##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to.
 COMMISSION FILE NUMBER: 333-132641
 SPHERIS INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    62-1805254(I.R.S. Employer Identification No.)
 9009
Carothers Pkwy., Suite C-3, Franklin, TN 37067  (Address of principal executive offices, including zip code)
 (615) 261-1500  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act
 Securities registered pursuant to Section 12(g) of the Act
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ




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##### 



SPHERIS INC.
 TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
 PagePART IItem 1.
    
    Business
    
    
    3Organization
and History
    
    
    3Company
Overview
    
    
    3Services Provided
    
    
    4Our Customers
    
    
    5Sales and Marketing
    
    
    5Technological Capabilities
    
    
    6Spheris Clinical Documentation Platforms
    
    
    6Intellectual Property
    
    
    7Competition
    
    
    7Employees
    
    
    8Regulatory Matters
    
    
    8Item 1A.
    
    Risk Factors
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    15Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    15Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Overview
    
    
    16Critical Accounting Policies and Estimates
    
    
    17Results of Operations
    
    
    19Liquidity and Capital Resources
    
    
    21Restructuring and Termination Benefits
    
    
    23Contractual Obligations
    
    
    23Off-Balance Sheet Arrangements
    
    
    24Recent Accounting Pronouncements
    
    
    24Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 8.
    
    Financial Statements and Supplementary Data
    
    
    25Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    25Item 9A.
    
    Controls and Procedures
    
    
    25Item 9B.
    
    Other Information
    
    
    25PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    26Item 11.
    
    Executive Compensation
    
    
    28Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    41Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    44Item 14.
    
    Principal Accountant Fees and Services
    
    
    45PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    46SIGNATURES
    
    
    49Ex-3.3 Articles Of OrganizationEx-10.14 Executive and Director CompensationEx-21.1 Subsidiaries of Spheris Inc.Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32   Section 906 Certification




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FORWARD LOOKING STATEMENTS
   2




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PART I
 
 Item 1. Business
 
 Organization
and History
  
 Company Overview
   Spheris
Clinical Documentation Process FlowDataCapture
    

DataCenter
    

Transcription
    

DataAccessPhysicians 
dictate data 
using leading 
hand-held or 
phone-based 
technology that 
is collected onto 
a voice server
    
    Physician dictated
data and patient
demographics are
directly linked,
via HL7-ready
interface, to a data center
where they are
consolidated
for access by MLS
    
    MLS access data
through virtual
private network or
other secure means
and transcribe
data directly onto
our platform
    
    The medical
center can directly
and securely access
transcribed reports
via fax, print-out,
internet, onscreen
or e-mail
   3




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Services Provided
    Domestic operations
      4




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Global operations
    
 Our Customers
    
 Sales and Marketing
   5




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Technological Capabilities
    
 Spheris Clinical Documentation Platforms
  
    
    an ability to view, edit and electronically sign and print medical records from any computer with a Web browser;
    
    secure private frame relay connections and virtual private network access;
    
    password-protected transactions audit logged for compliance;
 6




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
    
    an ability to view a range of management and business intelligence reports;
    
    system functionality provided for query, viewing, editing, printing, faxing, storage and uploading to the
healthcare facilitys electronic medical records system;
    
    an ability to integrate with the customers health information and dictation systems to ensure smooth
implementations and transitions, with uninterrupted workflow;
    
    an ability to assume responsibility for the servers, networks, software, secure lines and other critical
components behind the customers clinical documentation needs, including assuming the burden of purchasing,
maintaining and upgrading technology; and
    
    all voice and text files are secured at one of our enterprise level national data centers, which are supported
by emergency power and backup systems.
 
 Intellectual Property
    
 Competition
   7




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Employees
  
 Regulatory Matters
   
    
    electronic transactions involving healthcare information;
    
    privacy of individually identifiable health information; and
    
    security of individually identifiable healthcare information and electronic signatures.
    8




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Item 1A. Risk Factors
  Our substantial indebtedness could adversely affect our ability to raise
additional capital to fund our business, harm our ability to react to changes
in the economy or our business and prevent us from fulfilling our obligations
under our indebtedness, including our senior secured credit facilities and the
indenture relating to our senior subordinated notes.
   
    
    increase our vulnerability to general economic downturns and adverse competitive and industry conditions;
    
    require us to dedicate all or a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures,
research and development efforts, acquisitions and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
    
    place us at a competitive disadvantage compared to competitors that have less debt;
    
    limit our ability to raise additional financing for working capital, capital expenditures, research and
development, acquisitions and general corporate purposes on satisfactory terms or at all; and
    
    make it more difficult for us to satisfy our financial obligations.
 Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase
significantly.
  The terms of our senior secured credit facilities and the indenture relating to
our senior subordinated notes may restrict our current and future operations,
particularly our ability to respond to changes or to take certain actions that
may be in our long-term best interests.
  
    
    incur, assume or permit to exist additional indebtedness or guarantees;
    
    incur liens and engage in sale-leaseback transactions;
    
    make loans and investments;
    
    declare dividends, make payments on or redeem or repurchase capital stock;
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
    
    engage in mergers, acquisitions and other business combinations;
    
    prepay, redeem or purchase certain indebtedness;
    
    amend or otherwise alter terms of our material indebtedness and other material agreements;
    
    engage in transactions with affiliates;
    
    alter the business that we conduct (and, in the case of our direct parent, Spheris
Holding II, Inc. (Spheris Holding II), engage in any business activities other than
those incidental to its ownership of us);
    
    permit restrictions on the ability of our subsidiaries to pay dividends on
their capital stock, make loans or advances or to repay indebtedness, or
transfer property to us or our other subsidiaries; and
    
    sell or otherwise dispose of assets, including capital stock
of subsidiaries.
   We may not be able to fulfill our repurchase obligations in the event of a
change of control which would result in a default under the indenture governing
the senior subordinated notes.
   10




