<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
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, 1999
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.)
2840 MT. WILKINSON 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 6, 1999
- -------------- ------------------
<S> <C>
Common Stock $0.01 par value................................ 84,723,930 shares
Non-voting Common Stock $0.01 par value..................... 0 shares
</TABLE>
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<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements.............................. 1
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998...................................... 1
Consolidated Statements of Operations for the three and
six months ended June 30, 1999 and 1998................ 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998........................... 3
Notes to Consolidated Financial Statements................ 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
Part II: OTHER INFORMATION
Item 1: Legal Proceedings................................. 18
Item 4: Submission of Matters to a Vote of Security
Holders................................................ 18
Item 6: Exhibits and Reports on Form 8-K.................. 18
Index to Exhibits......................................... 21
</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,
1999 1998
--------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 45,237 $ 54,409
Restricted cash........................................... 5,631 5,754
Accounts receivable, billed............................... 51,213 54,800
Accounts receivable, unbilled............................. 43,290 46,757
Other..................................................... 7,526 8,022
--------- ---------
Total current assets.............................. 152,897 169,742
Property and equipment, net................................. 40,347 47,954
Intangible assets........................................... 47,337 48,241
Net assets of discontinued operations....................... 8,316 11,872
Other....................................................... 5,768 8,912
--------- ---------
$ 254,665 $ 286,721
========= =========
Current Liabilities:
Accounts payable.......................................... $ 8,521 $ 8,550
Accrued compensation...................................... 18,614 21,234
Accrued expenses.......................................... 24,023 22,361
Accrued litigation settlements............................ 6,107 12,026
Current portion of long-term debt......................... 1,014 1,067
Deferred revenue.......................................... 20,116 18,289
--------- ---------
Total current liabilities......................... 78,395 83,527
Long-term debt.............................................. 175,000 175,013
Accrued litigation settlements.............................. 28,135 20,250
Other obligations........................................... 3,649 5,608
--------- ---------
Total liabilities................................. 285,179 284,398
--------- ---------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized;
84,045 and 78,745 issued and outstanding in 1999 and
1998, respectively..................................... 840 787
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 756,507 740,014
Accumulated deficit....................................... (787,861) (738,390)
--------- ---------
(30,514) 2,411
Less treasury stock, at cost -- 15 shares in 1998........... -- 88
--------- ---------
Total stockholders' (deficit) equity.............. (30,514) 2,323
--------- ---------
$ 254,665 $ 286,721
========= =========
</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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................. $ 82,357 $ 89,329 $163,730 $184,678
-------- -------- -------- --------
Salaries and wages...................................... 53,769 56,631 106,923 113,415
Other operating expenses................................ 27,541 25,743 57,898 56,615
Depreciation............................................ 5,654 5,657 12,440 11,818
Amortization............................................ 2,248 5,369 4,515 10,698
Interest expense, net................................... 3,879 5,849 7,783 12,223
Legal settlements....................................... 29,250 21,875 29,250 21,875
Restructuring and other charges......................... -- 1,046 -- 1,607
-------- -------- -------- --------
Total expenses................................ 122,341 122,170 218,809 228,251
-------- -------- -------- --------
Loss before income taxes................................ (39,984) (32,841) (55,079) (43,573)
Income tax benefit...................................... -- (955) (525) (5,039)
-------- -------- -------- --------
Loss from continuing operations......................... (39,984) (31,886) (54,554) (38,534)
-------- -------- -------- --------
Discontinued operations, net of tax:
Income from discontinued operations................... 357 2,070 661 3,568
Gain on sale of subsidiaries.......................... 4,017 -- 4,487 --
-------- -------- -------- --------
4,374 2,070 5,148 3,568
-------- -------- -------- --------
Loss before extraordinary item.......................... (35,610) (29,816) (49,406) (34,966)
Extraordinary item, net of tax.......................... -- -- -- (5,557)
-------- -------- -------- --------
Net loss...................................... $(35,610) $(29,816) $(49,406) $(40,523)
======== ======== ======== ========
Basic net (loss) income per common share:
Loss from continuing operations....................... $ (0.48) $ (0.41) $ (0.67) $ (0.51)
Income from discontinued operations, net of tax....... 0.05 0.02 0.06 0.04
Extraordinary item, net of tax........................ -- -- -- (0.07)
-------- -------- -------- --------
Net loss.............................................. $ (0.43) $ (0.39) $ (0.61) $ (0.54)
======== ======== ======== ========
Weighted average shares outstanding..................... 83,325 77,136 81,138 75,318
======== ======== ======== ========
</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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(49,406) $(40,523)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations....................... (661) (3,568)
Depreciation and amortization............................. 16,955 22,516
Gain on sale of subsidiaries.............................. (4,814) --
Early extinguishment of debt.............................. -- 9,231
Non-cash legal settlement costs........................... 25,738 --
Deferred income taxes..................................... -- (7,079)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash......................................... 341 (11)
Accounts receivable, billed............................. 3,587 (4,930)
Accounts receivable, unbilled........................... 3,467 2,047
Accounts payable........................................ (29) (1,045)
Accrued compensation.................................... (2,620) (6,391)
Accrued expenses........................................ (671) (4,705)
Accrued litigation settlements.......................... (7,219) 21,875
Deferred revenue........................................ 1,827 (195)
Other, net.............................................. 1,015 838
-------- --------
Net cash used for continuing operations................. (12,490) (11,940)
Net cash used for discontinued operations............... (4,617) (657)
-------- --------
Net cash used for operating activities............. (17,107) (12,597)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,541) (16,797)
Software development costs.................................. (3,609) (2,165)
Proceeds from sale of subsidiaries, net..................... 12,934 --
Proceeds from sale of property and equipment................ 2,738 720
Other....................................................... -- (374)
-------- --------
Net cash provided by (used for) investing
activities........................................ 7,522 (18,616)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 503 756
Proceeds from the exercise of stock options................. 181 5,074
Proceeds from borrowings.................................... -- 294,310
Payments of debt............................................ (66) (270,678)
Debt issuance costs......................................... (205) (11,968)
-------- --------
Net cash provided by financing activities.......... 413 17,494
-------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (9,172) (13,719)
Balance at beginning of period.............................. 54,409 14,728
-------- --------
Balance at end of period.................................... $ 45,237 $ 1,009
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 8,391 $ 5,110
Income taxes.............................................. 940 1,282
Non-cash investing and financing activities:
Issuance of Common Stock upon funding of litigation
settlement.............................................. 15,875 52,500
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, 1998 included in the Company's Annual Report on Form 10-K filed
March 19, 1999.
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.
As more thoroughly discussed in Note 2, the Medaphis Services Corporation
("Hospital Services") and Impact Innovations Group ("Impact") segments have been
presented as discontinued operations for all periods presented.
NOTE 2 -- DISCONTINUED OPERATIONS
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. During
the first quarter of 1999, the Company received additional consideration of $0.8
million based on Hospital Services' final closing balance sheet and payment on
certain Hospital Services accounts receivable retained by Medaphis. The
additional consideration resulted in the recognition of an additional gain of
$0.5 million, net of tax of $0.3 million. Also, Medaphis could receive a
purchase price adjustment of up to $10.0 million subject to Hospital Services'
achievement of various operational targets in 1999.
After reviewing several alternatives for Impact throughout 1998, management
concluded that a sale of this segment (comprised of two divisions: commercial
and government) would generate the greatest return to the stockholders and
finalized its plan to sell Impact. The Company sold the commercial division of
Impact to Complete Business Solutions, Inc. ("CBSI") effective April 15, 1999
for $14.4 million, net of the final closing balance sheet adjustment of $0.6
million which was paid on July 16, 1999. Management expects to complete the sale
of the government division before the end of 1999.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"), the consolidated financial statements of the
Company have been presented to reflect both Hospital Services and Impact as
discontinued operations for all periods presented.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "Income from discontinued operations";
the net assets have been reported in the Consolidated Balance Sheets as "Net
assets of discontinued operations"; and the net cash flows have been reported in
the Consolidated Statements of Cash Flows as "Net cash used for discontinued
operations."
4
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Summarized financial information for the discontinued operations is as
follows (the 1999 results for Impact include the commercial division through
April 15, 1999 -- the effective date of the sale):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue............................................. $12,555 $26,832 $20,270 $47,102
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 357 2,330 695 3,025
Income tax expense.................................. -- 955 -- 955
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 357 $ 1,375 $ 695 $ 2,070
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue............................................. $33,177 $51,956 $42,704 $94,660
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 661 3,946 1,256 5,202
Income tax expense.................................. -- 1,634 -- 1,634
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 661 $ 2,312 $ 1,256 $ 3,568
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
1999 1998
-------------- ------------------
IMPACT IMPACT
-------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Current assets............................................. $ 9,883 $16,399
Total assets............................................... 11,375 21,829
Current liabilities........................................ 3,059 9,787
Total liabilities.......................................... 3,059 9,957
Net assets of discontinued operations...................... 8,316 11,872
</TABLE>
NOTE 3 -- LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs. The 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. In addition, the
Company is involved in legal proceedings and litigation arising in the ordinary
course of business and there can be no assurances that the Company will not be
subject to future customer complaints, claims and contract terminations,
employment claims or other litigation or that any such litigation will not have
a material adverse effect upon the Company or its operations.
SETTLED LEGAL MATTERS
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
investigating allegations concerning the Company's wholly-owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). While the
Company denies
5
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the contentions of the government, the Company determined it was in its best
interest to settle such claims. Accordingly, in September 1998, the Company
reached an agreement in principle with the United States to settle the matters
related to the GFS Investigation on an ability to pay basis. The settlement,
finalized on June 21, 1999, requires the Company to pay to the United States and
the various states a total of $15.0 million. The Company paid $6.8 million to
the United States on June 29, 1999, with the balance of $8.2 million to be paid
as follows: $2.2 million, in the aggregate, to the participating states upon
execution of settlement agreements with all of the participating states, $1.2
million to the United States on each of September 30, 1999 and December 31, 1999
and $0.9 million to the United States at the end of each calendar quarter of
2000. The deferred portion of the settlement payment will bear interest at the
one-year Treasury Bill rate, 4.73% at June 30, 1999. All pending claims against
the Company by the United States and the Relator in underlying qui tam
litigation have been dismissed with prejudice and the United States has released
the Company from all civil and administrative claims arising out of the
emergency room billing of government programs services provided by GFS from 1993
through the date of the settlement agreement with the United States. The
settlement agreements with the participating states will provide for the release
of the Company by the states of all civil and administrative claims arising out
of the emergency room billing services provided by GFS from 1993 through the
date of the settlement agreement with the individual state.
