<PAGE> 1
- --------------------------------------------------------------------------------
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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 MARCH 31, 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>
CLASS OUTSTANDING AT MAY 7, 1999
- ----- --------------------------
<S> <C>
Common Stock $0.01 par value................................ 84,027,931 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 MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998..................................... 1
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998.................. 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998.................. 3
Notes to Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Part II: OTHER INFORMATION.................................. 17
Item 1. Legal Proceedings................................. 17
Item 5. Other Matters..................................... 20
Item 6. Exhibits and Reports on Form 8-K.................. 21
Index to Exhibits......................................... 24
</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. 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS MANAGEMENT
TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 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>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 41,179 $ 54,409
Restricted cash........................................... 6,288 5,754
Accounts receivable, billed............................... 55,481 54,800
Accounts receivable, unbilled............................. 45,103 46,757
Other..................................................... 6,231 8,022
--------- ---------
Total current assets.............................. 154,282 169,742
Property and equipment, net................................. 43,291 47,954
Intangible assets........................................... 47,511 48,241
Net assets of discontinued operations....................... 18,074 11,872
Other....................................................... 8,211 8,912
--------- ---------
$ 271,369 $ 286,721
========= =========
Current Liabilities:
Accounts payable.......................................... $ 10,283 $ 8,550
Accrued compensation...................................... 21,912 21,234
Accrued expenses.......................................... 17,627 22,361
Accrued litigation settlements............................ 11,511 12,026
Current portion of long-term debt......................... 1,040 1,067
Deferred revenue.......................................... 20,792 18,289
--------- ---------
Total current liabilities......................... 83,165 83,527
Long-term debt.............................................. 175,000 175,013
Accrued litigation settlements.............................. 20,250 20,250
Other obligations........................................... 3,892 5,608
--------- ---------
Total liabilities................................. 282,307 284,398
--------- ---------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
78,946 and 78,745 issued and outstanding in 1999 and
1998, respectively..................................... 789 787
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 740,533 740,014
Accumulated deficit....................................... (752,260) (738,390)
--------- ---------
(10,938) 2,411
Less treasury stock, at cost -- 15 shares in 1998......... -- 88
--------- ---------
Total stockholders' (deficit) equity.............. (10,938) 2,323
--------- ---------
$ 271,369 $ 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
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................................... $ 81,374 $ 95,347
-------- --------
Salaries and wages.......................................... 53,154 56,785
Other operating expenses.................................... 30,356 30,872
Depreciation................................................ 6,787 6,160
Amortization................................................ 2,267 5,329
Interest expense, net....................................... 3,904 6,374
Restructuring and other charges............................. -- 561
-------- --------
Total expenses.................................... 96,468 106,081
-------- --------
Loss before income taxes.................................... (15,094) (10,734)
Income tax benefit.......................................... (524) (4,089)
-------- --------
Loss from continuing operations............................. (14,570) (6,645)
-------- --------
Discontinued operations, net of tax:
Income from discontinued operations....................... 304 1,494
Additional gain on sale of Hospital Services.............. 470 --
-------- --------
774 1,494
-------- --------
Loss before extraordinary item.............................. (13,796) (5,151)
Extraordinary item, net of tax.............................. -- (5,557)
-------- --------
Net loss.......................................... $(13,796) $(10,708)
======== ========
Basic net (loss) income per common share:
Loss from continuing operations........................... $ (0.18) $ (0.09)
Income from discontinued operations, net of tax........... 0.01 0.02
Extraordinary item, net of tax............................ -- (0.08)
-------- --------
Net loss.................................................. $ (0.17) $ (0.15)
======== ========
Weighted average shares outstanding......................... 78,928 73,479
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(13,796) $ (10,708)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations....................... (304) (1,494)
Depreciation and amortization............................. 9,054 11,489
Additional gain on sale of Hospital Services.............. (796) --
Early extinguishment of debt.............................. -- 9,231
Deferred income taxes..................................... -- (7,079)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ (8) (15)
Accounts receivable, billed............................ (681) (3,496)
Accounts receivable, unbilled.......................... 1,654 3,209
Accounts payable....................................... 1,733 (1,738)
Accrued compensation................................... 678 (2,772)
Accrued expenses....................................... (7,106) (2,725)
Accrued litigation settlements......................... (515) --
Deferred revenue....................................... 2,503 (841)
Other, net............................................. 2,275 (400)
-------- ---------
Net cash used for continuing operations................ (5,309) (7,339)
Net cash used for discontinued operations.............. (5,952) (4,306)
-------- ---------
Net cash used for operating activities............ (11,261) (11,645)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... -- (167)
Purchases of property and equipment......................... (2,112) (13,985)
Additional net proceeds from sale of Hospital Services...... 796 --
Proceeds from sale of property and equipment................ 373 --
Software development costs.................................. (1,537) (1,088)
-------- ---------
Net cash used for investing activities............ (2,480) (15,240)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 503 756
Proceeds from the exercise of stock options................. 48 2,907
Proceeds from borrowings.................................... -- 242,000
Payments of debt............................................ (40) (219,076)
Debt issuance costs......................................... -- (11,363)
-------- ---------
Net cash provided by financing activities......... 511 15,224
-------- ---------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (13,230) (11,661)
Balance at beginning of period.............................. 54,409 14,729
-------- ---------
Balance at end of period.................................... $ 41,179 $ 3,068
======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 8,356 $ 3,853
Income taxes.............................................. 867 616
Non-cash investing and financing activities:
Additions to capital lease obligations.................... -- 42
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 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 the 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 effective April 15, 1999 for $15.0 million to Complete Business
Solutions, Inc. ("CBSI"). Management expects to complete the sale of the
government division before the end of 1999.