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We have a history of losses and accumulated deficit and expect to incur losses in the future.
  Our ability to grow and service our customers depends on our ability to
effectively manage our global production capacity, including our ability to
recruit, train and retain qualified MLS and maintain high standards of quality
service in our operations, which we may not be able to do.
  Our success will depend on our ability to adapt and integrate new technology
into our clinical documentation platforms to improve our production
capabilities and expand the breadth of our service offerings, as well as our
ability to address any potential unanticipated problems with our information
technology systems, which we may not be able to do quickly, or at all.
  We compete with many others in the market for clinical documentation services
which may result in lower prices for our services, reduced operating margins
and an inability to increase our market share and expand our service offerings.
  11




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Potential customers may be reluctant to outsource or change the providers of
their clinical documentation services as a result of the cost and potential for
disruption in services since medical transcription is a critical element of
their operations.
  We may pursue future acquisitions which could require us to incur additional
debt and assume contingent liabilities and expenses, and we may not be able to
effectively integrate newly acquired operations.
   If our intellectual property is not adequately protected or if we are unable to
renew our intellectual property licenses, we may lose our market share to our
competitors and be unable to operate our business profitably.
  12




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If we fail to comply with extensive laws and government regulations applicable
to us and our customers and our contractual obligations, including those
relating to HIPAA and industry scrutiny of billing practices relating to the
counting of transcription lines, we could suffer material penalties and
liabilities or be negatively impacted as a result of our customers being
subject to material penalties and liabilities.
   Legislative changes and possible negative publicity may impede our ability to utilize our global service capabilities.
  Our global operations expose us to financial and operational risk.
  
    
    the possibility of currency controls;
 13




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
    
    currency fluctuations and devaluations;
    
    political, economic and social instability;
    
    potential restrictions on investments;
    
    hyper-inflation;
    
    changes of laws and regulations, including withholding and other tax laws and regulations; and
    
    the potential for expropriation or nationalization of enterprises.
  Our inability to attract, hire or retain necessary technical and managerial
personnel could negatively impact our ability to develop and implement new
technology and service our customers.
  Warburg Pincus controls us, and their interests may conflict with the interests of our security holders.
  14




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   
 Item 6. Selected Financial Data
   15




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November
    
    
    PredecessorCombined
    
    
    6, 2004
    
    
    January 1,Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    through
    
    
    2004 throughDecember
    
    
    December
    
    
    December
    
    
    December
    
    
    November 5,
    
    
    Year Ended December 31,31, 2006
    
    
    31, 2005
    
    
    31, 2004
    
    
    31, 2004
    
    
    2004
    
    
    2003
    
    
    2002(Amounts in Millions)Statement of Operations:Net revenues
    
    $
    207.1
    
    
    $
    209.0
    
    
    $
    152.7
    
    
    $
    23.9
    
    
    $
    128.8
    
    
    $
    90.0
    
    
    $
    18.7Direct costs of revenues
(exclusive of depreciation and
amortization below)
    
    
    152.1
    
    
    
    154.3
    
    
    
    113.8
    
    
    
    18.0
    
    
    
    95.8
    
    
    
    66.7
    
    
    
    16.1Gross profit
    
    
    55.0
    
    
    
    54.7
    
    
    
    38.9
    
    
    
    5.9
    
    
    
    33.0
    
    
    
    23.3
    
    
    
    2.6Selling, general and
administrative expenses
    
    
    24.4
    
    
    
    23.6
    
    
    
    18.8
    
    
    
    2.7
    
    
    
    16.1
    
    
    
    13.4
    
    
    
    6.2Depreciation and amortization
    
    
    26.6
    
    
    
    26.6
    
    
    
    14.2
    
    
    
    3.4
    
    
    
    10.8
    
    
    
    9.0
    
    
    
    2.1Operating income (loss)
    
    
    4.1
    
    
    
    4.5
    
    
    
    5.8
    
    
    
    (0.2
    )
    
    
    6.1
    
    
    
    0.9
    
    
    
    (5.7
    )Loss on refinance of debt
    
    
    
    
    
    
    
    
    
    
    4.6
    
    
    
    0.3
    
    
    
    4.3
    
    
    
    
    
    
    
    Interest expense, net
    
    
    21.1
    
    
    
    20.3
    
    
    
    4.6
    
    
    
    1.5
    
    
    
    3.1
    
    
    
    2.6
    
    
    
    Other (income) loss
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Net loss before income taxes
    
    
    (16.6
    )
    
    
    (15.4
    )
    
    
    (3.3
    )
    
    
    (2.0
    )
    
    
    (1.3
    )
    
    
    (1.7
    )
    
    
    (5.7
    )Income taxes
    
    
    (4.5
    )
    
    
    (5.1
    )
    
    
    (0.3
    )
    
    
    (0.8
    )
    
    
    0.5
    
    
    
    
    
    
    
    Net loss
    
    $
    (12.2
    )
    
    $
    (10.2
    )
    
    $
    (3.0
    )
    
    $
    (1.3
    )
    
    $
    (1.8
    )
    
    $
    (1.7
    )
    
    $
    (5.7
    )Balance Sheet Data(end of period):Unrestricted cash and cash
equivalents
    
    $
    6.3
    
    
    $
    7.3
    
    
    $
    6.1
    
    
    
    
    
    
    
    
    
    
    $
    5.9
    
    
    $
    1.0Total assets
    
    
    315.7
    
    
    
    320.3
    
    
    
    342.1
    
    
    
    
    
    
    
    
    
    
    
    78.7
    
    
    
    9.8Total capital lease obligations
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
    
    
    198.5
    
    
    
    199.3
    
    
    
    201.0
    
    
    
    
    
    
    
    
    
    
    
    49.8
    
    
    
    Total stockholders equity
    
    
    86.6
    
    
    
    90.7
    
    
    
    100.6
    
    
    
    
    
    
    
    
    
    
    
    16.7
    
    
    
    7.8
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  
 OVERVIEW
   
    
    the growing and aging populations need for more medical tests, treatments and
procedures that require documentation;
    
    the migration of record-keeping from paper to electronic format;
    
    the need for accurate documentation necessary to comply with increasingly stringent
regulations and reimbursement requirements;
 16




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
    
    the desire of healthcare providers to maximize the amount of time spent on patient care,
while minimizing the physicians administrative duties; and
    
    the need for healthcare providers to have timely and accurate documentation in order to
improve receivables collection, manage costs and provide high quality care.
   