In connection with the settlement in the third quarter of 1998 of an
investigation in California (the "California Investigation") and the then
pending settlement of the GFS Investigation, the Company entered into a
Corporate Integrity Agreement with the Office of the Inspector General of the
Department of Health and Human Services on September 2, 1998. This Agreement,
which has a term of sixty-five months, provides that the government will not
seek to exclude the Company from participation in governmental health care
programs based on the conduct alleged in the California and GFS Investigations
and requires the Company to continue its existing compliance program, augmented
by an annual third-party review and additional reporting requirements.
On June 16, 1999, the Company agreed to settle certain contract claims
arising out of a 1996 contract for emergency room billing services to be
provided by Medaphis Emergency Medicine Physician Services to Spectrum
Healthcare, Inc. and Emcare, Inc., the successor to Spectrum's emergency
business. The Company paid Emcare $1.75 million in cash in exchange for a
release by Spectrum and Emcare of all claims against Medaphis Emergency Medicine
Physician Services for breach of contract.
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 was brought
on behalf of all former shareholders of MMS (the "MMS Shareholders") who
exchanged their MMS holdings for unregistered shares of Common Stock. In
general, the complaint alleged common law fraud and violations of the federal
securities laws in connection with the merger. The parties entered into a
settlement agreement on June 24, 1999 and the litigation has been dismissed with
prejudice. The settlement agreement provides for the issuance by the Company to
the MMS Shareholders of 500,000 shares of Common Stock and warrants to purchase
an additional 500,000 shares of Common Stock. In addition, the Company entered
into a five-year consulting agreement with Providence Management Corporation, a
company controlled by James F. Thacker, providing for a $300,000 up front
payment and $150,000 a year for the five-year term. The Company also paid the
MMS Shareholders $375,000 for the MMS Shareholders' interest in a malpractice
claim.
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 Health Data
6
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Sciences Corporation ("HDS") in June of 1996. The Company and Foundation Health
Services, Inc. ("Foundation"), formerly Health Systems International, Inc., have
reached an agreement in principle to settle this litigation. The agreement
provides for the dismissal with prejudice of the pending litigation and mutual
releases by the parties. The settlement allows Foundation to realize $25.0
million from its investment in HDS, consisting of the value of 976,771 shares of
Medaphis Common Stock received by Foundation in the HDS transaction and still
owned by Foundation, $4.5 million in cash to be funded by the Company's insurers
and the balance in Medaphis Common Stock to be issued to Foundation, currently
estimated at 5,000,000 shares, subject to adjustment based on market value. The
settlement is contingent upon definitive documentation, funding by the Company's
insurers and issuance, registration and sale of the shares to be issued to
Foundation.
PENDING LEGAL MATTERS
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg 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 options to purchase Medaphis Common Stock in connection with
Medaphis' acquisition of BSG. The plaintiffs initially alleged 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 sought unspecified compensatory and
punitive damages, as well as fees, interest and other costs. On April 18, 1997,
the Medaphis 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 federal securities laws 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
granted defendants' motions, dismissing all of plaintiffs' claims with
prejudice. On May 15, 1998, the Court entered an order to that effect. The
plaintiffs appealed from this order. On December 9, 1998, the New Jersey Court
of Appeals dismissed the plaintiffs' appeal because the plaintiffs' appellate
brief was filed untimely. On May 10, 1999, the Appellate Court reinstated the
appeal. The appeal is currently pending. The Company is unable to estimate a
range of loss, if any, related to this matter.
In September 1996, Medaphis Physician Services Corporation ("MPSC") became
aware of apparently inadvertent computer software errors affecting some of its
electronic billing to carriers in the State of California. The error, which
primarily impacts certain managed care plans, 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 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.
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
7
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
restatements of the Company's financial statements. The Company has cooperated
with the Commission in its investigation and will continue to do so.
On January 28, 1998, SCI Management Corporation filed a complaint against
BSG Alliance/IT, Inc. (later known as Impact Innovations Group, Inc.) seeking
recovery for alleged damages in connection with work performed by Impact under a
consulting contract. Impact denies any liability to SCI and has counter claimed
for unpaid fees and expenses, interest and attorneys' fees. Pursuant to the
contract, the case is pending before the American Arbitration Association and
discovery is proceeding. The Company sold Impact Innovations Group, Inc.
effective April 15, 1999 but remains responsible for this litigation. The
Company is unable to estimate a possible range of loss, if any.
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
lawsuits, written demands and the pending governmental investigation will not
have a disruptive effect upon the operations of the business, that written
demands, the defense of lawsuits and the pending investigation will not consume
the time and attention of the senior management of the Company, or that the
resolution of lawsuits, written demands and the pending governmental
investigation will not have a material adverse effect upon the Company,
including, without limitation, the Company's results of operations, financial
position and cash flow. There can be no assurance that the agreement in
principle reached with respect to the Foundation litigation will be concluded
and implemented. Failure to reach definitive agreement or otherwise not to
conclude and implement such agreement in principle could have a material adverse
effect upon the Company. 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 4 -- RESTRUCTURING AND OTHER CHARGES
The description of the type and amount of restructuring costs recorded and
applied against each reserve in the six months ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE COSTS APPLIED BALANCE
DECEMBER 31, 1998 AGAINST RESERVE JUNE 30, 1999
----------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease termination costs........................ $4,292 $ (364) $3,928
Severance...................................... 1,148 (719) 429
------ ------- ------
$5,440 $(1,083) $4,357
====== ======= ======
</TABLE>
During the three and six months ended June 30, 1998, the Company recorded
approximately $0.2 million of restructuring costs for the reorganization of
several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.2 million and $0.7 million in the three
and six months ended June 30, 1998, respectively, for severance costs associated
with former executive management.
NOTE 5 -- LONG TERM DEBT
Under the indenture governing the 9 1/2% $175 million of Senior Notes due
2005 (the "Notes"), the balance of the excess sale proceeds, as defined, from
the sale of Hospital Services, the commercial division of Impact or from the
sale of any other asset having a fair value in excess of $1.0 million, must be
invested in the Company's business within 360 days of the sale. To the extent
that such excess proceeds are not invested, the Company is
8
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
required to offer to repurchase the Notes at par with such proceeds. Currently,
it is management's intention to invest the excess proceeds from the November
1998 sale of Hospital Services and the April 1999 sale of the commercial
division of Impact in the Company.
NOTE 6 -- INCOME TAXES
Based on recent events and the current operating forecast, the Company does
not believe it is more likely than not that net operating losses (NOLs) will be
realized; therefore a tax benefit has not been recognized related to the NOLs
during the three and six months ended June 30, 1999.
During the first quarter of 1998, the Company recorded a tax benefit
related to NOLs which was subsequently reserved for in the quarter ended
September 30, 1998.
NOTE 7 -- STOCKHOLDERS' EQUITY
On April 14, 1999, the Company issued 5,000,000 shares of Common Stock in
accordance with the January 13, 1999 settlement agreement of a previously
resolved legal matter. As a result of the issuance of the shares, non-current
accrued litigation settlements was reduced by $15.9 million with a corresponding
increase in stockholders' equity in the second quarter of 1999.
On July 13, 1999, the Company issued 500,000 shares of Common Stock and is
required to issue warrants to purchase an additional 500,000 shares of Common
Stock in accordance with the June 24, 1999 settlement of the legal matter
related to Medaphis' acquisition of MMS. Upon of the issuance of the shares and
the warrants, non-current accrued litigation settlements will be reduced by $4.0
million with a corresponding increase in stockholders' equity in the third
quarter of 1999.
In July 1999, the Company reached an agreement in principle to settle its
legal dispute with Foundation resulting from the Company's acquisition of HDS in
1996. The settlement allows Foundation to realize $25.0 million from its
investment in HDS, consisting of the value of 976,771 shares of Medaphis Common
Stock received by Foundation in the HDS transaction and still owned by
Foundation, $4.5 million in cash to be funded by the Company's insurers and the
balance in Medaphis Common Stock to be issued to Foundation, currently estimated
at 5,000,000 shares, subject to adjustment based on market value. Upon the
issuance of the shares, non-current accrued litigation settlements will be
reduced and stockholders' equity will be increased based on the market value of
the Company's Common Stock.
NOTE 8 -- SEGMENT REPORTING
The Company's reportable segments are strategic business units that offer
different products and services. Medaphis provides its services and products
through its Per-Se Technologies ("Per-Se") and Medaphis Physician Services
("Physician Services") segments. Per-Se provides application software and
electronic commerce solutions to healthcare providers. The Per-Se segment
includes the results of the electronic commerce group for all periods presented.
Some parts of this group had previously been included in the Physician Services
and Hospital Services segments. The Physician Services segment provides business
management services and claims processing to hospital-based physicians including
the collection of clinical data, data input, medical coding, billing, cash
collections and accounts receivable management. Also, certain expenses
previously included in Corporate overhead have been reclassified to Per-Se and
Physician Services for all periods presented.
Medaphis evaluates each segment's performance based on operating profit or
loss. The Company also accounts for intersegment sales as if the sales were to
third parties.
9
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Per-Se........................................ $ 23,788 $ 22,999 $ 46,561 $ 50,659
Physician Services............................ 61,462 69,152 122,919 139,702
Eliminations.................................. (2,893) (2,822) (5,750) (5,683)
-------- -------- -------- --------
$ 82,357 $ 89,329 $163,730 $184,678
======== ======== ======== ========
Operating profit (loss) (1):
Per-Se........................................ $ (271) $ (531) $ (2,946) $ 1,476
Physician Services............................ (1,667) 951 (4,506) 1,242
Corporate..................................... (4,917) (4,491) (10,594) (10,586)
-------- -------- -------- --------
$ (6,855) $ (4,071) $(18,046) $ (7,868)
======== ======== ======== ========
Interest expense, net........................... $ 3,879 $ 5,849 $ 7,783 $ 12,223
======== ======== ======== ========
Restructuring and other charges (including legal
settlements):
Per-Se........................................ $ -- $ 162 $ -- $ 162
Physician Services............................ 1,750 -- 1,750 --
Corporate..................................... 27,500 22,759 27,500 23,320
-------- -------- -------- --------
$ 29,250 $ 22,921 $ 29,250 $ 23,482
======== ======== ======== ========
Loss before income taxes........................ $(39,984) $(32,841) $(55,079) $(43,573)
======== ======== ======== ========
Depreciation and amortization:
Per-Se........................................ $ 2,343 $ 2,274 $ 4,671 $ 4,596
Physician Services............................ 4,561 7,826 9,114 16,147
Corporate..................................... 998 926 3,170 1,773
-------- -------- -------- --------
$ 7,902 $ 11,026 $ 16,955 $ 22,516
======== ======== ======== ========
Capital expenditures:
Per-Se........................................ $ 448 $ 873 $ 928 $ 2,788
Physician Services............................ 1,899 804 3,141 12,059
Corporate..................................... 79 1,135 472 1,950
-------- -------- -------- --------
$ 2,426 $ 2,812 $ 4,541 $ 16,797
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets:
Per-Se.................................................... $ 60,589 $ 65,320
Physician Services........................................ 124,419 134,485
Corporate (2)............................................. 69,657 86,916
-------- --------
$254,665 $286,721
======== ========
</TABLE>
- ---------------
(1) Excludes restructuring and other charges, legal settlements and interest
expense.