Pursuant to APB 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, 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue................................................... $20,622 $25,126 $22,433 $47,559
======= ======= ======= =======
Income from discontinued operations before income taxes... 502 1,619 559 2,178
Income tax expense........................................ 198 684 -- 684
------- ------- ------- -------
Income from discontinued operations, net of tax........... $ 304 $ 935 $ 559 $ 1,494
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
--------------- ------------------
1999 1998
--------------- ------------------
IMPACT IMPACT
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $20,519 $16,399
Total assets................................................ 25,743 21,829
Current liabilities......................................... 7,577 9,787
Total liabilities........................................... 7,669 9,957
Net assets of discontinued operations....................... 18,074 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.
SETTLED LEGAL MATTERS
Beginning in June 1995, the United States Attorney's Office for the Central
District of California conducted an investigation of the billing and collection
practices in two offices of the Company's wholly-owned subsidiary, Medaphis
Physician Services Corporation ("MPSC"), which offices are located in Calabasas
and Cypress, California (the "California Investigation"). Investigations such as
the California Investigation can be initiated following the commencement of qui
tam litigation which is commenced under applicable state and federal statutes
and is maintained under court seal without disclosure to the defendant. Under
the applicable statutes, the United States and the appropriate state or states
may elect to intervene fully or partially in qui tam litigation and proceed with
the action.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provided for the payment by the Company of $3.6
million in the aggregate ($3.1 million of which was paid in the fourth quarter
of 1998 and $0.1 million of which was paid in the first quarter of 1999), the
dismissal of all pending proceedings against the Company and the release of
various other claims arising out of the California Investigation. As part of
these settlements, CompMed, Inc., a company acquired by the Company in 1992,
pled guilty to a single criminal count.
5
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services requested information from GFS following an audit of a GFS client. GFS
complied with those requests.
While the Company denies the contentions of the government, the Company
determined it was in its best interest to settle such claims. Accordingly, 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, which is subject to definitive documentation, requires the Company
to pay to the United States and the various states a total of $15 million, of
which $6.8 million will be paid to the United States within 10 days of the
execution of a definitive settlement agreement with the United States. The
balance of $8.2 million will be paid as follows: $1.2 million to the
participating states upon execution of settlement agreements with all of the
participating states, $1.0 million to the participating states on June 30, 1999,
$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. The definitive settlement agreements will
provide for the dismissal with prejudice of claims against the Company and the
release by the United States and the participating states of 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.
The Company recorded a litigation settlement charge of $19.5 million in the
quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement in the third quarter of 1998 of the
California Investigation and the agreement in principle to settle 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.
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.
PENDING LEGAL MATTERS
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs
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 ruled in favor of defendants
on the motions, dismissing all of plaintiffs' claims with prejudice and without
leave to amend. On May 15, 1998, the Judge signed an order to that effect. The
plaintiffs appealed from this order. On
6
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
December 9, 1998, the New Jersey Court of Appeals ruled in favor of the Medaphis
and BSG defendants, dismissing the plaintiffs' appeal. The plaintiffs have filed
motions seeking to reopen this appeal, which motions are currently pending.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error, 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 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
Sciences Corporation ("HDS"). Plaintiff seeks rescissory, compensatory and
punitive damages in excess of $100 million, rescission, injunctive relief and
costs. On January 10, 1997, the defendants filed a demurrer to the complaint. On
February 5, 1997, the Court overruled defendants' demurrer. On March 18, 1997,
the court denied the plaintiff's motion for a preliminary injunction. On July
16, 1997, plaintiff filed an amended complaint adding several new parties,
including current and former directors and former and current officers of
Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under federal securities laws, but the Company believes that
it has substantial defenses to the alleged damages relating to such federal
securities laws claims. The Company continues discussions with the parties in
this matter in an attempt to reach a fair settlement as expeditiously as
possible. However, there are no assurances that a settlement acceptable to the
Company can be reached or that any settlement reached will not have a material
adverse effect on the Company. The Company is unable to estimate a possible
range of loss, if any.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shaumaker,
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 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. In addition, the complaint alleged breaches of contract relating to the
merger agreement and a registration rights agreement, as well as tortious
interference with economic advantage and declaratory judgment. Defendants filed
a motion to dismiss the complaint. On September 29, 1998, the Court granted
Defendants' motion to dismiss with respect to all securities law, fraud and tort
claims. The Court gave plaintiffs twenty days to serve an amended complaint.
Plaintiffs filed their amended complaint on October 19, 1998. Plaintiffs
informed the Court, however, that while they reserved the right to appeal the
Court's order of partial dismissal, they were neither amending nor pursuing any
of the fraud or tortious interference claims that the Court dismissed in its
September 29, 1998 order. Plaintiffs filed a Revised Supplemental Amended
Complaint on November 20, 1998. On December 7, 1998, Medaphis filed its answer
and counterclaim. The Counterclaim-Defendants filed their answer on January 11,
1999. Discovery is now proceeding. The Company
7
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
continues discussions with the parties in this matter in an attempt to reach a
fair settlement as expeditiously as possible. However, there are no assurances
that a settlement acceptable to the Company can be reached or that any
settlement reached will not have a material adverse effect on the Company. The
Company is unable to estimate a 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 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. (now 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 counterclaimed 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 the
lawsuits, the written demands and the pending governmental investigation will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigation will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental 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 GFS Investigation 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.