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
  Allowance for Doubtful Accounts
  17




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Accounting for Goodwill, Intangibles and Other Long-Lived Assets
   Income Taxes
  Stock-Based Compensation
   Self-Insurance
  18




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RESULTS OF OPERATIONS
 Net Revenues and Expense Components
  Net
Revenues.
 Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Interest Expense.
 Executive Summary
   19




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The Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 Net Revenues.
 Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Interest Expense.
 Income Taxes.
 The Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
 Net Revenues.
 20




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Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Loss on Refinance of Debt.
 Interest Expense.
 Income Taxes.
 
 LIQUIDITY AND CAPITAL RESOUCES
   21




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22




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RESTRUCTURING AND TERMINATION BENEFITS
  2003
    
    
    2003
    
    
    2004EDiX
    
    
    Executive
    
    
    HealthScribeAcquisition Plan
    
    
    Founder Plan
    
    
    Acquisition Plan(Amounts in Thousands)Balance, December 31, 2003
    
    $
    299
    
    
    $
    107
    
    
    $
    Additions
    
    
    
    
    
    
    
    
    
    
    1,849Payments and adjustments
    
    
    (299
    )
    
    
    (107
    )
    
    
    Balance, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    1,849Additions
    
    
    
    
    
    
    
    
    
    
    Payments and adjustments
    
    
    
    
    
    
    
    
    
    
    (1,323
    )Balance, December 31, 2005
    
    
    
    
    
    
    
    
    
    
    526Additions
    
    
    
    
    
    
    
    
    
    
    Payments and adjustments
    
    
    
    
    
    
    
    
    
    
    (526
    )Balance, December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
 
 CONTRACTUAL OBLIGATIONS
  23




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Payments due by period(Amounts in Thousands)2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalLong-term debt
obligations
    
    $
    750
    
    
    $
    750
    
    
    $
    750
    
    
    $
    71,250
    
    
    $
    
    
    
    $
    125,000
    
    
    $
    198,500Capital lease obligations
    
    
    59
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Operating leases
    
    
    1,543
    
    
    
    2,076
    
    
    
    1,954
    
    
    
    1,978
    
    
    
    2,020
    
    
    
    9,361
    
    
    
    18,932MLS deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    384Total
    
    $
    2,352
    
    
    $
    2,861
    
    
    $
    2,704
    
    
    $
    73,228
    
    
    $
    2,020
    
    
    $
    134,745
    
    
    $
    217,910
  
 OFF-BALANCE SHEET ARRANGEMENTS
  
 RECENT ACCOUNTING PRONOUNCEMENTS
 SFAS No. 157
 FIN No. 48.
 SFAS No. 123(R).
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  24




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Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Disclosure Controls.   Changes in Control Over Financial Reporting.
 Limitations
on the Effectiveness of Controls
  
 Item 9B. Other Information
  25




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  Name
    
    Age
    
    PositionSimpson, Steven E.
    
    
    47
    
    
    President and Chief Executive Officer; DirectorCallahan, Brian P.
    
    
    45
    
    
    Chief Financial OfficerJames, Anthony D.
    
    
    40
    
    
    Chief Operating OfficerWhorton, J. Alan
    
    
    48
    
    
    Senior Vice President, Sales and MarketingStevens, Gregory T.
    
    
    42
    
    
    Chief Administrative Officer, General Counsel
and SecretaryAckerman, Joel
    
    
    41
    
    
    Director (Independent), Compensation Committee
memberBilzin, Jonathan
    
    
    34
    
    
    Director (Independent), Audit and Compensation
Committee memberHensley, Robert Z.
    
    
    49
    
    
    Director (Independent), Audit Committee Chair
and Compensation Committee memberKane, John A.
    
    
    54
    
    
    Director (Independent)King, Michael J.
    
    
    68
    
    
    Director, Nominating and Corporate Governance
Committee ChairMoszkowski, Neal
    
    
    41
    
    
    Director (Independent), Nominating and
Corporate Governance Committee memberSmith, Wayne T.
    
    
    61
    
    
    Director (Independent), Compensation Committee
Chair and Audit Committee memberWenstrup, David J.
    
    
    42
    
    
    Director (Independent), Audit, Nominating and
Corporate Governance Committee member
 Steven
E. Simpson
 Brian P. Callahan
 Anthony D. James
 J. Alan Whorton
 26




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Gregory T. Stevens
 Joel Ackerman
 Jonathan Bilzin
 Robert Z. Hensley
 John A. Kane
 Michael J. King
 Neal Moszkowski
 Wayne T. Smith
 27




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David J. Wenstrup
 Audit Committee Financial Expert
  Code of Ethics
  Compensation Committee Matters
  
 Item 11. Executive Compensation
 Compensation Discussion and Analysis
 Overview
of Compensation Process .
  28




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Compensation Philosophy.
 
    
    Performance-based: A significant component of compensation should be determined based on
whether or not the Company meets performance criteria that in the view of the Board of
Directors are indicative of the Companys success.
    
    Stockholder-aligned: Equity incentives should be used to align the interests of our
executive officers with those of our stockholders.
    
    Fair: Compensation should take into account compensation among similarly situated
companies, our success relative to peer companies and our overall Company pay scale.
  Compensation Programs for 2006 .
  Base Salary
 29




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2006 Base
    
    2005 Base
    
    IncreaseName
    
    Title
    
    Salary
    
    Salary
    
    (%)Steven E. Simpson
    
    President and Chief Executive Officer
    
    $
    336,700
    
    
    $
    325,000
    
    
    
    3.6
    %Brian P. Callahan (1)
    
    Chief Financial Officer
    
    $
    215,000
    
    
    
    N/A
    
    
    
    N/AAnthony D. James (2)
    
    Chief Operating Officer
    
    $
    220,000
    
    
    $
    190,000
    
    
    
    15.8
    %Gregory T. Stevens
    
    Chief Administrative Officer, General Counsel and Secretary
    
    $
    197,600
    
    
    $
    190,000
    
    
    
    4.0
    %J. Alan Whorton (3)
    