(2) Includes net assets of $8,316 and $11,872, respectively, related to the
discontinued operations.
10
<PAGE> 13
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"), provides a wide range of
business management services, enterprise-wide software and electronic commerce
solutions to healthcare providers. The Company's large client base and national
presence further support the Company's competitive position. 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. Medaphis provides its services and products
through Per-Se Technologies ("Per-Se") and Medaphis Physician Services
("Physician Services").
Per-Se provides a diverse, integrated suite of patient-focused,
enterprise-wide software and services and electronic commerce solutions that
enable healthcare organizations to more effectively deliver quality care, manage
resources, reduce costs, improve productivity and drive operational
effectiveness. Physician Services 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 to focus on providing quality patient care. These services
also assist physicians in improving cash flows and reducing administrative costs
and burdens.
The Company provides consulting services through its non-core business
segment, Impact Innovations Group ("Impact"). After reviewing several
alternatives for Impact throughout 1998, management concluded a sale of this
segment (comprised of two divisions: commercial and government) would generate
the greatest return to the stockholders and finalized its plan to sell Impact.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid on July
16, 1999. Management expects to complete the sale of the government division
before the end of 1999.
Medaphis markets its services and products primarily to physician
enterprises, integrated delivery networks, hospitals, long-term care facilities,
home health agencies and managed care organizations.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30, 1998
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Per-Se...................................................... $23,788 $22,999
Physician Services.......................................... 61,462 69,152
Eliminations................................................ (2,893) (2,822)
------- -------
$82,357 $89,329
======= =======
</TABLE>
Per-Se's revenue increased 3.4% to $23.8 million in the second quarter of
1999 from $23.0 million in the same period in 1998. This increase is a result of
higher internal and external electronic commerce transaction volume, increased
software consulting services and higher software maintenance revenue. These
increases were partially offset by lower software license revenue due to more
contracts requiring percentage of completion accounting.
Physician Services' revenue decreased 11.1% to $61.5 million in the second
quarter of 1999 from $69.2 million in the same period in 1998. The decline in
revenue is attributable to operating issues resulting in client discontinuances
throughout 1998 primarily at the Company's wholly-owned operating subsidiary,
Medaphis Emergency Medicine Physician Services (formerly known as Gottlieb's
Financial Services, Inc. or GFS) (the
11
<PAGE> 14
"Emergency Medicine division"). These discontinuances were partially offset by
the addition of new business during the first half of 1999, which, on an
annualized basis, exceeded discontinuances over that same period. The Physician
Services segment continues to be affected by the revenue pressures on the
physician accounts receivable operation resulting from an increase in managed
care. Management believes the client discontinuances, both Company and client
initiated, and revenue pressure will continue in the near term. Client
discontinuances initiated by the Company are a result of management's ongoing
review and evaluation process of unprofitable or marginally profitable clients
that yield returns unacceptable to management.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes legal
settlements, restructuring and other charges and interest expense, classified by
the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Per-Se...................................................... $ (271) $ (531)
Physician Services.......................................... (1,667) 951
Corporate................................................... (4,917) (4,491)
------- -------
$(6,855) $(4,071)
======= =======
</TABLE>
Per-Se had an operating loss of $0.3 million for the three months ended
June 30, 1999 as compared to a loss of $0.5 million for the same period in 1998.
This decrease was primarily a result of the previously mentioned overall revenue
increase during the quarter.
Physician Services' had an operating loss of $1.7 million for the three
months ended June 30, 1999 as compared to a profit of $1.0 million for the same
period in 1998. The decrease is attributable to the revenue declines previously
discussed and increased expenses associated with the assimilation of the
Company's multiple operating systems. The decrease was partially offset by lower
salaries and wages attributable to staff reductions and lower amortization
expense resulting from the intangible asset impairment charge of $390.6 million
for the quarter ended September 30, 1998.
The Company's overhead increased 9.5% for the three months ended June 30,
1999 as compared to the to the same period in 1998. This increase is related to
the Company's year 2000 efforts and severance costs associated with downsizing
the corporate function. For the quarter ended June 30, 1998, certain corporate
overhead expenses of $1.7 million and $1.0 million have been reclassified to
Physician Services and Per-Se, respectively.
INTEREST. Net interest expense was $3.9 million in the second quarter of
1999 as compared with $5.8 million in the second quarter of 1998. The decrease
is attributable to less debt outstanding and interest income of $0.7 million
generated from the short-term investment of cash.
LEGAL SETTLEMENTS. In June 1999, the Company recorded legal settlement
charges of $21.5 million and $6.0 million related to litigation arising from
Medaphis' June 1996 acquisition of Health Data Sciences Corporation ("HDS") and
December 1995 acquisition of Medical Management Sciences, Inc. ("MMS"),
respectively. In addition, the Company paid $1.8 million to settle contract
claims against the Emergency Medicine division which arose in January 1998 from
a 1996 contract dispute in the ordinary course of business.
In June 1998, the Company recorded an estimated litigation settlement
liability of $21.3 million associated with claims made on behalf of certain
former BSG Corporation ("BSG") shareholders in connection with Medaphis'
acquisition of BSG in June 1996. Such liability was estimated based upon a
proposed settlement of approximately 3.2 million shares of Common Stock. This
settlement was subsequently finalized for 5.0 million shares of Common Stock,
and, based on the prevailing market price, the settlement was valued at $15.9
million. A reduction to litigation settlements totaling approximately $5.4
million was recorded in the fourth quarter of 1998 to reflect the final
settlement value.
Also in June 1998, the Company recorded $0.6 million in connection with the
settlement of two other legal matters.
12
<PAGE> 15
RESTRUCTURING AND OTHER CHARGES. During the three months ended June 30,
1998, the Company recorded approximately $0.2 million of restructuring costs for
the reorganization of several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.2 million in the three months ended June
30, 1998 for severance costs associated with former executive management.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company does not believe it is more likely than not that net operating
losses (NOLs) will be realized; therefore a tax benefit has not been recognized
related to the NOLs during the three months ended June 30, 1999. During the
second quarter of 1998, the Company began to fully reserve all tax benefits
generated.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the three-month periods ended June 30, 1999 and 1998
is as follows (the 1999 results for Impact include the commercial division
through April 15, 1999 -- the effective date of the sale):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue............................................. $12,555 $26,832 $20,270 $47,102
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 357 2,330 695 3,025
Income tax expense.................................. -- 955 -- 955
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 357 $ 1,375 $ 695 $ 2,070
======= ======= ======= =======
</TABLE>
On November 30, 1998, the Company completed the sale of Medaphis Services
Corporation ("Hospital Services") to NCO Group, Inc. ("NCO") for initial
consideration of $107.5 million. During the first quarter of 1999, the Company
received additional consideration of $0.8 million based on Hospital Services'
final closing balance sheet and payment on certain Hospital Services accounts
receivable retained by Medaphis. The additional consideration resulted in the
recognition of an additional gain of $0.5 million, net of tax of $0.3 million.
Also, Medaphis could receive a purchase price adjustment of up to $10.0 million
subject to Hospital Services' achievement of various operational targets in
1999.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid July 16,
1999. Management expects to complete the sale of the government division of
Impact before the end of 1999.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Per-Se................................................. $ 46,561 $ 50,659
Physician Services..................................... 122,919 139,702
Eliminations........................................... (5,750) (5,683)
-------- --------
$163,730 $184,678
======== ========
</TABLE>
Per-Se's revenue decreased 8.1% to $46.6 million for the six months ended
June 30, 1999 from $50.7 million in the same period in 1998. This decrease is
primarily a result of lower software license revenue from the Ulticare
13
<PAGE> 16
product line and more contracts requiring percentage of completion accounting.
The decrease in software license revenue was partially offset by higher software
maintenance revenue and electronic commerce revenue.
Physician Services' revenue decreased 12.0% to $122.9 million for the six
months ended June 30, 1999 from $139.7 million in the same period in 1998. The
decline in revenue is attributable to operating issues resulting in client
discontinuances throughout 1998 primarily at the Emergency Medicine division.
These discontinuances were partially offset by the addition of new business
during the first half of 1999, which, on an annualized basis, exceeded
discontinuances over that same period. The Physician Services segment continues
to be affected by the revenue pressures on the physician accounts receivable
operation resulting from an increase in managed care. Management believes the
client discontinuances, both Company and client initiated, and revenue pressure
will continue in the near term. Client discontinuances initiated by the Company
are a result of management's ongoing review and evaluation process of
unprofitable or marginally profitable clients resulting in unreasonable returns.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes legal
settlements, restructuring and other charges and interest expense, classified by
the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Per-Se...................................................... $ (2,946) $ 1,476
Physician Services.......................................... (4,506) 1,242
Corporate................................................... (10,594) (10,586)
-------- --------
$(18,046) $ (7,868)
======== ========
</TABLE>
Per-Se had an operating loss of $2.9 million for the six months ended June
30, 1999 as compared to a profit of $1.5 million for the same period in 1998.
The decline was primarily a result of the previously mentioned decrease in
revenue.
Physician Services' had an operating loss of $4.5 million for the six
months ended June 30, 1999 as compared to a profit of $1.2 million for the same
period in 1998. The decrease is attributable to the revenue declines previously
discussed and increased expenses associated with the assimilation of the
Company's multiple operating systems. The decrease was partially offset by lower
salaries and wages attributable to staff reductions and lower amortization
expense resulting from the intangible asset impairment charge of $390.6 million
for the quarter ended September 30, 1998.
For the six months ended June 30, 1998, certain corporate overhead expenses
of $3.2 million and $1.5 million have been reclassified to Physician Services
and Per-Se, respectively.
