of these intangible assets had occurred.
However, the Company recognizes that modest adjustments to the assumptions could
have a material impact on the analysis and related conclusions. For example, if
the Physician Services segment is unable to improve its EBITDA margin, revenue
growth of at least 4.1% would be required to allow for recoverability of these
assets over the 40 year life. As of June 30, 1998, the Physician Services
segment has not realized the revenue growth and EBITDA margin that was projected
at December 31, 1997. Management continues to monitor its results of operations
and other developments within the industry to adjust its cash flow forecast as
necessary. If the projected undiscounted cash flows used in the Company's
recoverability analysis decreased to one dollar below the carrying value of the
intangible assets, the Company would be required to record a non-cash impairment
charge that may exceed $300 million to reduce the Physician Services segment's
intangible assets to their fair value, as determined by discounting the future
cash flows of this segment. Management still believes the current intangible
asset balance is recoverable.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in determining that the
amortization period of goodwill is appropriate and that goodwill is not
impaired. Management concluded that, based on the assumptions used, the
anticipated future cash flows associated with the goodwill recognized in the
acquisitions will continue indefinitely, and, based on such assumptions, there
is no persuasive evidence that any material portion will dissipate over a period
shorter than 40 years.
DEPENDENCE ON TURNAROUND; FUTURE OPERATING RESULTS; MANAGEMENT
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the California Investigation, and (b) 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
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could have a material adverse effect on the Company which could require the
Company to seek appropriate amendments to its existing credit facility.
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.
ACCOUNTING ISSUES
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 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.
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YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. GFS's computerized coding system is one of the legacy
systems from which the Company has determined to transition. The Company
believes that it is on target to have completed these system migration efforts
with respect to its Physician Services and Hospital Services businesses in the
first half of 1999. The detail planning and inventory for the majority of the
Company's legacy systems that are being modified for Year 2000 compatibility has
been completed and such systems are in remediation. Per-Se Technologies products
are scheduled to be Year 2000 compatible with releases due out in the third
quarter of 1998. Customers, vendors and resellers have been identified and
requests for information distributed regarding the Year 2000 readiness of such
parties. Responses are expected through the first quarter of 1999. The Company
will develop contingency plans during the fourth quarter of 1998 through the
second quarter of 1999 in response to assessments of the Year 2000 readiness of
customers, vendors and resellers. The estimated cost of the Company's Year 2000
efforts is $10 million to $15 million over 1998 and 1999, the majority of which
represents redirection of internal resources. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its computer
systems or those of its customers, vendors or resellers in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to identify and
address such problems, or the expenses or liabilities to which the Company may
become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenue. In addition, failure of the Company to identify and remedy
Year 2000 problems could put the Company at a competitive disadvantage relative
to companies that have corrected such problems.
COMPETITION; INDUSTRY AND MARKET CHANGES
The business of providing management services and information technology to
physicians and hospitals is highly competitive. Medaphis competes with certain
national and regional physician and hospital reimbursement organizations and
collection businesses (including local independent operating companies), certain
national information and data processing organizations and certain physician
groups and hospitals that provide 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.
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Historically, some healthcare payors have paid the prices established by
providers while other healthcare payors, notably government agencies and managed
care companies, have paid less than established prices (in many cases less than
the average cost of providing the services). As a consequence, prices charged to
healthcare payors willing to pay established prices have increased in order to
recover the cost of services purchased by government agencies and others but not
paid for by them (i.e., "cost shifting"). The increasing complexity in the
reimbursement system and assumption of greater payment responsibility by
individuals have caused healthcare providers to experience increased accounts
receivable and bad debt levels and higher business office costs. Healthcare
providers historically have addressed these pressures on profitability by
increasing their prices, by relying on demographic changes to support increases
in the volume and intensity of medical procedures and by cost shifting.
Notwithstanding the providers' responses to these pressures, management believes
that the revenue growth rate experienced by the Company's clients continues to
be adversely affected by increased managed care and other industry factors
affecting healthcare providers in the United States. At the same time, the
process of submitting healthcare claims for reimbursement to third party payors
in accordance with applicable industry and regulatory standards continues to
grow in complexity and to become more costly. Management believes that these
trends have adversely affected and could continue to adversely affect the
revenues and profit margins of the Company's operations.
GOVERNMENTAL INVESTIGATORY RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities,
and particularly on possibly fraudulent billing practices. This heightened
scrutiny has resulted in a number of high profile civil and criminal
investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (codified
in scattered 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.
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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 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.
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.
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This Safe Harbor Statement supersedes the Safe Harbor Statements filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 and as Exhibit 99.13 to the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1997.
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