8
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- RESTRUCTURING AND OTHER CHARGES
In the first quarter of 1998, the Company recorded a charge of $0.6 million
for the severance costs associated with a former executive.
The description of the type and the amount of exit costs applied against
each reserve in the quarter ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE COSTS APPLIED BALANCE
12/31/98 AGAINST RESERVE 3/31/99
-------- --------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease termination costs................................ $4,292 $(207) $4,085
Severance.............................................. 1,148 (670) 478
------ ----- ------
$5,440 $(877) $4,563
====== ===== ======
</TABLE>
NOTE 5 -- LONG-TERM DEBT
On February 20, 1998, the Company sold $175 million of senior notes (the
"Notes"). The Notes bear interest at the rate of 9 1/2% per annum, payable
semi-annually on February 15 and August 15, which commenced on August 15, 1998
and will mature on February 15, 2005. The Notes will be redeemable at the option
of the Company, in whole or in part, at any time on or after February 15, 2002,
at a declining premium to par until 2004 and at par thereafter, plus accrued and
unpaid interest. In addition, at any time on or prior to February 15, 2001, the
Company may redeem up to 35% of the original principal amount of the Notes at a
redemption price equal to 109.5% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date, with
the net cash proceeds of one or more equity offerings; provided that at least
$100 million aggregate principal amount of the Notes remain outstanding
immediately following any such redemption.
Payment of principal, premium, if any, and interest on the Notes is fully
and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). Any non-guarantor subsidiaries are
inconsequential individually and in the aggregate to the consolidated financial
statements.
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 any other asset sale 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
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 months ended March 31, 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
9
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
shares, non-current accrued litigation settlements will be reduced by $15.9
million with a corresponding increase in stockholders' equity in the second
quarter of 1999.
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 Medaphis Physician Services ("Physician Services") and Per-Se
Technologies ("Per-Se") 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. 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. Also, certain expenses
previously included in Corporate overhead have been reclassified to Physician
Services and Per-Se 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.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Physician Services........................................ $ 61,457 $ 70,550
Per-Se.................................................... 22,773 27,660
Eliminations.............................................. (2,856) (2,863)
-------- --------
$ 81,374 $ 95,347
======== ========
Operating profit (loss)(1):
Physician Services........................................ $ (2,839) $ 291
Per-Se.................................................... (2,675) 2,007
Corporate................................................. (5,676) (6,097)
-------- --------
$(11,190) $ (3,799)
======== ========
Interest expense, net....................................... $ 3,904 $ 6,374
-------- --------
Restructuring and other charges:
Corporate................................................. $ -- $ 561
-------- --------
$ -- $ 561
-------- --------
Loss before income taxes.................................... $(15,094) $(10,734)
======== ========
Depreciation and amortization:
Physician Services........................................ $ 4,553 $ 8,320
Per-Se.................................................... 2,328 2,322
Corporate................................................. 2,173 847
-------- --------
$ 9,054 $ 11,489
======== ========
Capital expenditures:
Physician Services........................................ $ 1,242 $ 11,255
Per-Se.................................................... 480 1,915
Corporate................................................. 390 815
-------- --------
$ 2,112 $ 13,985
======== ========
</TABLE>
10
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF
------------------------
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets:
Physician Services........................................ $131,087 $134,485
Per-Se.................................................... 63,554 65,320
Corporate (2)............................................. 76,728 86,916
-------- --------
$271,369 $286,721
======== ========
</TABLE>
- ---------------
(1) Excludes interest expense and restructuring and other charges.
(2) Includes net assets of $18,074 and $11,872, respectively, related to the
discontinued operations.
11
<PAGE> 14
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 the following two core healthcare segments: Medaphis Physician Services
("Physician Services") and Per-Se Technologies ("Per-Se").
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. 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.
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 effective April 15, 1999 for
$15.0 million to Complete Business Solutions, Inc. ("CBSI"). 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 March 31, 1999 as compared to three months ended March 31,
1998
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $61,457 $70,550
Per-Se...................................................... 22,773 27,660
Eliminations................................................ (2,856) (2,863)
------- -------
$81,374 $95,347
======= =======
</TABLE>
Physician Services' revenue decreased by 12.9% in the first quarter of 1999
as compared to the same period in 1998 and decreased by 1.0% as compared to the
fourth quarter of 1998. The decline is attributable both to operating problems
at the Company's wholly-owned operating subsidiary, Medaphis Emergency Medicine
Physician Services (formerly known as Gottlieb's Financial Services, Inc. or
GFS) (the "Emergency Medicine division") and to an increase in client
discontinuances within the entire Physician Services segment. Revenue declines
attributable to client discontinuances in 1998 at the Emergency Medicine
division and Physician Services were approximately $22.9 million and $54.7
million, respectively, on an annualized basis. For the three months ended March
31, 1999, annualized revenue associated with client discontinuances approximated
$1.1 million and $11.0 million at the Emergency Medicine division and Physician
Services, respectively, of which $2.9 million was initiated by the Company.
Client discontinuances
12
<PAGE> 15
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. These discontinuances were partially offset by the
addition of new business during the three months ended March 31, 1999
approximating $0.5 million and $15.7 million at the Emergency Medicine division
and Physician Services, respectively, of revenue on an annualized basis. In
addition, 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.