INTEREST. Net interest expense was $7.8 million for the six-month period
ended June 30, 1999 as compared to $12.2 million in the same period of 1998. The
decrease is primarily related to less debt outstanding and interest income of
$1.3 million generated from the short-term investment of cash.
LEGAL SETTLEMENTS. In June 1999, the Company recorded legal settlement
charges of $21.5 million and $6.0 million related to Medaphis' June 1996
acquisition of HDS and December 1995 acquisition of MMS, respectively. In
addition, the Company paid $1.8 million to settle contract claims against the
Emergency Medicine division which arose in January 1998 from a 1996 contract
dispute in the ordinary course of business.
In June 1998, the Company recorded an estimated litigation settlement
liability of $21.3 million associated with claims made on behalf of certain
former BSG shareholders. Such liability was estimated based upon a proposed
settlement of approximately 3.2 million shares of Common Stock. This settlement
was subsequently finalized for 5.0 million shares of Common Stock, and, based on
the prevailing market price, the settlement was valued at $15.9 million. A
reduction to litigation settlements totaling approximately $5.4 million was
recorded in the fourth quarter to reflect the final settlement value.
Also in June 1998, the Company recorded $0.6 million in connection with the
settlement of two other legal matters.
14
<PAGE> 17
RESTRUCTURING AND OTHER CHARGES. During the six months ended June 30,
1998, the Company recorded approximately $0.2 million of restructuring costs for
the reorganization of several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.7 million in the six months ended June
30, 1998 for severance costs associated with former executive management.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company does not believe it is more likely than not that net operating
losses (NOLs) will be realized; therefore a tax benefit has not been recognized
related to the NOLs during the six months ended June 30, 1999.
During the six months ended June 30, 1998, the Company recorded a tax
benefit related to NOLs, which was subsequently reserved for in the quarter
ended September 30, 1998.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the six-month periods ended June 30, 1999 and 1998
is as follows (the 1999 results for Impact include the commercial division
through April 15, 1999 -- the effective date of the sale):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue............................................. $33,177 $51,956 $42,704 $94,660
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 661 3,946 1,256 5,202
Income tax expense.................................. -- 1,634 -- 1,634
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 661 $ 2,312 $ 1,256 $ 3,568
======= ======= ======= =======
</TABLE>
EXTRAORDINARY ITEM. During the six months ended June 30, 1998, 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 Company's then-current debt facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $74.5 million at June 30, 1999,
including $45.2 million of unrestricted cash and cash equivalents. The $9.2
million decrease in cash and cash equivalents from December 31, 1998 is
primarily a result of the payment of a semi-annual interest payment required
under the 9 1/2% $175 million of Senior Notes due February 15, 2005 (the
"Notes") and payments made upon the execution of the definitive agreement
related to the government investigation of allegations concerning the Company's
wholly-owned subsidiary, GFS.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid on July
16, 1999. Management expects to complete the sale of the government division of
Impact before the end of 1999.
Under the Indenture governing the Notes, the balance of the excess sale
proceeds, as defined, from the sale of Hospital Services, the commercial
division of Impact or the sale of any other asset having a fair value in excess
of $1.0 million, must be invested in the Company's business within 360 days of
the sale. To the extent that such excess proceeds are not invested, the Company
is required to offer to repurchase the Notes at par with such proceeds.
Currently, it is management's intention to invest the estimated excess proceeds
in the Company. As of June 30, 1999, excess proceeds related to the sale of
Hospital Services were approximately $16.0 million and must be invested by
November 25, 1999. The excess proceeds from the sale of the commercial division
of Impact were approximately $12.5 million at June 30, 1999 and must be invested
by April 15, 2000.
15
<PAGE> 18
The Company is a party to various legal actions. See Note 3 of Notes to
Consolidated Financial Statements. 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 will not have a material
adverse effect on the Company, including, without limitation, the Company's
results of operations, financial position or cash flow and liquidity.
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purposes may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness thereby reducing the funds available to the
Company for its operations. In addition, the Indenture for the Notes contains
restrictive covenants, including without limitation those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets.
The Company believes that its current cash position is sufficient to permit
the Company to meet its operating expenses, service its debt requirements as
they become due in the next twelve months and for the long term and to invest in
the business; however, there can be no assurance that such results will be
achieved. 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.
To enhance the Company's financial flexibility, management is currently
seeking a new credit facility. This flexibility would give management the
ability to make prudent strategic investments in the business. Additionally,
management anticipates receiving proceeds from the sale of the government
division of Impact which will be available to invest in the business subject to
the limitations discussed above.
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 Company-wide 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 Company-wide review, the Company has
identified a number of older legacy systems, all within the Physician Services
business, that will be abandoned in favor of a limited number of more efficient
processing systems ("Systems Assimilation"), rather than make all the systems
Year 2000 compatible. The Emergency Medicine division's computerized coding
system is one of the legacy systems from which the Company has already
transitioned. The Company believes that it is on target to complete
substantially all of these system migration efforts by the third quarter of
1999. The detailed planning and inventory for all of the Company's legacy
systems that are being modified for Year 2000 compatibility have been completed.
These legacy systems have been remediated and are in final testing. Customers,
vendors and resellers have been identified and requests for information
distributed regarding the Year 2000 readiness of such parties. Responses have
been received throughout the first and second quarters of 1999 and follow up is
planned for the remainder of the year. The Company began to develop contingency
plans during the fourth quarter of 1998 and will continue developing these plans
through the third quarter of 1999 in response to assessments of the Year 2000
readiness of customers, vendors and resellers.
In the second quarter of 1999, Per-Se completed testing and documentation
of Year 2000 compatible versions of the clinical information system and the
radiology information system. Those releases, along with Year 2000 compatible
versions of the patient scheduling and staff management products, are currently
available to customers. Year 2000 testing for products that will be generally
available late in 1999 or early in 2000 will be done as a routine part of
quality assurance and documentation.
16
<PAGE> 19
Through June 30, 1999, the Company has spent approximately $8.8 million on
its Year 2000 and Systems Assimilation efforts, and it expects to spend an
additional $4.0 million to $6.0 million in 1999 on such efforts, the majority of
which represents redirection of internal resources. However, there can be no
assurance that the Company will identify all 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.
17
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 3 of Notes to
Consolidated Financial Statements in Item 1 on pages 5 to 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 6, 1999. The
following directors were elected at such meeting:
<TABLE>
<CAPTION>
BOARD VOTES VOTES VOTES
NOMINEE TERM FOR AGAINST WITHHELD
- ------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C>
Roderick M. Hills....................... Through 1999 57,636,378 -- 1,413,711
David R. Holbrooke, M.D................. Through 1999 57,651,264 -- 1,398,825
David E. McDowell....................... Through 1999 57,376,680 -- 1,673,409
Kevin E. Moley.......................... Through 1999 57,649,920 -- 1,400,169
John C. Pope............................ Through 1999 57,659,018 -- 1,391,071
Allen W. Ritchie........................ Through 1999 57,658,870 -- 1,391,219
C. Christopher Trower................... Through 1999 57,646,783 -- 1,403,306
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions Inc.,
E-Business Solutions.com, Inc., Impact Innovations Holdings,
Inc. and Registrant (incorporated by reference to Exhibit
2.1 to Current Report on Form 8-K filed on May 5, 1999).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8,
Registration No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.5 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
3.6 -- Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.5 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S> <C>
4.1 -- 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 Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998)
4.3 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.4 -- Registration Rights Letter Agreement, dated as of May 3,
1999, by and among NFT Ventures Inc., Raymond J. Noorda,
Mark Rogers, NP Ventures, Ltd., Steven G. Papermaster and
the Registrant (incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3, File No. 333-78775).
10.1 -- Settlement Agreement and Full and Complete Release dated
June 24, 1999, among James F. Thacker, et al., and
Registrant.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
</TABLE>
The Company filed the following report on Form 8-K during the quarter ended
June 30, 1999:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -----------
<S> <C> <C> <C>
Sale of Impact Innovations' commercial division to
Complete Business Solutions, Inc........................ No April 20, 1999 May 5, 1999
</TABLE>
19
<PAGE> 22
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/ WAYNE A. TANNER
------------------------------------
Wayne A. Tanner
Executive Vice President and
Chief Financial Officer
By: /s/ MICHAEL A. SNYDER
------------------------------------
Michael A. Snyder
Vice President and Controller
(Chief Accounting Officer)
Date: August 12, 1999
20
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions Inc., E-Business Solutions.com,
Inc., Impact Innovations Holdings, Inc. and Registrant
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on May 5, 1999).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8,
Registration No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.5 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
3.6 -- Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.5 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
4.1 -- 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 Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998)
4.3 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.4 -- Registration Rights Letter Agreement, dated as of May 3,
1999, by and among NFT Ventures Inc., Raymond J. Noorda,
Mark Rogers, NP Ventures, Ltd., Steven G. Papermaster and
the Registrant (incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3, File No. 333-78775).
10.1 -- Settlement Agreement and Full and Complete Release dated
June 24, 1999, among James F. Thacker, et al., and
Registrant.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
</TABLE>
21
<PAGE> 1
EXHIBIT 10.1
SETTLEMENT AGREEMENT AND FULL AND COMPLETE RELEASE
This Settlement Agreement and Full and Complete Release (the "Agreement"),
dated June 24, 1999, is made and entered into by and among James F. Thacker
("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 (collectively the "MMS Shareholders"), on the one
hand, and Medaphis Corporation, a Delaware corporation (including its present
and former directors, officers, employees, agents, attorneys, and advisors)
("Medaphis"), on the other, in connection with the settlement (the "Settlement",
as described and defined more fully below) of the claims described below. The
MMS Shareholders and Medaphis are sometimes referred to hereinafter collectively
as the "Parties".