    Senior Vice President, Sales and Marketing
    
    $
    175,000
    
    
    $
    168,376
    
    
    
    3.9
    %
 
 (1)
    
    Mr. Callahan was hired during May 2006.(2)
    
    Mr. James received a base pay increase when he was
promoted to his current role as Chief Operating Officer in
December 2005.(3)
    
    Mr. Whorton received a base pay increase when he was
promoted to Senior Vice President, Sales and Marketing in June 2006. Performance-Based Cash Incentive Awards
  Long-Term Stock-Based Incentive Compensation
 30




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##### Table of Contents



Number ofName
    
    Title
    
    Restricted Shares
    
    OptionsSteven E. Simpson
    
    President and Chief Executive Officer
    
    
    150,000
    
    
    
    Brian P. Callahan
    
    Chief Financial Officer
    
    
    
    
    
    
    870,000
    (1)Anthony D. James
    
    Chief Operating Officer
    
    
    75,000
    
    
    
    Gregory T. Stevens
    
    Chief Administrative Officer, General Counsel and Secretary
    
    
    75,000
    
    
    
    J. Alan Whorton
    
    Senior Vice President, Sales and Marketing
    
    
    7,500
    
    
    
    300,000
    (2)
 
 (1)
    
    Mr. Callahans options were awarded in connection with his initial employment with the Company
in May 2006;(2)
    
    Mr. Whortons options were awarded in connection
with his promotion to Senior Vice President,
Sales and Marketing in June 2006. th
 Compensation of President and Chief Executive Officer.
 Compensation Programs for 2007 .
 Retirement Plans . .
 31




---



##### Table of Contents



Severance and Change of Control Benefits .
 Severance
Benefits
  Change
in Control Benefits
  Non-competition, Non-solicitation and Confidentiality Agreements.
 32




---



##### Table of Contents



Perquisites and Other Benefits
 Tax Deductibility of Compensation .
 Accounting for Stock-Based Compensation .
 Compensation Committee Report
   COMPENSATION COMMITTEE
 
 33




---



##### Table of Contents



Summary Compensation Table
  Change inPension ValueandNon-Equity
    
    NonqualifiedStock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherName and Principal
    
    
    
    
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    CompensationPosition
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings ($)
    
    ($)
    
    Total ($)(a)
    
    (b)
    
    (c)
    

(d)(1)
    

(e)(2)
    

(f)(2)
    
    (g)
    
    (h)
    

(i)(3)
    
    (j)Steven E. Simpson,
President and Chief
Executive Officer
    
    
    2006
    
    
    $
    334,450
    
    
    $
    101,296
    
    
    $
    21,209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,200
    
    
    $
    461,155Brian P. Callahan,
Chief Financial
Officer
    
    
    2006
    
    
    $
    136,442
    
    
    $
    29,373
    
    
    
    
    
    
    $
    49,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    214,827Anthony D. James,
Chief Operating
Officer
    
    
    2006
    
    
    $
    220,000
    
    
    $
    50,169
    
    
    $
    8,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,192
    
    
    $
    283,090Gregory T. Stevens,
Chief
Administrative
Officer, General
Counsel and
Secretary
    
    
    2006
    
    
    $
    196,139
    
    
    $
    46,469
    
    
    $
    7,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,169
    
    
    $
    254,774J. Alan Whorton,
Senior Vice
President, Sales
and Marketing
    
    
    2006
    
    
    $
    171,688
    
    
    $
    41,018
    
    
    $
    630
    
    
    $
    4,396
    
    
    
    
    
    
    
    
    
    
    $
    2,081
    
    
    $
    219,813
 
 (1)
    
    Includes amounts executives earned in 2006 under
the executive cash incentive plan, as well as amounts paid to all
employees, including the Named Executive Officers, receiving restricted stock grants during the first quarter
of 2006 to assist
such employees in satisfying their federal income tax withholding
requirements. Amounts earned under the 2006 executive cash incentive plan were as
follows: Steven E. Simpson ($75,758); Brian P. Callahan ($29,373);
Anthony D. James ($37,400); Gregory T. Stevens ($33,700); and J. Alan
Whorton ($39,375). Payments for tax withholdings in connection with the
restricted stock grants were as follows: Steven E. Simpson ($25,538);
Anthony D. James ($12,769); Gregory T. Stevens ($12,769); and J. Alan
Whorton ($1,643).(2)
    
    The amounts in the columns captioned Stock Awards and Option Awards reflect the dollar
amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2006, in accordance with SFAS No. 123(R) of
awards granted pursuant to the Stock
Incentive Plan, and therefore may include amounts from awards granted in and prior to 2006.
All Stock Awards and Option Awards represent Spheris Holding III equity issuances. For a
description of the assumptions used by the Company in valuing these awards for fiscal 2006,
please see Note 1 to the Companys consolidated financial
statements included elsewhere in this Report.(3)
    
    Amounts are comprised of the following: Company ContributionCompany Contribution
    
    to the DeferredName
    
    to 401(k) Plan ($)
    
    Compensation Plan ($)
    
    Total ($)Steven E. Simpson
    
    $
    2,063
    
    
    $
    2,137
    
    
    $
    4,200Brian P. Callahan
    
    
    
    
    
    
    
    
    
    
    Anthony D. James
    
    $
    2,094
    
    
    $
    2,098
    
    
    $
    4,192Gregory T. Stevens
    
    $
    4,169
    
    
    
    
    
    
    $
    4,169J. Alan Whorton
    
    $
    2,081
    
    
    
    
    
    
    $
    2,081
 34




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##### Table of Contents



Grants of Plan-Based Awards
  All OtherStock
    
    All OtherAwards:
    
    OptionEstimated Future Payouts
    
    Estimated Future Payouts
    
    Number of
    
    Awards:
    
    Exercise or
    
    Grant DateUnder Non-Equity Incentive
    
    Under Equity Incentive Plan
    
    Shares of
    
    Number of
    
    Base Price
    
    Fair Value ofPlan Awards
    
    Awards
    
    Stock or
    
    Securities
    
    of Option
    
    Stock andThreshold
    
    Target
    
    Maximum
    
    Threshold
    
    Target
    
    Maximum
    
    Units
    
    Underlying
    
    Awards
    
    OptionName
    
    Grant Date
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    Options (#)
    