Per-Se's revenue decreased 17.7% in the first quarter of 1999 as compared
to the same period in 1998. This is primarily the result of a decrease in the
amount of revenue associated with the patient scheduling and Uticare product
lines and more contracts requiring percentage of completion accounting.
Percentage of completion accounting initially delays software revenue
recognition. The factors contributing to the decrease in revenue were partially
offset by higher revenue in the electronic commerce businesses during the three
months ended March 31, 1999 as compared to the same period in 1998.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes
restructuring and other charges and interest expense, classified by the
Company's reportable segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Physician Services.......................................... $ (2,839) $ 291
Per-Se...................................................... (2,675) 2,007
Corporate................................................... (5,676) (6,097)
-------- -------
$(11,190) $(3,799)
======== =======
</TABLE>
The decrease in Physician Services' operating profit (loss) for the three
months ended March 31, 1999 as compared to the same period in 1998 is
attributable to the revenue declines previously discussed and $0.7 million of
increased expense associated with the assimilation of the Company's multiple
operating systems. The decrease was partially offset by approximately $3.0
million in lower amortization expense of intangible assets resulting from the
intangible asset impairment charge of $390.6 million for the quarter ended
September 30, 1998.
The fluctuation in Per-Se's operating profit (loss) from the three months
ended March 31, 1999 as compared to the same period in 1998 is primarily
attributable to the previously discussed reduction in revenue for this segment.
The decrease in the Company's overhead is related to management's continued
commitment to reduce costs where feasible and create efficient processes. This
decrease was partially offset by an increase in depreciation expense of
approximately $1.0 million related to the accelerated depreciation of the
Company's former payroll processing system resulting from management's decision
to outsource payroll processing. For the quarter ended March 31, 1998, certain
expenses of approximately $2.0 million of Corporate's overhead have been
reclassified to Physician Services and Per-Se in the amounts of $1.6 million and
$0.4 million, respectively.
INTEREST. Net interest expense was $3.9 million in the first quarter of
1999 as compared with $6.4 million in the first quarter of 1998. The decrease is
attributable to less debt outstanding, a reduced interest rate and interest
income of $0.6 million generated from the short term investment of cash.
RESTRUCTURING AND OTHER CHARGES. In the first quarter of 1998, the Company
recorded a charge of $0.6 million for the severance costs associated with a
former executive.
INCOME TAXES. 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 March 31, 1999. During the
first
13
<PAGE> 16
quarter of 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 three month periods ended March 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue........................................... $20,622 $25,126 $22,433 $47,559
======= ======= ======= =======
Income from discontinued operations before income
taxes........................................... 502 1,619 559 2,178
Income tax expense................................ 198 684 -- 684
------- ------- ------- -------
Income from discontinued operations, net of tax... $ 304 $ 935 $ 559 $ 1,494
======= ======= ======= =======
</TABLE>
In early 1998, management decided to sell its non-core business segments:
Medaphis Services Corporation ("Hospital Services") and Impact.
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 the 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 effective April 15, 1999
for $15.0 million to Complete Business Solutions, Inc. ("CBSI"). Management
expects to complete the sale of the government division of Impact before the end
of 1999.
For the three months ended March 31, 1999, income from discontinued
operations before income taxes includes the reversal of a $1.1 million lease
abandonment reserve which is no longer necessary due to the sale of the
commercial division of Impact. Excluding the effect of the reversal of the $1.1
million lease abandonment reserve, net loss from discontinued operations before
income taxes would have been $0.6 million. This loss is primarily attributable
to a reduction in revenue producing headcount without a corresponding reduction
in operating expenses.
EXTRAORDINARY ITEM. During the three months ended March 31, 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 $71.1 million at March 31, 1999,
including $41.2 million of unrestricted cash and cash equivalents. The $13.2
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 $175 million Senior Notes due February 15, 2005 and payments under
certain variable compensation expense programs based on individual performance
in 1998.
On February 20, 1998, the Company sold $175 million of Senior Notes due
2005 (the "Notes"). The Notes bear interest at the rate of 9 1/2% per annum,
payable semi-annually on February 15 and August 15, commencing on August 15,
1998, and will mature on February 15, 2005. The Notes will be redeemable at the
option of the Company, in whole or in part, at any time on or after February 15,
2002, at a declining premium to par until 2004 and at par thereafter, plus
accrued and unpaid interest. In addition, at any time on or prior to February
15, 2001, the Company may redeem up to 35% of the original principal amount of
the Notes at a redemption price equal to 109.5% of the principal amount thereof,
plus accrued and unpaid interest to the
14
<PAGE> 17
redemption date, with the net cash proceeds of one or more equity offerings;
provided that at least $100 million aggregate principal amount of the Notes
remain outstanding immediately following any such redemption.
Payment of principal, premium, if any, and interest on the Notes is fully
and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). Any non-guarantor subsidiaries are
insignificant individually and in the aggregate to the consolidated financial
statements.
The Company sold the commercial division of Impact effective April 15, 1999
for $15.0 million, subject to final closing adjustments. 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 any other asset sale 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 of $33.4 million from the sale of Hospital Services
and the commercial division of Impact in the Company.