INTRODUCTION:
WHEREAS, Medaphis acquired Medical Management Sciences, Inc. ("MMS")
pursuant to the terms of a Merger Agreement dated as of December 29, 1995 (the
"Merger Agreement"), in a tax-free merger in which all of the shareholders of
MMS received shares of the Common Stock of Medaphis in exchange for their shares
of MMS (the "Merger");
WHEREAS, in connection with the closing of the Merger, Medaphis and certain
of the MMS Shareholders entered into an Indemnification Agreement dated as of
December 29, 1995 (the "Indemnification Agreement") relating to the agreements
by Medaphis and certain of the MMS Shareholders to provide certain
indemnification rights to each other in respect to losses, costs, expenses, and
other damages (including, but not limited to, attorneys' fees and expenses)
sustained as a result of a breach by the Parties of certain of their
representations, warranties, and covenants contained in the Merger Agreement or
in any MMS Ancillary Documents or Medaphis Ancillary Documents (as such terms
are defined in the Indemnification Agreement), as the case may be, or any
<PAGE> 2
fraud, willful misconduct, bad faith, or intentional breach of any
representation, warranty, covenant, or agreement made by the signing parties,
all as more fully described in the Indemnification Agreement;
WHEREAS, Medaphis has sought indemnification from the MMS Shareholders for,
among other things, attorneys' fees and expenses arising out of or related to a
lawsuit known as Medical Billing, Inc. v. Medical Management Sciences, Inc., et
al., (N.D. Ohio) Case No. 1:94-CV-1567, and the related spoliation suit known as
Medical Billing, Inc., and Reich, Seidelmann & Janicki v. Medical Management
Sciences, Inc., et al., (N.D. Ohio) Case No. 1:96-CV-1015 (collectively the
"Cleveland Matters");
WHEREAS, the MMS Shareholders have asserted claims against Medaphis under
the Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and related common law
and state statutory claims, for alleged damages that relate to or arise out of
certain alleged breaches in the representations and warranties of Medaphis
contained in the Merger Agreement, certain alleged material misstatements and
omissions in the Registration Statement/Prospectus delivered in connection with
the Merger, and certain other acts or omissions of Medaphis in connection with
the Merger, the Merger Agreement, and the Registration Rights Agreement
incorporated into the Merger Agreement;
WHEREAS, Medaphis has denied all liability and has raised counterclaims
against certain of the MMS Shareholders arising out of or relating to the Merger
and the Indemnification Agreement;
WHEREAS, the MMS Shareholders have denied all liability; and
WHEREAS, the Parties now desire to settle their differences arising out of
the above-referenced facts and the Merger.
<PAGE> 3
AGREEMENT:
NOW, THEREFORE, IT IS HEREBY AGREED by and among the Parties that the
Released Claims (as defined below) are finally and fully compromised and
settled, as follows:
1.0 The Settlement Consideration.
1.1 The Settlement Shares and Settlement Warrants. Medaphis shall
deliver an aggregate Five Hundred Thousand (500,000) shares (the "Settlement
Shares") of Medaphis Common Voting Stock, par value $.01 per share ("Common
Stock"), and warrants to purchase an additional Five Hundred Thousand (500,000)
shares of Medaphis Common Voting Stock at a strike price equal to the closing
price per share of Medaphis common stock on the date that the parties execute
this agreement for a five-year period from the date of issuance, which warrants
shall contain other terms and conditions customary for securities of that type
("Settlement Warrants"), to the MMS Shareholders in accordance with the
percentages set forth on Schedule A hereto, subject to and in accordance with
the provisions set forth herein. Should any change be made to the capital stock
of Medaphis prior to the Closing (as defined below) by reason of any of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the receipt of consideration by Medaphis, or should any record date be
set with respect to such a matter on a date prior to the date of Closing,
appropriate adjustments shall be made to the number of Settlement Shares in
order to prevent the dilution or enlargement of the numbers of shares as a
proportion of the outstanding capital stock of Medaphis. In the case of (i) any
merger or consolidation in which securities possessing more than 50% of the
total combined voting power of Medaphis' outstanding securities are transferred
to a person or persons different from the persons holding those securities
immediately prior to such transaction, or (ii) the sale, transfer, or other
disposition of all or substantially all of Medaphis' assets (each of 1.1(i) and
(ii) being referred to as a "Corporate Transaction"),
<PAGE> 4
in each case prior to the date on which the Settlement Shares or Settlement
Warrants have been issued occurring prior to Closing, or for which any record
date shall have been set prior to Closing, the MMS Shareholders shall thereafter
be entitled to receive the numbers of shares of stock or other securities or
other property (including cash) to which a holder of the Settlement Shares or
Settlement Warrants (as adjusted in the manner provided herein) would be
entitled to receive if all of the Settlement Shares or Settlement Warrants had
been issued on the record date of such Corporate Transaction. The MMS
Shareholders assume all market risk with respect to the Settlement Shares and
Settlement Warrants.
1.2 The Settlement Consulting Agreement. Medaphis shall enter into a
mutually agreeable consulting agreement with Providence Management Corp.
("Providence"), pursuant to which Providence will be paid Three Hundred Thousand
dollars ($300,000) upon execution of such consulting agreement and an additional
One Hundred Fifty Thousand dollars ($150,000) per year, payable monthly, for a
period of five years in exchange for Thacker's performance, on behalf of
Providence, of such consulting services with respect to the MMS system and
Medaphis' practice management and billing and accounts receivable services to
physicians, including radiologists and radiation oncologists, as he may be
called upon by Medaphis to perform. The consulting agreement shall contain a
suitable provision barring Providence and its employees, including but not
limited to Thacker, from soliciting customers or employees of Medaphis. In
connection with such Agreement, Medaphis agrees to pay Providence's reasonable
and necessary business expenses incurred in connection with the consulting
services. Upon a change of control of Medaphis, before the end of Providence's
five year consulting agreement, Medaphis shall pay Providence the remaining
unpaid monthly payments for the duration of such consulting agreement, if any,
in one lump sum payment. Neither Providence nor Thacker will be considered a
Medaphis employee but
<PAGE> 5
rather an independent contractor, in connection with the performance under such
consulting agreement.
1.3 Medaphis' Retention of Rights in the Hahn, Loeser & Parks
Matter. At the signing of this Agreement, Medaphis shall pay to the MMS
Shareholders (in amounts set forth on Schedule A hereto) an additional Three
Hundred Seventy- Five Thousand Dollars ($375,000) in connection with any
potential malpractice claim against Hahn, Loeser, & Parks ("HLP") arising from
or related to HLP's representation of the MMS Shareholders during the Cleveland
Matters; provided, however, that Medaphis shall retain the right to any
consideration received either by settlement or judgment from HLP. Moreover,
Medaphis shall have the sole control and discretion (a) to enter into any
settlement with HLP and (b) to decide what the terms and conditions of any such
settlement shall be, so long as such terms and conditions place or impose no
liabilities on the MMS Shareholders; and provided, further, that the MMS
Shareholders shall consent to and sign or execute any document or documents
necessary to effectuate such settlement.
1.4 MMS Release from the Indemnification Agreement. In addition to
the release set forth below, the MMS Shareholders shall be released from any
claim for indemnification arising under or related to the Indemnification
Agreement dated December 29, 1995 entered into in connection with the Merger
("Indemnification Agreement"), including without limitation, any claim based
upon the Cleveland Matters; provided, however, that Medaphis shall retain the
right to receive any recovery that Thacker or the MMS Shareholders may receive
from the Cleveland Matters; and provided, further, that Thacker agrees to
cooperate fully with Medaphis in the resolution of the Cleveland Matters and
further acknowledges and agrees that Medaphis has complete control over the
resolution of the Cleveland Matters.
1.5 Dismissal of Pending Litigation. Medaphis and the MMS Shareholders
shall cause the litigation known as James F. Thacker, et. al., v. Medaphis
<PAGE> 6
Corporation and Randolph Brown, (S.D.N.Y.) 97 CIV 2849 (WHP) (the "Litigation")
to be dismissed with prejudice as to all claims and counterclaims.
1.6 The Settlement Consideration. The "Settlement Consideration" shall
be the Settlement Shares, the Settlement Warrants, the Settlement Consulting
Agreement, and the other agreements contained in paragraphs 1.1 through 1.5 of
this Agreement.
2.0 Releases.
2.1 General Release by the MMS Shareholders. Upon the occurrence of the
Closing, each of the MMS Shareholders, severally, on behalf of himself, herself,
or itself, and for each and all of his, hers, or its respective partners
subsidiaries, affiliates (as defined in SEC Rule 12b-2), associates (as defined
in SEC Rule 12b-2), successors, assigns, heirs, and others claiming through or
under him, her, or it, shall have and shall hereby be deemed to have, fully,
finally, and forever released, relinquished, and discharged all "MMS Shareholder
Released Claims" (as defined below) against the "Medaphis Released Persons" (as
defined below).
(1) "MMS Shareholder Released Claims" collectively means all
claims, demands, rights, liabilities, and causes of action, known or unknown,
accrued or unaccrued, fixed or contingent, direct or derivative, individual or
representative, of every nature and description whatsoever, of the MMS
Shareholders against Medaphis from the beginning of time to the date of this
Agreement, including, without limitation, all claims that are asserted or that
could have been asserted by the MMS Shareholders arising out of or relating to
the purchase, sale, or ownership of Medaphis Common Stock, options, or other
Medaphis securities, or pursuant to or in connection with the Merger, or arising
out of or relating to any of the claimed acts, omissions, misrepresentations,
facts, events, matters, transactions, or occurrences referred to in the recitals
to this Agreement or as alleged in 1996 Medaphis Corporation Securities
Litigation, (N.D. Ga.), Civil Action No. 1:96-CV-2088-TWT, and James F. Thacker,
et. al., v. Medaphis Corporation
<PAGE> 7
and Randolph G. Brown, (S.D.N.Y.), Civil Action No. 97 Civ. 2849 (WHP) ("Thacker
Litigation"), including, without limitation, any of Medaphis' restatements of
any of its financial statements, excepting from such release only those rights
and obligations created or preserved by this Agreement.
(2) "Medaphis Released Persons" means Medaphis and each of its
respective past or present directors; employees; partners; principals; agents;
underwriters; issuers; insurers; con-insurers; reinsurers; shareholders;
attorneys (including, without limitation, King & Spalding; Skadden Arps, Slate,
Meager & Flom LLP; Paul, Hastings, Janofsky & Walker; and any present and former
partners or employees thereof); accountants; investment bankers; advisors;
securities analysts; brokerage firms; personal representatives; predecessors;
successors; parents; subsidiaries; divisions; assigns; spouses; heirs;
associates (as defined by SEC Rule 12b-2); affiliates (as defined by SEC Rule
12b-2) and any members of their immediate families; any person, firm, trust,
corporation, officer, director, or other individual or entity in which any of
the above persons has a controlling interest, or which is related to or
affiliated with any of the above persons; or any trust of which any of the above
persons is the settlor or which is for the benefit of any of the above persons
and/or member(s) of his family; and any individual, group, or entity who
directly or indirectly participated in the dissemination of information about
Medaphis or who directly or indirectly is responsible for any of the damages
alleged by the MMS Shareholders, including, without limitation, any securities
analysts or brokerage firms.