    ($/Sh)
    
    Awards ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)(1)
    
    (j)(2)
    
    (k)(2)
    
    (l)(3)Steven E. Simpson,
President
and Chief Executive
Officer
    
    April 20, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    $
    54,000Brian P.
Callahan, Chief
Financial Officer
    
    July 3, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    870,000
    
    
    $
    0.36
    
    
    $
    108,633Anthony D.
James, Chief
Operating Officer
    
    April 20, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    $
    27,000Gregory T.
Stevens, Chief
Administrative
Officer, General
Counsel and
Secretary
    
    April 20, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    $
    27,000J. Alan
Whorton,
    
    April 20, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    $
    2,700Senior
Vice President,
     Sales and Marketing
    
    July 3, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    $
    0.36
    
    
    $
    37,460
 
 (1)
    
    The amounts shown represent shares of restricted stock of Spheris Holding III granted
under the Stock Incentive Plan. The restrictions on these shares lapse in one-fourth
increments annually beginning on the first anniversary of the date of grant.(2)
    
    The amounts shown represent the number of options granted relating to shares of Spheris
Holding III under the Stock Incentive Plan. Options are awarded by the Compensation Committee
and are priced at the fair market value on the date of grant. The options vest in one-fourth
increments annually beginning on the first anniversary of the date of grant and have a
ten-year life.(3)
    
    These grants were valued at fair market value on the date of grant using third-party
valuations. 35




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  Stock AwardsEquity
    
    EquityOption Awards
    
    
    
    
    
    
    
    
    
    Incentive
    
    IncentiveEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    Plan Awards:Incentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Number of
    
    Payout ValueNumber of
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of
    
    Unearned
    
    of UnearnedSecurities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Number of
    
    Shares or
    
    Shares, Units
    
    Shares, UnitsUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Shares or
    
    Units of
    
    or Other
    
    or OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    Option
    
    Units of Stock
    
    Stock That
    
    Rights That
    
    Rights ThatOptions (#)
    
    Options (#)
    
    Unearned
    
    Exercise
    
    Expiration
    
    That Have Not
    
    Have Not
    
    Have Not
    
    Have NotName
    
    Exercisable
    
    Unexercisable
    
    Options (#)
    
    Price ($)
    
    Date
    
    Vested (#)
    
    Vested ($)
    
    Vested (#)
    
    Vested ($)(a)
    
    (b)
    
    (c)(1)
    
    (d)
    
    (e)
    
    (f)
    
    (g)(2)
    
    (h)(3)
    
    (i)
    
    (j)Steven E. Simpson,
 President
and Chief Executive
Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389,762
    
    
    $
    740,826
    
    
    
    
    
    
    
    Brian P. Callahan,
 Chief
Financial Officer
    
    
    
    
    
    
    870,000
    
    
    
    
    
    
    $
    0.36
    
    
    July 2, 2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Anthony
D. James,
Chief
Operating Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    774,925
    
    
    $
    240,227
    
    
    
    
    
    
    
    Gregory T. Stevens,
 Chief
Administrative
Officer, General
Counsel and
Secretary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634,940
    
    
    $
    196,831
    
    
    
    
    
    
    
    J. Alan Whorton,
 Senior
Vice President,
Sales and Marketing
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    $
    0.36
    
    
    July 2, 2016
    
    
    45,000
    
    
    $
    13,950
    
    
    
    
    
    
    
    
 
 (1)
    
    The options vest in one-fourth increments annually beginning on the first anniversary of
the date of grant.(2)
    
    Of the share amounts indicated, restricted stock grants for Mr. Simpson
(2,234,762 shares), Mr. James (699,925 shares) and Mr. Stevens
(559,940 shares) vest
monthly over a four-year period. The
remainder of the restricted stock grants indicated vest in one-fourth
increments annually beginning on the first anniversary of the date of
grant.(3)
    
    These restricted stock grants were valued at fair market value on the date of grant using
third-party valuations. 36




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##### Table of Contents



Option Exercises and Stock Vested
  Option Awards
    
    Stock AwardsNumber of
    
    
    
    
    
    Number ofShares
    
    
    
    
    
    Shares
    
    Value RealizedAcquired
    
    Value Realized
    
    Acquired
    
    on Vesting aton Exercise
    
    on Exercise
    
    on Vesting
    
    December 31,Name
    
    (#)
    
    ($)
    
    (#)
    
    2006 ($)(a)
    
    (b)
    
    (c)
    

(d)(1)
    

(e)(2)Steven E. Simpson,
 President
and Chief Executive
Officer
    
    
    
    
    
    
    
    
    
    
    1,168,571
    
    
    $
    362,257Brian P. Callahan,
 Chief
Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Anthony D. James,
 Chief
Operating Officer
    
    
    
    
    
    
    
    
    
    
    365,179
    
    
    $
    113,205Gregory T. Stevens,
 Chief
Administrative
Officer, General
Counsel and
Secretary
    
    
    
    
    
    
    
    
    
    
    292,143
    
    
    $
    90,564J. Alan Whorton,
 Senior
Vice President,
Sales and Marketing
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    $
    3,875
 
 (1)
    
    Represents shares of common stock of Spheris Holding III.(2)
    
    Reflects the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in
accordance with SFAS No. 123(R). 37




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##### Table of Contents



Nonqualified Deferred Compensation
  AggregateExecutive
    
    Registrant
    
    Aggregate
    
    Aggregate
    
    BalanceContributions in
    
    Contributions in
    
    Earnings in
    
    Withdrawals/
    
    at December 31,2006
    
    2006
    
    2006
    
    Distributions
    
    2006Name
    
    ($)
    

($)(1)
    
    ($)
    
    ($)
    
    ($)Steven E. Simpson,
 President
and Chief Executive
Officer
    
    $
    19,973
    
    
    $
    2,137
    
    
    $
    5,302
    
    
    
    
    
    
    $
    52,173Brian P. Callahan,
 Chief
Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Anthony D. James,
 Chief
Operating Officer
    