In 1998, the Company decided to transition from a computerized coding
system used by the Emergency Medicine division of Physician Services for
emergency medicine physician billing to manual coding. No material extraordinary
charges were incurred as a result of the transition from the computerized coding
system. There can be no assurance that any third-party claims or lost business
relating to transition from, or modifications previously made to, the Emergency
Medicine division's coding system will not have a material adverse effect on the
Company, including, without limitation, on the Company's revenue, results of
operations, financial condition or cash flow.
The Company 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's liquidity or financial position.
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 flow 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 Impact which will be available to invest in the business subject to the
limitations discussed above.
15
<PAGE> 18
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, 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 mid-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. The majority of these 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 quarter 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 second quarter of 1999 in response to assessments of the
Year 2000 readiness of customers, vendors and resellers.
In the third quarter of 1998, Per-Se released Year 2000 compatible versions
of its patient scheduling and staff management products. The testing and
documentation of Per-Se's clinical information system and its radiology products
are scheduled to be completed by the end of the second quarter of 1999. A new
patient financial management system, as well as enhancements to the clinical
information system, which are not scheduled for general availability until late
1999, are being tested and documented with regard to Year 2000 support as part
of ongoing software development.
Through March 31, 1999, the Company has spent approximately $3.7 million on
its Year 2000 efforts, and it expects to spend an additional $3.0 million to
$4.5 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.
16
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs. The 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.
SETTLED LEGAL MATTERS
Beginning in June 1995, the United States Attorney's Office for the Central
District of California conducted an investigation of the billing and collection
practices in two offices of the Company's wholly-owned subsidiary, Medaphis
Physician Services Corporation ("MPSC"), which offices are located in Calabasas
and Cypress, California (the "California Investigation"). Investigations such as
the California Investigation can be initiated following the commencement of qui
tam litigation which is commenced under applicable state and federal statutes
and is maintained under court seal without disclosure to the defendant. Under
the applicable statutes, the United States and the appropriate state or states
may elect to intervene fully or partially in qui tam litigation and proceed with
the action.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provided for the payment by the Company of $3.6
million in the aggregate ($3.1 million of which was paid in the fourth quarter
of 1998 and $0.1 million of which was paid in the first quarter of 1999), the
dismissal of all pending proceedings against the Company and the release of
various other claims arising out of the California Investigation. As part of
these settlements, CompMed, Inc., a company acquired by the Company in 1992,
pled guilty to a single criminal count.
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"). Beginning
in February 1998, the Office of the Inspector General of Health and Human
Services requested information from GFS following an audit of a GFS client. GFS
complied with those requests.
While the Company denies the contentions of the government, the Company
determined it was in its best interest to settle such claims. Accordingly, 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, which is subject to definitive documentation, requires the Company
to pay to the United States and the various states a total of $15 million, of
which $6.8 million will be paid to the United States within 10 days of the
execution of a definitive settlement agreement with the United States. The
balance of $8.2 million will be paid as follows: $1.2 million to the
participating states upon execution of settlement agreements with all of the
participating states, $1.0 million to the participating states on June 30, 1999,
$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. The definitive settlement agreements will
provide for the dismissal with prejudice of claims against the Company and the
release by the United States and the participating states of 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.
17
<PAGE> 20
The Company recorded a litigation settlement charge of $19.5 million in the
quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement in the third quarter of 1998 of the
California Investigation and the agreement in principle to settle 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.
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.
PENDING LEGAL MATTERS
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs
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 ruled in favor of defendants
on the motions, dismissing all of plaintiffs' claims with prejudice and without
leave to amend. On May 15, 1998, the Judge signed an order to that effect. The
plaintiffs appealed from this order. On December 9, 1998, the New Jersey Court
of Appeals ruled in favor of the Medaphis and BSG defendants, dismissing the
plaintiffs' appeal. The plaintiffs have filed motions seeking to reopen this
appeal, which motions are currently pending.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error, 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 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
Sciences Corporation ("HDS"). Plaintiff seeks rescissory, compensatory and
punitive damages in excess of $100 million, rescission, injunctive relief and
costs. On January 10, 1997, the defendants filed a demurrer to the complaint. On
February 5, 1997, the Court overruled defendants' demurrer. On March 18, 1997,
the court denied the plaintiff's motion for a preliminary injunction. On July
16, 1997, plaintiff filed an amended complaint adding several new parties,
including current and former directors and former and current officers of
18
<PAGE> 21
Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under federal securities laws, but the Company believes that
it has substantial defenses to the alleged damages relating to such federal
securities laws claims. The Company continues discussions with the parties in
this matter in an attempt to reach a fair settlement as expeditiously as
possible. However, there are no assurances that a settlement acceptable to the
Company can be reached or that any settlement reached will not have a material
adverse effect on the Company. The Company is unable to estimate a possible
range of loss, if any.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shaumaker,
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 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. In addition, the complaint alleged breaches of contract relating to the
merger agreement and a registration rights agreement, as well as tortious
interference with economic advantage and declaratory judgment. Defendants filed
a motion to dismiss the complaint. On September 29, 1998, the Court granted
Defendants' motion to dismiss with respect to all securities law, fraud and tort
claims. The Court gave plaintiffs twenty days to serve an amended complaint.