2.2 General Release by Medaphis. Upon Closing, Medaphis, on behalf of
itself and for each and all of its respective subsidiaries, affiliates, (as
defined in SEC Rule 12b-2), associates (as defined in SEC Rule 12b-2),
successors, assigns, and others claiming through or under it, shall have and
shall hereby be deemed to have, fully, finally, and forever released,
relinquished, and discharged all "Medaphis Released
<PAGE> 8
Claims" (as defined below) against the "MMS Shareholder Released Persons" (as
defined below).
(1) "Medaphis Released Claims" collectively means all claims,
demands, rights, liabilities, and causes of action, known or unknown, accrued or
unaccrued, fixed or contingent, direct or derivative, individual or
representative, of every nature and description whatsoever, from the beginning
of time down to the date of this Agreement, including without limitation: all
claims that Medaphis has or could assert against Thacker under the non-compete
agreement that Thacker entered into in connection with the Merger; all claims
that are asserted or that could have been asserted by Medaphis arising out of or
relating to the Merger; all claims that are asserted or could have been asserted
by Medaphis arising out of the Registration Rights Agreement incorporated in the
Merger Agreement; all claims that are asserted or could have been asserted by
Medaphis arising out of the Indemnification Agreement dated December 29, 1995
entered into in connection with the Merger; and all claims for indemnification
that are asserted or could have been asserted by Medaphis as a result of the
litigation known as Medical Billing, Inc. v. Medical Management Sciences, Inc.,
et al., (N.D. Ohio), Case No. 1:94-CV-1567 and the related spoliation suit known
as Medical Billing, Inc., and Reich, Seidelmann & Janicki v. Medical Management
Sciences, Inc., et al., (N.D. Ohio), Case No. 1:96-CV-1015 (the "Cleveland
Matters"); excepting therefrom only those rights and obligations created or
preserved by this Agreement; provided, however, that Medaphis shall retain the
right to receive any recovery that Thacker or the MMS Shareholders may receive
from the Cleveland Matter.
(2) "MMS Shareholder Released Persons" means each of the MMS
Shareholders and each of his, hers, or its respective past or present directors,
officers, employees, partners, principals, agents, underwriters, issuers,
insurers, co- insurers, reinsurers, shareholders, attorneys, (including, without
limitation Howard, Smith & Levin LLP; and any present or former partners or
employees of the foregoing firm),
<PAGE> 9
accountants, investment bankers, advisors, securities analysts, brokerage firms,
predecessors, successors, parents, subsidiaries, divisions, assigns, associates
(as defined by SEC Rule 12b-2), and affiliates (as defined by SEC Rule 12b-2).
2.3 Released Claims. The Medaphis Released Claims, as defined in
paragraph 2.2 (a) of this Agreement, and the MMS Shareholder Released Claims, as
defined in paragraph 2.1 (a) of this Agreement, sometimes are referred to
collectively as the "Released Claims".
2.4 California Civil Code.
Effective as of the Closing and the giving of the releases
described above, the Parties knowingly, voluntarily, and expressly waive and
relinquish any and all rights that they may have under Section 1542 of the
California Civil Code, or any similar provision or law of any jurisdiction or
any similar or analogous principle of common law. California Civil Code Section
1542 provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
3.0 Registration of Settlement Shares
3.1 Resale Registration Statement. Medaphis shall prepare and file
with the Securities and Exchange Commission (the "Commission") as soon as
practicable after the date hereof a registration statement (the "Registration
Statement) on Form S-3 or other available form with respect to resale of the
Settlement Shares by the MMS Shareholders and shall use its reasonable best
efforts to have the Registration Statement declared effective by the Commission
as promptly as practicable thereafter. Medaphis and each of the MMS Shareholders
will cooperate in the preparation of the Registration Statement for the
Settlement Shares and will furnish each other with all information concerning
themselves, and such other matters as may be reasonably necessary or
<PAGE> 10
advisable for the Registration Statement, filings under the state securities
laws, and any other statement or application made by or on behalf of Medaphis or
any of the MMS Shareholders to any governmental body in connection with this
Settlement Agreement and the transactions contemplated hereby. Medaphis shall
provide a reasonable opportunity for the MMS Shareholders to review a draft of
the Registration Statement, and any amendment or supplement thereto, and to
correct any information with respect to the MMS Shareholders prior to the time
the Registration Statement is filed with the Commission. Medaphis agrees to
maintain the effectiveness of the Registration Statement from the date on which
the Commission declares the Registration Statement to be effective through the
first to occur of (i) the first anniversary of the Closing and the effectiveness
of the respective releases provided under Section 2.0; (ii) the date on which
each of the MMS Shareholders is no longer subject to any restriction on resale
pursuant to Rule 144 promulgated under the Securities Act ("Rule 144"); and
(iii) the date on which each of the MMS Shareholders shall have sold all of the
Settlement Shares held by such person. Notwithstanding the preceding sentence,
if the Board of Directors of Medaphis determines in good faith that it is in the
best interests of the stockholders of Medaphis not to disclose the existence of
facts surrounding any proposed or pending acquisition, disposition, strategic
alliance, financing transaction, or other pending material event involving
Medaphis, Medaphis, by written notice to the MMS Shareholders, may suspend the
rights of the MMS Shareholders to make sales pursuant to the Registration
Statement; provided that such period of suspension shall not exceed forty-five
(45) days during the period in which the Registration Statement is required to
remain effective as provided herein. In addition to the foregoing, in connection
with the preparation, filing, and effectiveness of the Registration Statement,
Medaphis will:
(a) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to keep the Registration Statement
effective for such
<PAGE> 11
period as may be required hereunder, and in each case to comply with
provisions of the Securities Act with respect to the disposition of the
Settlement Shares during such period in accordance with the intended
methods of distribution by the MMS Shareholders set forth in the
Registration Statement;
(b) furnish the MMS Shareholders such number of copies of the
Registration Statement, each amendment and supplement thereto, in each
case including all exhibits, the prospectus included in the Registration
Statement, and such other documents as the MMS Shareholders may reasonably
request in order to facilitate the disposition of the Settlement Shares by
the MMS Shareholders;
(c) use its reasonable best efforts to register or qualify the
Settlement Shares under such other securities or blue sky laws of such
jurisdictions within the United States as the MMS Shareholders reasonably
requests to keep such registration or qualification in effect for as long
as the Registration Statement is in effect and to do any and all other
acts and things which may be reasonably necessary or advisable to enable
the MMS Shareholders to consummate the disposition in such jurisdictions
of the Settlement Shares then held or owned by the MMS Shareholders;
(d) at any time when a prospectus relating to the resale of
Settlement Shares is required to be delivered under the Securities Act, to
notify the MMS Shareholders of the happening of any event as a result of
which the prospectus contained in the Registration Statement contains an
untrue statement of material fact or omits any facts necessary to make the
statements therein not misleading, and promptly prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of Settlement Shares, such prospectus will not contain an
untrue statement of material fact or omit to state any fact necessary to
make the statements therein, in light of the circumstances under which
statements were made, not misleading;
(e) If the Registration Statement has been filed on Form S-3
or any other available form promulgated by the Commission permitting the
incorporation of
<PAGE> 12
Medaphis's Commission reports or other documents by reference, and if such
short form thereafter becomes unavailable for use by Medaphis for any reason,
Medaphis shall promptly as practicable thereafter take such steps as are
necessary to convert the Registration Statement into a registration statement on
Form S-1 or other available long form, including, but not limited to, by
post-effective amendment, and shall use commercially reasonable efforts to cause
such long-form registration statement to become effective as promptly as
practicable thereafter and to otherwise comply with the provisions of this
Section 3.1.
3.2 Exchange Act Reports. From and after the date hereof, and for so
long as is necessary in order to permit the MMS Shareholders to sell the
Settlement Shares pursuant to Rule 144 and to maintain the availability to
Medaphis of Form S-3 or other available short-form registration statement
permitting the incorporation of Medaphis's Commission reports or other documents
by reference, Medaphis will file on a timely basis all reports and other
documents required to be filed by it pursuant to the Securities Act, and the
Exchange Act, including Section 13 or 15(d) thereof; and to furnish to any MMS
Shareholder, so long as such MMS Shareholder owns any Settlement Shares,
forthwith upon request (i) a written statement by Medaphis that it has complied
with reporting requirements of Rule 144, the Securities Act, and the Exchange
Act, or that it qualifies as a registrant whose securities may be issued or
resold pursuant to Form S-3 (or any other available short-form registration
statement), (ii) a copy of the most recent annual or quarterly report of
Medaphis and such other reports and documents so filed by Medaphis (including
all exhibits), and (iii) such other information as may be reasonably requested
in availing any MMS Shareholder of any rule or regulation of the Commission
which permits the selling of any such securities of Medaphis without
registration or pursuant to Form S-3 or other available short-form registration
statement.
<PAGE> 13
3.3 Payment of Certain Expenses.
(a) Registration Statement. Medaphis shall bear and pay all
expenses incurred in connection with the preparation, filing, and
maintenance of the Registration Statement provided for under Section
3.1, including, without limitation, all registration, filing, and
qualification fees, printer and accounting fees, but excluding any
underwriters' or brokers' discounts or commissions associated with the
resale of the Settlement Shares, which discounts or commissions shall
be borne by the MMS Shareholder incurring same;
(b) Share Transfers and Opinions. If at any time after the one-year
period specified in subsection (d)(1) of Rule 144, any MMS Shareholder
shall not be an affiliate of Medaphis, Medaphis agrees (i) to cooperate
with such MMS Shareholder in connection with the removal of legends
placed on such MMS Shareholder's Settlement Shares pursuant to Section
5.0 hereof, (ii) not to require legal opinions with respect to the
transfer of such Settlement Shares after expiration of such one-year
holding period (or if it does to issue or cause to be issued such
opinion at its own expense), and (iii) to otherwise bear all expenses
associated with reissuing such shares without legends or in connection
with the issuance of any opinions requested by Medaphis or its transfer
agent with respect to the transfer of such shares.
<PAGE> 14
4.0 Closing. The consummation of the transactions contemplated by the
Agreement shall take place at the offices of King & Spalding, 191 Peachtree
Street, Atlanta, Georgia 30303, on June , 1999, or such other date and place
as the parties shall agree (which time and place are designated as the
"Closing").
5.0 Acknowledgment, Representations and Warranties of MMS Shareholders.
Each of the MMS Shareholders acknowledges that the issuance of the Settlement
Shares will not be registered under the Securities Act, or any applicable state
securities laws, in reliance upon exemptions from registration contained in the
Securities Act and such state laws, and that Medaphis's reliance upon such
exemptions is based in part upon each of the MMS Shareholder's representations,
warranties, and agreements contained in this Agreement. Each Recipient
acknowledges that, prior to the execution of this Agreement, such MMS
Shareholder has had the opportunity to ask questions of and receive answers to
obtain additional information from a representative of Medaphis concerning the
financial and other affairs of Medaphis and the terms and conditions of the
issuance of the Settlement Shares, and, to the extent such MMS Shareholder
believes necessary in light of its personal knowledge of Medaphis' affairs, such
MMS Shareholder has asked such questions and received satisfactory answers.