    $
    4,400
    
    
    $
    2,098
    
    
    $
    1,280
    
    
    
    
    
    
    $
    15,738Gregory T. Stevens,
 Chief
Administrative
Officer, General
Counsel and
Secretary
    
    $
    9,807
    
    
    
    
    
    
    $
    3,066
    
    
    
    
    
    
    $
    29,703J. Alan Whorton,
 Senior
Vice President,
Sales and Marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    All amounts reported are also reported as compensation to such Named Executive Officer in
the Summary Compensation Table. Potential
Payments Upon Termination or Change in Control
  38




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##### Table of Contents



DisabilityVoluntary
    
    Involuntary
    
    
    
    By Employee
    
    orExecutive Benefits
    
    Termination
    
    Not for Cause
    
    Change In
    
    for Good Reason
    
    Deathand Payments upon
    
    on
    
    Termination on
    
    Control on
    
    on
    
    onSeparation(1)
    
    12/31/2006
    
    12/31/2006
    

12/31/2006
    
    12/31/2006
    
    12/3/2006Compensation:Steven E.
Simpson,

President and Chief
Executive Officer
    
    
    
    
    
    $
    418,864
    
    
    
    
    
    
    $
    418,864
    
    
    $
    82,164Brian
P. Callahan,
Chief Financial
Officer
    
    
    
    
    
    $
    215,000
    
    
    
    
    
    
    $
    215,000
    
    
    
    Anthony
D. James,
Chief Operating
Officer
    
    
    
    
    
    $
    249,700
    
    
    
    
    
    
    $
    249,700
    
    
    $
    29,700Gregory T.
Stevens,

Chief
Administrative
Officer, General
Counsel and
Secretary
    
    
    
    
    
    $
    223,950
    
    
    
    
    
    
    $
    223,950
    
    
    $
    26,350J. Alan Whorton,

Senior Vice
President, Sales
and Marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits &
Perquisites:Steven E. Simpson,

President and Chief
Executive Officer
    
    
    
    
    
    $
    13,386
    (2)
    
    $
    740,826
    (3)
    
    $
    13,386
    (2)
    
    
    Brian P.
Callahan, 
Chief
Financial Officer
    
    
    
    
    
    $
    13,386
    (2)
    
    
    
    
    
    $
    13,386
    (2)
    
    
    Anthony D.
James,
 Chief
Operating Officer
    
    
    
    
    
    $
    13,386
    (2)
    
    $
    240,227
    (3)
    
    $
    13,386
    (2)
    
    
    Gregory T.
Stevens, 
Chief
Administrative
Officer, General
Counsel and
Secretary
    
    
    
    
    
    $
    13,386
    (2)
    
    $
    193,831
    (3)
    
    $
    13,386
    (2)
    
    
    J. Alan
Whorton, 
Senior
Vice President,
Sales and Marketing
    
    
    
    
    
    
    
    
    
    $
    13,950
    (3)
    
    
    
    
    
    
    
 
 (1)
    
    Does not include accrued obligations, including any unpaid
annual bonus earned.(2)
    
    Represents reimbursement amount of COBRA premiums in excess
of cost of health insurance coverage for active employees for one
year following the date of termination.(3)
    
    Represents the value of
restricted stock grants that would vest upon a change in control. 39




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##### Table of Contents





Director Compensation
  Annual Retainer.
 Meeting Fees.
 Committee Chairmen.
 Equity
Incentives.
 Election. st
  Change inFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    PensionEarned
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value andor
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    NonqualifiedPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)(a)
    

(b)(1)
    

(c)(2)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Steven E.
Simpson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Joel Ackerman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jonathan Bilzin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert Z. Hensley
    
    $
    18,000
    
    
    $
    8,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    26,400John A. Kane
    
    $
    4,000
    
    
    $
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,000Michael J. King
    
    $
    15,750
    
    
    $
    3,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,350Neal Moszkowski
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wayne T. Smith
    
    $
    21,250
    
    
    $
    3,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,850David J. Wenstrup
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents fees paid since the outside directors compensation
program was adopted in August 2006, and in the case of Mr. Hensely and
Mr. Kane, since their election to the Board of Directors in August
and November 2006, respectively.(2)
    
    These restricted stock grants were valued at fair market
value on the date of grant using third-party valuations. 40




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##### Table of Contents



Compensation Committee Interlocks and Insider Participation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
 Securities Authorized for Issuance Under Equity Compensation Plans
  Number of SecuritiesRemaining Availablefor Future IssuanceNumber of
    
    
    
    
    
    
    Under EquitySecurities to be
    
    
    
    
    
    
    Compensation PlansIssued Upon
    
    
    Weighted-average
    
    
    (excluding securitiesExercise of
    
    
    Exercise Price of
    
    
    reflected in thePlan Category
    
    Outstanding Options
    
    
    Outstanding Options
    
    
    first column)Equity compensation plans
approved by security holders
    
    
    1,585,000
    
    
    $
    0.31
    
    
    
    173,869Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,585,000
    
    
    $
    0.31
    
    
    
    173,869
 Security Ownership of Certain Beneficial Owners and Management
    41




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##### Table of Contents



Common StockBeneficially Owned(On an as-Converted Basis)Name (1)
    
    Shares
    
    PercentageWarburg Pincus Private Equity VIII, L.P.(2)(3)
    
    
    155,758,109
    
    
    
    59.7
    %Spheris Investment LLC(4)
    
    
    155,259,156
    
    
    
    59.5
    %TowerBrook Investors L.P.(5)
    
    
    77,879,055
    
    
    
    29.9
    %Steven E. Simpson(6)
    
    
    11,908,420
    
    
    
    4.6
    %Brian P. Callahan(7)
    
    
    217,500
    
    
    
    *Anthony D. James(8)
    
    
    3,251,797
    
    
    
    1.3
    %Gregory T.
Stevens(9)
    
    
    2,655,660
    
    
    
    1.0
    %J. Alan
Whorton(10)
    
    
    57,500
    
    
    
    *Joel Ackerman(2)(11)
    
    
    155,758,109
    
    
    
    59.3
    %Jonathan Bilzin(5)(12)
    