Plaintiffs filed their amended complaint on October 19, 1998. Plaintiffs
informed the Court, however, that while they reserved the right to appeal the
Court's order of partial dismissal, they were neither amending nor pursuing any
of the fraud or tortious interference claims that the Court dismissed in its
September 29, 1998 order. Plaintiffs filed a Revised Supplemental Amended
Complaint on November 20, 1998. On December 7, 1998, Medaphis filed its answer
and counterclaim. The Counterclaim-Defendants filed their answer on January 11,
1999. Discovery is now proceeding. The Company continues discussions with the
parties in this matter in an attempt to reach a fair settlement as expeditiously
as possible. However, there are no assurances that a settlement acceptable to
the Company can be reached or that any settlement reached will not have a
material adverse effect on the Company. The Company is unable to estimate a
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 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. (now 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 counterclaimed 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 the
lawsuits, the written demands and the pending governmental investigation will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigation will
not consume the time and attention of the senior management of the Company, or
that the resolution of
19
<PAGE> 22
the lawsuits, the 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 GFS Investigation 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.
ITEM 5. OTHER MATTERS
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.
20
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <C> <S>
2.1 -- Merger Agreement dated as of December 29, 1995, among
Registrant, CarSub, Inc. and Medical Management Sciences,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on January 19, 1996).
2.2 -- Merger Agreement dated as of March 15, 1996, among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 333-2506).
2.3 -- 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).
2.4 -- 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 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan.
10.1 -- Second Amendment to Medaphis Corporation Non-Employee
Director Stock Option Plan.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
</TABLE>
21
<PAGE> 24
(B) Reports on Form 8-K
The Company has filed the following reports on Form 8-K during the quarter
ended March 31, 1999:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILE DATE
- ------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Adoption of Rights Agreement and
declaration of dividend distribution
of one Right for each share of Common
Stock................................ No February 11, 1999 February 12, 1999
</TABLE>
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDAPHIS CORPORATION
(Registrant)
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: May 17, 1999
23
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2.1 -- Merger Agreement dated as of December 29, 1995, among
Registrant, CarSub, Inc. and Medical Management Sciences,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on January 19, 1996).
2.2 -- Merger Agreement dated as of March 15, 1996, among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 333-2506).
2.3 -- 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).
2.4 -- 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 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan.
10.1 -- Second Amendment to Medaphis Corporation Non-Employee
Director Stock Option Plan.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
</TABLE>
24
<PAGE> 1
EXHIBIT 4.4
MEDAPHIS CORPORATION
NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the ____ day of __________,
______, by and between MEDAPHIS CORPORATION, a corporation organized and doing
business under the laws of the State of Delaware (the "Company"), and
__________________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee has been granted an option to purchase the number
of shares of voting common stock, par value $.01 per share ("Common Stock"), of
the Company allocated to such Optionee under the formula contained in the
Medaphis Corporation Non-Employee Director Stock Option Plan, as amended (the
"Plan"), and the Board of Directors of the Company (the "Board"), as
administrator of the Plan, wishes for the Optionee and the Company to enter into
this Agreement to provide for certain matters relating to such option;
WHEREAS, Optionee is a director of the Company and is not an employee
of the Company (a "Non-Employee Director");
WHEREAS, the Company and the Optionee wish to confirm the terms and
conditions of the option; and
WHEREAS, capitalized terms used and not otherwise defined herein shall
have the meaning provided to such terms in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, it is hereby agreed between the parties hereto as follows:
1. Grant of Option. Upon and subject to the terms, restrictions,
limitations and conditions stated herein and in the Plan, the Company hereby
grants to the Optionee an option (the "Option") to purchase all or any part of
____ Thousand (_______) shares of Common Stock (hereinafter, the "Option
Shares"), effective as of the date first written above.
2. Terms and Exercise of Option. Subject to the provisions of Section 5
of this Agreement:
(a) The Option shall be fully vested as of the date of this
Agreement (the "Date of Grant"), but the Optionee shall not have the
right to exercise the Option until one (1) year after the Date of Grant
; provided, however, that in the event the Optionee ceases to be a
Non-Employee Director of the Company by reason of retirement, total and
permanent disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code")), or death, the
Option shall become immediately exercisable. For purposes of this
Agreement, the term "by reason of retirement" means mandatory
retirement pursuant to established Board policy.
<PAGE> 2
(b) The Option shall expire, terminate and no longer be
exercisable upon the date which is eleven (11) years from the Date of
Grant.
(c) After the Option has become exercisable, the Optionee
shall have the right to exercise the Option at any time and from time
to time, subject to Section 2(b), with respect to any unexercised
portion of the Option Shares. The Option may be exercised by delivery
to the Company, at its principal place of business in Atlanta, Georgia,
of the written Notice of Exercise in the form attached hereto as
Exhibit A, which is incorporated herein by reference, specifying the
number of shares of Common Stock with respect to which the Option is
being exercised and signed by the Optionee or the personal
representative of the Optionee pursuant to Section 2(a) hereof, and
payment of the exercise price. Upon acceptance of such notice and
receipt of payment in full, the Company shall cause to be issued a
certificate representing the shares of Common Stock purchased.
(d) The Optionee, or the personal representative of the
Optionee pursuant to Section 2(a) hereof, shall have no rights as a
stockholder with respect to any shares covered by the Option until the
issuance of a stock certificate to the Optionee for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other
rights on or with respect to shares of Common Stock purchased pursuant
to the Option for which the record date for such dividend, distribution
or other right is prior to the date of exercise of the Option, except
as provided in Section 4 hereof.