Each of the MMS Shareholders further represents, warrants, and agrees
as follows:
(a) Such MMS Shareholder shall not make any sale, transfer, or
other disposition of the Settlement Shares without registration under the
Securities Act and any applicable state securities laws unless an
exemption from such registration is available and is complied with;
(b) such MMS Shareholder is familiar with the business in
which Medaphis is engaged, and based upon its knowledge and experience in
financial and business matters, such MMS Shareholder is familiar with the
<PAGE> 15
investments of the sort which he, she, or it is undertaking by receiving
the Shares; such MMS Shareholder is fully aware of the problems and risks
involved in making an investment of this type; and such MMS Shareholder is
capable of evaluating the merits and risks of this investment;
(c) that the investment which the MMS Shareholder is undertaking by
receiving the Settlement Shares is in accord with the nature and size of
such MMS Shareholder's present investments and net worth, and such MMS
Shareholder is financially above to bear the economic risk of this
investment;
(d) that there will be placed on the certificates for the Settlement
Shares, or any substitutions therefor, a legend stating in substance as
follows:
"The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be
transferred, nor will any assignee or endorsee hereof be recognized as
an owner hereof by the issuer for any purpose, unless a registration
statement under the Securities Act of 1933, as amended, with respect to
such shares shall then be in effect or unless the availability of an
exemption from registration with respect to any proposed transfer or
disposition of such shares shall be established to the satisfaction of
counsel for the issuer. In addition, these securities have not been
registered or qualified under the securities laws of any state and may
not be sold or transferred except in a transaction which is exempt under
the applicable state securities laws or pursuant to an effective
registration or qualification under such laws.";
(e) that all information with respect to such MMS Shareholder
contained in the Registration Statement and any prospectus used in
connection therewith is true and correct in all material respects as of the
date hereof; and
<PAGE> 16
(f) that such MMS Shareholder is an "accredited investor" as such term
is defined in rule 501(a) under the Securities Act.
6.0 Additional Agreements.
6.1 Reservation of Shares. Subject to the following sentence, Medaphis
will at all times reserve and keep available out its authorized but unissued
shares of Medaphis Common Stock, solely for the purpose of satisfying its
obligations hereunder, up to one million (1,000,000) shares of Common Stock. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to permit Medaphis to perform its obligations hereunder, in
addition to such other remedies as shall be available to the MMS Shareholders at
law or in equity, Medaphis will use its reasonable best efforts to take such
corporate action as is necessary to increase the number of authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, using its reasonable best
efforts to obtain the requisite stockholder approval of any necessary amendment
to increase its authorized capital stock under its Certificate of Incorporation,
as the same has been or may be amended from time to time.
6.2 Public Announcements. Each of the MMS Shareholders and their
counsel agree not to disclose the existence or terms of this Agreement to any
person until after public disclosure of the settlement by Medaphis. Any
subsequent public disclosure of the existence or terms of this Agreement by any
of the MMS Shareholders or their counsel will be subject to Medaphis' prior
review and consent, which consent will not be unreasonably withheld.
<PAGE> 17
6.3 Further Assurances. Each Party will diligently perform all acts,
and execute and deliver all documents, reasonably necessary to effect all
provisions of this Agreement.
6.4 Tax Matters. The Parties agree that, for Federal and state income
tax purposes, they will treat and report the issuance of the Settlement Shares,
the Settlement Warrants, and the Settlement Consulting Agreement as additional
consideration delivered to the MMS Shareholders in connection with the Merger,
with no portion being treated or reported as imputed interest. The Parties
further agree not to take any position inconsistent with such treatment before
any taxing or other governmental authorities.
7.0 Termination.
7.1 Termination and Abandonment. This Agreement may be terminated at
any time prior to Closing by written agreement among Medaphis and each of the
MMS Shareholders.
7.2 Effect of Termination. In the event of termination of this
Agreement, this Agreement shall forthwith become void and each party shall be
returned to its position prior to entering into this Agreement. The Settlement
Stock and Settlement Warrants shall be returned to Medaphis. Any Judgment or
Order of Dismissal entered as a result of or in accordance with this Agreement
shall be treated as vacated, nunc pro tunc, and the Parties shall be restored to
their respective positions in the litigation.
8.0 Miscellaneous Provisions.
8.1 Cooperation and Intent. The Parties agree to the following:
(1) That it is their intent to consummate this Agreement; and
(2) That they agree to cooperate to the extent necessary to
effectuate and implement all terms and conditions of the Stipulation and,
subject to their
<PAGE> 18
fiduciary obligations, to exercise their reasonable best efforts to promptly
accomplish the terms and conditions of this Agreement.
8.2 No Admission of Liability. Neither this Agreement nor any act
performed or document executed pursuant to or in furtherance of this Agreement
or the Settlement:
(a) Is or may be deemed to be, or may be used as an admission of,
or evidence of, the validity of any Released Claim, or of any alleged wrongdoing
or liability of Medaphis, the Medaphis Released persons, the MMS Shareholders or
the MMS Shareholder Released Persons or any of them; or
(b) Is or may be deemed to be, or may be used as an admission of,
or evidence of, any alleged fault or omission of Medaphis, any MMS Shareholder,
any MMS Shareholder Released Persons or any Medaphis Released Persons, in any
civil, criminal, or administrative proceeding in any court, administrative
agency, or other tribunal, other than in such proceedings as may be necessary to
consummate or enforce this Agreement, except that Medaphis, any MMS
Shareholders, any MMS Shareholder Released Person, or any Medaphis Released
persons, or any of them, may, upon at least five days prior written notice to
the non-disclosing Parties, file the Agreement in any action that may be brought
against them in order to support a claim, defense, or counterclaim based on
principles of res judicata, collateral estoppel release, judgment bar or
reduction, or any other theory of claim preclusion or issue preclusion or
similar claim, defense, or counterclaim.
8.3 Good Faith: Benefit of Counsel. Each of the Parties intend the
Agreement to be final and complete resolution of all disputes asserted which
could be asserted by such Party against Medaphis or any MMS Shareholders, as
applicable, and the MMS Shareholder Released Persons or Medaphis Released
Persons with respect to the Released Claims. The Parties agree that the amount
paid and the other terms of the
<PAGE> 19
Agreement were negotiated at arms' length in good faith by the Parties and
reflect a Settlement that was reached voluntarily after consultation with
experienced counsel.
8.4 Entire Agreement. This Agreement constitutes the entire agreement
among the Parties with respect to the subject matter hereof, and no
representations, warranties, or inducements have been made to any Parties
concerning the foregoing other than the representations, warranties, and
covenants contained and memorialized in this Agreement. The Parties further
agree, to the extent permitted by law, that all previous agreements that were
made, if any, relating to the confidentiality of information and requirements
for return or destruction of documents shall survive this Agreement.
8.5 Ownership of Claims. Each of the Parties warrants and represents
that: (i) such Party has not prior to the date hereof sold, transferred,
conveyed, encumbered, or assigned any portion of such rights as are being
settled and released in this Agreement; and (ii) such Party is the sole and
exclusive holder of such rights.
8.6 Counterparts. This Agreement may be executed in or more
counterparts. All executed counterparts and each of them shall be deemed to be
one and the same instrument. Counsel for the Parties shall exchange among
themselves original signed counterparts.
8.7 Successor and Assigns. This Agreement shall be binding upon, and
inure to the benefit of, the successors and assigns of the Parties hereto.
8.8 Governing Law. This Agreement shall be considered to have been
negotiated, executed, and delivered, and to be wholly performed, in the State of
Georgia, and the rights and obligations of the Parties to this Agreement shall
be governed by, construed, and enforced in accordance with the laws of the State
of Georgia without giving effect to that state's choice of law or conflicts of
law principles.
8.9 Amendments; Waivers. This Agreement may be modified only by a
written instrument signed by all the Parties hereto.
<PAGE> 20
8.10 Expenses. Medaphis and the MMS Shareholders will bear their own
expenses with respect to the negotiation, execution, and delivery of the
Agreement and the performance of their obligations hereunder, unless stated
otherwise expressly herein.
8.11 Headings. The headings of the several sections and subsections of
this Agreement are for convenience or reference only and are not intended to
supplement or change the terms of this Agreement.
IN WITNESS WHEREOF, the undersigned Parties have executed this
Settlement Agreement and Release effective as of the date first set forth above.
Dated: 6/24/99
- -------------------------------------
MEDAPHIS CORPORATION
By: /s/ RANDOLPH L. M. HUTTO
------------------------------
Name: Randolph L. M. Hutto
------------------------------
Title: Executive Vice President
------------------------------
JAMES F. THACKER
/s/ JAMES F. THACKER
- -------------------------------------
ALYSON T. STINSON
/s/ ALYSON T. STINSON
- -------------------------------------
CAROL T. SHUMAKER
/s/ CAROL T. SHUMAKER
- -------------------------------------
<PAGE> 21
LORI T. CAUDILL
/s/ LORI T. CAUDILL
- -------------------------------------
WILLIAM J. DEZONIA
/s/ WILLIAM J. DEZONIA
- -------------------------------------
THE JAMES F. THACKER RETAINED ANNUITY TRUST
By: /s/ JAMES F. THACKER
-------------------------------------
Name: James F. Thacker
-------------------------------------
Title: Trustee
-------------------------------------
PAULANNE H. THACKER RETAINED ANNUITY TRUST
By: /s/ JAMES F. THACKER
-------------------------------------
Name: James F. Thacker
-------------------------------------
Title: Trustee
-------------------------------------
<PAGE> 22
SCHEDULE A
TO
SETTLEMENT AGREEMENT AND FULL AND COMPLETE RELEASE
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHAREHOLDER AND WARRANTS
----------- --------------------
<S> <C>
James F. Thacker 50.858
James F. Thacker
Retained Annuity Trust 15.198
Paulanne H. Thacker
Retained Annuity Trust 15.198
Alyson T. Stinson 5.998
Carol T. Shumaker 5.998
Lori T. Caudill 5.998
William J. Dezonia 0.752
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE MEDAPHIS CORPORATION FOR THE PERIOD ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 45,237
<SECURITIES> 0
<RECEIVABLES> 94,503
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 152,897
<PP&E> 40,347
<DEPRECIATION> 0
<TOTAL-ASSETS> 254,665
<CURRENT-LIABILITIES> 78,395
<BONDS> 175,000
0
0
<COMMON> 840
<OTHER-SE> (31,354)
<TOTAL-LIABILITY-AND-EQUITY> 254,665
<SALES> 0
<TOTAL-REVENUES> 163,730
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 211,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,783
<INCOME-PRETAX> (55,079)
<INCOME-TAX> (525)
<INCOME-CONTINUING> (54,554)
<DISCONTINUED> 5,148
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,406)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
</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"), 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
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 because 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. We undertake
no obligation to update or revise this Safe Harbor Compliance Statement for
Forward-Looking Statements to reflect future developments. In addition, we
undertake 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.