    
    77,879,055
    
    
    
    29.6
    %Robert Z. Hensley(13)
    
    
    30,000
    
    
    
    *John A. Kane(14)
    
    
    30,000
    
    
    
    *Michael J. King(15)
    
    
    60,000
    
    
    
    *Neal
Moszkowski(5)(12)
    
    
    77,879,055
    
    
    
    29.6
    %Wayne T.
Smith(16)
    
    
    539,510
    
    
    
    *David J. Wenstrup(2)(11)
    
    
    155,758,109
    
    
    
    59.7
    %All
directors and executive officers as a group (13 persons)(17)
    
    
    252,340,663
    
    
    
    96.0
    %
 
 *
    
    Less than one percent(1)
    
    Unless otherwise indicated, the address of each listed person is c/o Spheris Holding
III, Inc., 9009 Carothers Pkwy., Suite C-3, Franklin, TN 37067.(2)
    
    Address is 466 Lexington Avenue, New York, NY 10017-3147.(3)
    
    The holdings of Warburg Pincus Private Equity VIII, L.P. include the
holdings of Warburg Pincus Netherlands Private Equity VIII C.V.I and
WP-WPVIII Investors, L.P., which, together, are
referred to as (WP VIII). These holdings include approximately 155,758,109 shares
of common stock issuable upon conversion of 69,360,660 shares of Series A Convertible
Preferred Stock, plus 10 shares of common stock held directly by WP VIII. Warburg Pincus Partners LLC
(WPP LLC) is the sole general partner of WP VIII, which
holds the
securities of record, and Warburg Pincus LLC (WP LLC)
manages each of WPP LLC and WP VIII. Warburg Pincus & Co. (WP & Co.) is the sole managing member of WPP
LLC. Charles R. Kaye and Joseph P. Landy are each Managing General Partners of WP & Co. and
Co-Presidents and Managing Members of WP LLC. Each of WP & Co., WPP LLC, WP LLC, Mr. Kaye
and Mr. Landy disclaims beneficial ownership of the shares of common stock reported herein
as beneficially owned by WP VIII.(4)
    
    Includes approximately 155,259,156 shares of common stock issuable upon conversion of
69,141,454 shares of Series A Convertible Preferred Stock held by Spheris Investment LLC,
an entity formed by Warburg Pincus in connection with the November 2004 Recapitalization
(Spheris Investment). WP VIII is the managing member of Spheris
Investment and, as such, has voting and investment power over certain shares of Spheris
Investment not directly attributable to WP VIII. As a result, WP
VIII, WP & Co., WPP LLC, WP LLC, Charles R. Kaye and Joseph P. Landy may
be deemed to be the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of all of the common stock of Spheris Holding III owned by Spheris Investment,
including the shares of common stock of Spheris Holding III not directly attributable to WP
VIII. Each of WP VIII, WP & Co., WPP LLC, WP LLC, Charles R. Kaye and
Joseph P. Landy disclaims beneficial ownership of all shares of common stock of Spheris
Holding III reported herein as beneficially owned by Spheris Investment which are not
directly attributable to WP VIII.(5)
    
    Includes 77,879,055 shares of common stock which are issuable upon conversion of
34,680,330 shares of Series A Convertible Preferred Stock. Address is 430 Park Avenue, New
York, NY 10022. TowerBrook Investors L.P. is a Delaware limited partnership.
Its general partner is TCP General Partner L.P., a Delaware limited partnership (TCP GP).
An investment committee of TCP GP exercises exclusive decision making authority with regard
to the acquisition and disposition of, and voting power with respect to, investments by
TowerBrook Investors L.P. TCP GPs general partner is TowerBrook Capital Partners LLC, a Delaware limited
liability company, whose controlling members are Neal Moszkowski and Ramez Sousou, who in
such capacity may be 42




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##### Table of Contents



deemed to have shared voting and dispositive power over securities
held for the account of TowerBrook Investors L.P. Mr. Bilzin is a Managing Director of TowerBrook
Capital Partners L.P. Each of Mr. Moszkowski, Mr. Sousou
and Mr. Bilzin disclaims
beneficial ownership of such securities except to the extent of any pecuniary interest
therein.(6)
    
    Includes 2,389,762 shares of restricted common stock for which the restrictions have
not lapsed. Mr. Simpson also holds 3,145,667 Class A Units of Spheris Investment,
representing an economic interest in approximately 7,084,134 shares of common stock
issuable upon conversion of the shares of Series A Convertible Preferred Stock held by
Spheris Investment.(7)
    
    Represents 217,500 common stock options exercisable within
60 days of March 30, 2007.(8)
    
    Includes 774,925 shares of restricted common stock for which the restrictions have not
lapsed. Mr. James also holds 760,331 Class A Units of Spheris Investment, representing
an economic interest in approximately 1,716,083 shares of common stock issuable upon
conversion of the shares of Series A Convertible Preferred Stock held by Spheris Investment.(9)
    
    Includes 634,940 shares of restricted common stock for which the restrictions have not
lapsed. Mr. Stevens also holds 625,643 Class A Units of Spheris Investment,
representing an economic interest in approximately 1,412,089 shares of common stock
issuable upon conversion of the shares of Series A Convertible Preferred Stock held by
Spheris Investment.(10)
    
    Includes 45,000 shares of restricted common stock for which the restrictions have not
lapsed.(11)
    
    Represents shares that may be deemed to be beneficially owned
by WP & Co. and WP LLC. Mr. Ackerman
and Mr. Wenstrup are each a general partner of WP & Co. and a managing director and member
of WP LLC. All shares indicated as beneficially owned by Mr. Ackerman and Mr. Wenstrup are
included because of their affiliation with WP & Co. and WP LLC. Mr. Ackerman and Mr.
Wenstrup disclaim beneficial ownership of all shares which may be deemed to be beneficially
owned by WP & Co. and WP LLC.(12)
    
    Represents shares held by TowerBrook Investors L.P., as described in note (5).(13)
    
    Includes 30,000 shares of restricted common stock for which the restrictions have not
lapsed.(14)
    
    Includes 30,000 shares of restricted common stock for which the restrictions have not
lapsed.(15)
    