3. Exercise Price. The Optionee must pay to the Company $______ per
share for the Common Stock acquired pursuant to the exercise of the Option. The
Option exercise price shall be paid in full at the time of exercise (a) in cash,
(b) by tendering Common Stock then owned (which has been held for the preceding
six (6) months) and properly endorsed to the Company having a Fair Market Value
equal to the Option exercise price, or (c) partly in cash and partly in Common
Stock (which has been held for the preceding six (6) months) valued at Fair
Market Value, at the election of the Recipient. The Fair Market Value of any
such tendered Shares shall be determined as of the close of the business day
immediately preceding the day on which the certificate is received by the office
of the Secretary of the Company.
4. Change in Control. If the Company agrees to sell all or
substantially all of its assets for cash or property or for a combination of
cash and property or agrees to any merger, consolidation, reorganization or
other corporate transaction in which Common Stock is converted into another
security or into the right to receive securities or property, or in the event of
a Change in Control of the Company or a tender or exchange offer is made for
Common Stock other than by the Company, the Option shall, on the date
immediately preceding the effective date of a transaction contemplated by this
Section 4, become immediately exercisable and the Optionee shall be entitled to
receive (at Optionee's election) upon exercise of such Option and payment of the
applicable Option exercise price, either (1) the number of Shares subject to
such Option, or (2) a cash payment,
- 2 -
<PAGE> 3
the amount of which shall be determined by the Board by multiplying the number
of shares subject to such Option by the Fair Market Value of the Common Stock;
provided, however, that in the event the transaction contemplated by this
Section 4 involves a merger to be accounted for under the "pooling of interests"
accounting method, then the Board shall have the authority hereunder to modify
the rights of the Optionee under this Section 4 to the extent necessary in order
to preserve the "pooling of interests" accounting treatment for such merger.
5. General Restrictions. If there is no registration statement covering
the Shares in effect under the Securities Act of 1933, as amended, then
notwithstanding anything contained herein to the contrary, no purported transfer
or exercise of the Option shall be effective without the written opinion of
counsel to the Company that the Common Stock to be acquired pursuant to the
exercise of the Option is being acquired in accordance with the terms of an
applicable exemption from the registration requirements of applicable federal
and state securities laws.
6. Limitation of Rights.
(a) No Stockholder Rights. Neither the Optionee nor the
Optionee's successor or successors in interest shall have any rights as
a stockholder of the Company with respect to the Shares subject to the
Option until the date of issuance of a certificate for such Shares. No
adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or
other rights for which the record date is prior to the date the
certificate is issued, except as otherwise provided in this Agreement.
(b) Limitation as to Directorship. Neither this Agreement, nor
the granting of the Option evidenced hereunder, nor any other action
taken pursuant hereto shall constitute or be evidence of any agreement
or understanding, express or implied, that the Optionee has a right to
continue as a director for any period of time.
7. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon the Optionee to exercise the Option.
8. Governing Laws. This Agreement shall be construed, administered and
enforced according to the laws of the State of Delaware; provided, however, that
no Option may be exercised except, in the reasonable judgment of the Board, in
compliance with exemptions under applicable state securities laws of the state
in which the Optionee resides, and/or any other applicable securities laws.
9. Transferability. The Option shall not be assignable or transferable
by the Optionee other than (i) to the spouse, children or grandchildren of the
Optionee ("Immediate Family Members"), (ii) to a trust or trusts for the
exclusive benefit of such Immediate Family Members, (iii) to a partnership in
which such Immediate Family Members are the only partners, (iv) to an entity
exempt from federal income tax pursuant to Section 501(c)(3) of the Code or any
successor provision, or (v) to a split interest trust or pooled income fund
described in Section 2522(c)(2) of the
- 3 -
<PAGE> 4
Code or any successor provision; provided, however, that (x) there shall be no
consideration for any such transfer, and (y) other transfers by the Optionee, or
any subsequent transfer of transferred Options by a transferee, shall be
prohibited, except those by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code or Title
I of the Employee Retirement Income Security Act of 1974, as amended; and
provided, further, that following transfer, for purpose of elections to exercise
the Option and the sale or merger and change in control provisions of the Plan
and of Section 4 of this Agreement, the terms "Non-Employee Director," as used
in the Plan, and "Optionee," as used in this Agreement, shall be deemed to
include the transferee, but the Option otherwise shall continue to be subject to
the same terms and conditions that were applicable immediately prior to
transfer. The Company shall have no obligation to register with any federal or
state securities commission or agency any Common Stock issuable or issued under
the Option in the event that the Option has been transferred by the Optionee
under Section 5(h) of the Plan or under this Section 9.
10. Successors. This Agreement shall be binding upon and inure to the
benefit of the heirs, legal representatives, successors and permitted assigns of
the parties.
IN WITNESS WHEREOF, the parties have executed and sealed this Agreement
on the day and year first written above.
MEDAPHIS CORPORATION
By:
--------------------------------
Name:
[CORPORATE SEAL] Title:
ATTEST:
- -------------------------------
Name:
Title:
OPTIONEE
(Seal)
-----------------------------
Name:
- 4 -
<PAGE> 5
EXHIBIT A
NOTICE OF EXERCISE OF MEDAPHIS CORPORATION
NON-EMPLOYEE DIRECTOR STOCK OPTION TO PURCHASE
COMMON STOCK OF MEDAPHIS CORPORATION
Name:
-------------------------------
Address:
----------------------------
Date:
-------------------------------
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339
Attn: President
Re: Exercise of Medaphis Corporation Non-Employee Director Stock
Option
Ladies and Gentlemen:
Subject to acceptance hereof in writing by Medaphis Corporation (the
"Company") pursuant to the provisions of the Medaphis Corporation Non-Employee
Director Stock Option Plan, I hereby elect to exercise options granted to me to
purchase __________ shares of Common Stock, par value $.01 per share, of the
Company under the Medaphis Corporation Non-Employee Director Stock Option
Agreement dated the ____ day of ____________, _____, at a price of $_______ per
share.