We are providing the following risk factor disclosure in connection with
our continuing effort to qualify our 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 Form 10-Q to which this
statement is appended as an exhibit and also include the following:
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We have a significant amount of indebtedness and, as a result, significant
obligations to make payments on our debt. If we are unable to make the required
debt payments, we could be required to reduce or delay capital expenditures,
sell certain of our assets, restructure or refinance our indebtedness, or seek
additional equity capital. Our ability to make payments on our debt obligations
will depend on our future operating performance, which will be affected by
certain conditions that are beyond our control.
Our substantial indebtedness could have important consequences to our
financial performance. For example:
- our ability to obtain additional financing in the future may be impaired;
- if a substantial portion of our cash flow from operations is dedicated to
the payment of debt, we may have reduced funds available for operations;
- the terms of our existing debt places restrictions on us, including our
ability to incur additional debt or pay dividends; and
- we may be more leveraged than our competitors, which may limit our
flexibility to respond to changes in the marketplace and may place us at
a competitive disadvantage.
WE ARE SUBJECT TO ONGOING LITIGATION AND A GOVERNMENT INVESTIGATION WHICH MAY
ADVERSELY AFFECT OUR BUSINESS.
We are involved in several lawsuits which may expose us to material loss
contingencies. These lawsuits include, but are not limited to, claims brought by
former shareholders of companies that we acquired. We
<PAGE> 2
have also received written demands from customers and former customers that have
not yet resulted in legal action and may receive demands with respect to the
operation of our business and actions we have taken, including modifications
made to a computerized coding tool to assist in healthcare reimbursement used by
one of our subsidiaries and the transition from the computerized coding tool to
manual coding. We are also subject to a formal, non-public investigation by the
Securities and Exchange Commission into, among other things, trading and other
issues relating to restatements of our financial statements.
We may not be able to successfully defend any of these lawsuits. In
addition, other lawsuits may be filed and other governmental investigations may
be commenced against us. Existing or new lawsuits or new government
investigations could have a material adverse effect on us. The ongoing
governmental investigation against us may result in significant fines, damages
or other penalties and the Commission could require further restatements of our
financial statements. The investigation could have a material adverse effect on
us. Also, in the event of an adverse outcome with respect to pending lawsuits,
there is the risk that our insurance coverage may not fully cover any damages
assessed against us. The litigation with which we are involved (as well as
future litigation) could have a disruptive effect upon the operations of the
business and consume the time and attention of our senior management.
WE HAVE INCURRED SIGNIFICANT LOSSES IN RECENT YEARS.
We had losses in each of 1995, 1996, 1997, 1998 and 1999. Most of these
losses result from restructuring and other charges, litigation settlements,
intangible asset impairment and acquisition costs. We cannot assure you when or
if we will become profitable in the future.
WE HAVE SUFFERED SIGNIFICANT SETBACKS IN RECENT YEARS AND MAY NOT BE ABLE TO
TURNAROUND SUCCESSFULLY.
We have suffered several setbacks in recent years, including:
- government investigations;
- the failure successfully to integrate acquired companies;
- restatements of our 1994, 1995, 1996 and interim 1997 financial
statements;
- the discontinuance of the operations of one of the businesses we
acquired;
- the abandonment of an extensive reengineering program that failed;
- a steep drop in the price of our common stock; and
- the filing of various lawsuits and claims against us.
As a result of these setbacks, we have been operating in what is commonly
described as a "turnaround" situation. In addition to risks associated with
"turnaround" situations, we face certain challenges more specific to our
operations, including:
- successfully integrating acquired companies;
- shifting our strategic focus from acquiring compatible businesses to
running our existing businesses efficiently and profitably;
- managing our customers' perceptions of our continued viability and
focusing on customer service;
- combating employee turnover;
- reducing costs and increasing efficiencies; and
- reevaluating the efficiency of our operations following our abandonment
of the reengineering initiative in 1996.
2
<PAGE> 3
WE MAY NOT BE ABLE TO KEEP UP WITH CHANGES IN OUR INDUSTRY.
The markets for our software products and services are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. We may not be able to keep pace with changes in our
industry. Our success depends in part upon our ability to:
- enhance our existing products and services;
- introduce new products and services quickly and cost effectively;
- achieve market acceptance for new products and services; and
- respond to emerging industry standards and other technological changes.
Also, our competitors may develop competitive products that could adversely
affect our operating results. In addition, it is possible that:
- we will be unsuccessful in refining, enhancing and developing our
software and billing systems going forward;
- the costs associated with refining, enhancing and developing our software
and systems may increase significantly in the future; or
- our existing software and technology will become obsolete as a result of
ongoing technological developments in the marketplace.
WE COULD LOSE CERTAIN CUSTOMERS IF WE ARE NOT SUCCESSFUL ON SEVERAL MAJOR CLIENT
PROJECTS.
Our client/server information technology business involves projects
designed to reengineer customer operations through the strategic use of imaging,
client/server and other advanced technologies. Failure to meet our customers'
expectations with respect to a major project could have the following
consequences:
- damage our reputation and standing in this marketplace;
- impairment of our ability to attract new client/server information
technology business;
- the payment of damages to a customer; and
- the inability to collect for services already performed on the project.
WE MAY INCUR ADDITIONAL COSTS BECAUSE OF POTENTIAL "YEAR 2000" PROBLEMS.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results as we approach or
when we reach the Year 2000.
We have undertaken an assessment of our Year 2000 issues. We have
identified some older computer systems that we will replace with more efficient
processing systems, rather than attempting to make all these older systems Year
2000 compliant. Until we have replaced all these older systems, we cannot be
sure that our efforts to address Year 2000 issues are appropriate, adequate or
complete. In addition, we cannot be sure that we have identified all Year 2000
problems in the computer systems of our customers, vendors or resellers, or that
we will be able to successfully remedy any future problems that are discovered.
As a result of Year 2000 issues and the replacement of older computer
systems, we may suffer the following consequences:
- we may incur a significant amount of additional expenses to remedy Year
2000 issues and we may experience a significant loss of revenues;
3
<PAGE> 4
- our existing customers may be adversely impacted by Year 2000 problems,
which could cause fluctuations in our revenue; and
- our failure to identify and remedy all Year 2000 problems could put us at
a competitive disadvantage relative to companies that have corrected such
problems.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER MANAGEMENT SERVICES
COMPANIES.
The medical management services business is highly competitive. We compete
with national and regional physician and hospital reimbursement organizations
and collection businesses, national information and data processing
organizations, and physician groups and hospitals that provide their own
business management services. We are uncertain whether we can continue to
compete successfully with all of these competitors.
Potential industry and market changes that could adversely affect our
ability to compete for billing and collection business include:
- an increase in the number of managed care providers compared to
fee-for-service providers; and
- new alliances between healthcare providers and third-party payors in
which healthcare providers are employed by such third-party payors.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER INFORMATION TECHNOLOGY
COMPANIES.
The business of providing application software, information technology and
consulting services is also highly competitive. We compete with national and
regional companies in this regard. Certain of our competitors have longer
operating histories and greater financial, technical and marketing resources
than we do. We are uncertain whether we can continue to compete successfully
with these competitors.
OUR REVENUE AND OPERATIONS MAY BE ADVERSELY AFFECTED BY PRICING PRESSURES WHICH
ADVERSELY AFFECT OUR CUSTOMERS.
We believe that the revenue growth rate experienced by our healthcare
clients continues to be adversely affected by managed care pricing and declining
government reimbursement levels. At the same time, the process of submitting
healthcare claims for reimbursement to third-party payors in accordance with
applicable industry and regulatory standards grows in complexity and cost. We
believe that these trends have adversely affected and could continue to
adversely affect our customers' revenues and profitability and, therefore,
adversely affect us too.
CHANGES IN THE HEALTHCARE MARKETPLACE MAY DECREASE DEMAND FOR OUR BILLING
SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for our services. Some of these types of
initiatives include:
- employer initiatives such as creating purchasing cooperatives, like HMOs;
- 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.
We believe that the continued consolidation of management and billing
services through integrated delivery systems could result in a decrease in
demand for our billing and collection services for particular physician
practices.
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FUTURE INVESTIGATIONS OF HEALTHCARE BILLING AND COLLECTION PRACTICES MAY
ADVERSELY AFFECT OUR BUSINESS.
Our medical billing and collection activities are governed by numerous
federal and state civil and criminal laws. Federal and state regulators
increasingly use these laws to investigate healthcare providers and companies,
like us, that provide billing and collection services. In connection with these
laws:
- we may be subjected to federal or state government investigation and
possible civil or criminal fines;
- we may ultimately be required to defend a false claims action;
- we may be sued by private payors; or
- we may be excluded from Medicare, Medicaid and/or other government funded
healthcare programs.
We have been the subject of several federal investigations, and we may
become the subject of false claims litigation or additional investigations
relating to our billing and collection activities. Any such proceeding or
investigation could have a material adverse effect on our business.
The ownership and operation of hospitals is also subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. This regulation could have an adverse effect on the operations of
hospitals in general, and consequently reduce the amount of our revenues related
to hospital clients. Current or future government regulations or healthcare
reform measures may have a material adverse effect upon our business.
OUR STOCK PRICE HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE SUBSTANTIALLY.
Our common stock is listed on The Nasdaq Stock Market(R). The market price
of our common stock has been volatile and could fluctuate substantially, based
on a variety of factors, including the following:
- announcements relating to governmental investigations;
- our liquidity and financial resources;
- our divestiture of businesses;
- the status of lawsuits or other demands;
- healthcare reform measures;
- quarter-to-quarter and year-to-year variations in financial results; and
- failure to continue to meet The Nasdaq Stock Market listing requirements.
Furthermore, stock prices for many companies fluctuate widely for reasons
that may be unrelated to their operating results. These fluctuations and general
economic, political and market conditions may adversely affect the market price
of our common stock.
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