Enclosed is $__________________ for the full purchase price in the form
of ________________________.
-1-
<PAGE> 6
As soon as the Stock Certificate is registered in my name, please
deliver it to me at the above address.
Very truly yours,
-----------------------------------
Name:
- --------------------------------------------------------------------------------
AGREED TO AND ACCEPTED:
MEDAPHIS CORPORATION
By: __________________________________
Title: _________________________________
Number of Shares
Exercised: _____________________________
Number of Shares
Remaining: ____________________________
- 2 -
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT
TO MEDAPHIS CORPORATION
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
THIS SECOND AMENDMENT is effective as of April 1, 1999, and is made by
MEDAPHIS CORPORATION, a corporation organized and doing business under the laws
of the State of Delaware (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has previously adopted the Medaphis Corporation
Non-Employee Director Stock Option Plan, as amended (the "Plan"); and
WHEREAS, the Board of Directors of the Company has duly authorized an
amendment of the Plan as set forth herein.
NOW, THEREFORE, Section 5(d) of the Plan is hereby amended by deleting
Section 5(d) of the Plan in its entirety, and replacing it with the following:
"(d) Vesting; Exercisability. An Option shall be fully vested
as of the date of grant, but shall not become exercisable until one (1)
year after the date of grant; provided, however, that in the event of
the termination of an optionee's service as a director by reason of
retirement, total and permanent disability (within the meaning of
Section 22(e) of the Code), or death, all of the outstanding Options of
such optionee shall become immediately exercisable. For purposes of the
Plan, the term "by reason of retirement" means mandatory retirement
pursuant to established Board policy."
FURTHER, Section 5(g) of the Plan is hereby amended by deleting Section
5(g) of the Plan in its entirety, and replacing it with the following:
"(g) Term of Options. Each Option shall expire eleven
(11) years from its date of grant, and shall not be subject to earlier
termination or forfeiture."
FURTHER Section 5(h) of the Plan is hereby amended by deleting Section
5(h) of the Plan in its entirety, and replacing it with the following:
"(h) Transferability. An Option granted to an optionee
under the Plan shall not be assignable or transferable by the optionee
other than (i) to the spouse, children or grandchildren of the optionee
("Immediate Family Members"), (ii) to a trust or trusts for the
-1-
<PAGE> 2
exclusive benefit of such Immediate Family Members, (iii) to a
partnership in which such Immediate Family Members are the only
partners, (iv) to an entity exempt from federal income tax pursuant to
Section 501(c)(3) of the Code or any successor provision, or (v) to a
split interest trust or pooled income fund described in Section
2522(c)(2) of the Code or any successor provision; provided, however,
that (x) there shall be no consideration for any such transfer, and (y)
other transfers by the optionee, or any subsequent transfer of
transferred Options by a transferee, shall be prohibited, except those
by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code or Title I of
the Employee Retirement Income Security Act of 1974, as amended; and
provided, further, that following transfer, for purpose of elections to
exercise the Option and the sale or merger and change in control
provisions of the the Plan, the term "Non-Employee Director" shall be
deemed to include the transferee, but the Option otherwise shall
continue to be subject to the same terms and conditions that were
applicable immediately prior to transfer. The Company shall have no
obligation to register with any federal or state securities commission
or agency any Common Stock issuable or issued under an Option that has
been transferred by a Non-Employee Director under this Section 5(h)."
FURTHER, Section 10 of the Plan is hereby amended by deleting Section 10 of the
Plan in its entirety, and replacing it with the following:
"10. Amendment of the Plan. This Plan may be amended by the
Board from time to time to the extent that the Board deems necessary or
appropriate; provided, however, that the Board shall not have the right
unilaterally to modify, amend or cancel any Option granted before the
effective date of such modification, amendment or cancellation unless
the optionee consents in writing to such modification, amendment or
cancellation."
Except as specifically amended by this Second Amendment, the Plan shall
remain in full force and effect as prior to this Second Amendment.
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be
executed on the day and year first above written.
MEDAPHIS CORPORATION
By: /s/ ALLEN W. RITCHIE
-----------------------------------------
Allen W. Ritchie
President and Chief Executive Officer
ATTEST:
By: /s/ RANDOLPH L. M. HUTTO
------------------------------
Randolph L. M. Hutto
Secretary
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 41,179
<SECURITIES> 0
<RECEIVABLES> 100,584
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 154,282
<PP&E> 43,291
<DEPRECIATION> 0
<TOTAL-ASSETS> 271,369
<CURRENT-LIABILITIES> 83,165
<BONDS> 175,000
0
0
<COMMON> 789
<OTHER-SE> (11,727)
<TOTAL-LIABILITY-AND-EQUITY> 271,369
<SALES> 0
<TOTAL-REVENUES> 81,374
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 92,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,904
<INCOME-PRETAX> (15,094)
<INCOME-TAX> (524)
<INCOME-CONTINUING> (14,570)
<DISCONTINUED> 774
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,796)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</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 the first quarter of
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.
4
<PAGE> 5
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 meet The Nasdaq Stock Market listing maintenance 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.
5