    Includes 47,500 shares of restricted common stock for which the restrictions have not
lapsed.(16)
    
    Includes 47,500 shares of restricted common stock for which the restrictions
have not lapsed. Mr. Smith also holds 200,000 Class A Units of Spheris Investment,
representing an economic interest in approximately 432,622 shares of common stock issuable
upon conversion of the shares of Series A Convertible Preferred Stock held by Spheris
Investment. Also includes 46,888 shares of common stock issuable upon
conversion of 46,500 restricted shares of Series A Convertible Preferred Stock.(17)
    
    Includes all shares which may be deemed to be beneficially owned (within the meaning of
Rule 13d-3 under the Exchange Act) by directors and executive officers. Also includes (i)
155,758,109 shares which Mr. Ackerman and Mr. Wenstrup may be deemed to be beneficially own
by virtue of their affiliation with WP & Co. and WP LLC, and (ii) 77,879,055 shares which
Mr. Bilzin and Mr. Moszkowski may be deemed to beneficially own by virtue of their
affiliation with TowerBrook Investors L.P. 43




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
 Tax Sharing Agreement
  Operating Agreement
    Stockholders Agreement
   44




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##### Table of Contents



Stockholders Registration Rights Agreement
  Director Independence
  Related Party Transactions
   
 Item 14. Principal Accountant Fees and Services
 Audit and Audit Related Fees
  45




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##### Table of Contents



2006
    
    
    2005Audit fees(1)
    
    $
    601,967
    
    
    $
    279,343Audit related fees (2)
    
    
    59,800
    
    
    
    66,877Tax fees (3)
    
    
    137,338
    
    
    
    378,868All other fees
    
    
    
    
    
    
    Total fees
    
    $
    799,105
    
    
    $
    725,088
 
 (1)
    
    Audit fees consisted of fees for professional services provided in connection
with the audit of our consolidated financial statements and review of our
quarterly financial statements and audit services provided in connection with other
statutory or regulatory filings including our Registration
Statement on Form S-4 filed during 2006. Total fees include some amounts in foreign currencies that have been translated
to U.S. dollars as of the date such fees were approved.(2)
    
    Audit related fees consisted principally of fees for certain due diligence
services and consultation on accounting matters.(3)
    
    Tax fees consisted of fees for tax consultation and tax compliance services. Pre-Approval of Audit and Non-Audit Fees
   
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
    PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2006 and 2005, for the period from
November 6, 2004 through December 31, 2004 and for the period from January 1, 2004 through
November 5, 2004
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2006 and 2005, for the
period from November 6, 2004 through December 31, 2004 and for the period from January 1, 2004
through November 5, 2004
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005, for the period from
November 6, 2004 through December 31, 2004 and for the period from January 1, 2004 through
November 5, 2004
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
     46




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits
 2.1
    
    Stock Purchase and Sale Agreement, dated as of April 10, 2003, as amended, by and
between IDX Systems Corporation and Spheris Inc. (formerly known as Total eMed, Inc.).*2.2
    
    Securities Purchase Agreement, dated as of October 12, 2004, by and among
Spheris Holdings LLC and Spheris Holding, Inc.*2.3
    
    Agreement and Plan of Merger, dated as of September 20, 2004, by and among
HealthScribe, Inc., HSI Merger Sub, Inc. and Spheris Inc. (as successor in interest to
MTS Group Holdings, Inc.).*2.4
    
    Agreement and Plan of Merger, dated as of December 13, 2005, as amended, by and
among Spheris Holding III, Inc., Spheris Operations Inc., Spheris MergerSub, Inc.,
Vianeta Communications and the Principal Shareholders listed on the signatures pages
thereto.*3.1
    
    Certificate of Incorporation of Spheris Inc., as amended.*3.2
    
    Bylaws of Spheris Inc., as amended.*3.3
    
    Articles of Organization of Spheris Operations LLC3.4
    
    Charter of Spheris Canada Inc., as amended.*3.5
    
    Bylaws of Spheris Canada Inc., as amended.*3.6
    
    Articles of Organization of Spheris Leasing LLC, as amended.*3.7
    
    Articles of Incorporation of Vianeta Communications, as amended.*3.8
    
    Bylaws of Vianeta Communications, as amended.*4.1
    
    Indenture dated as of December 22, 2004 by and among Spheris Inc., the
guarantors (as defined therein) and the Bank of New York as trustee, with form of 11%
Senior Subordinated Notes due 2012 attached.*4.2
    
    Registration Rights Agreement, dated as of December 22, 2004, by and among
Spheris Inc., the guarantors listed in Schedule 1 thereto and J.P. Morgan Securities
Inc. and UBS Securities LLC.*4.3
    
    Credit Agreement among Spheris Holding II, Inc., Spheris Inc. (as successor in
interest to Spheris Holding, Inc.), the several lenders from time to time parties
thereto, UBS Securities LLC, Merrill Lynch Capital, a division of Merrill Lynch
Financial Services, Inc. and General Electric Capital Corporation and JP Morgan Chase
Bank N.A. dated as of November 5, 2004, as amended.*#4.4
    
    Spheris, India Private Limited Line of Credit, dated October 7, 2005.*10.1
    
    Spheris Holding III, Inc. Stock Incentive Plan.*^10.2
    
    Stockholders Agreement, dated as of November 5, 2004, by and among Spheris
Holding III, Inc. and the Warburg Investors (as defined therein), the Towerbrook
Investors (as defined therein) and Spheris Investment LLC.*^10.3
    
    Registration Rights Agreement, dated as of November 5, 2004, among the
investors listed on Schedule 1 thereto and Spheris Holding III, Inc.*^10.4
    
    Employment Agreement, dated as of October 12, 2004, by and between Spheris
Operations Inc. (as successor in interest to Spheris Holdings, Inc.) and Steven E.
Simpson.*^10.5
    
    Amended and Restated Employment Agreement, dated as of November 5, 2004, by and
between Spheris Operations Inc. and Anthony D. James.*^10.6
    
    Amended and Restated Employment Agreement, dated as of November 5, 2004, by and
between Spheris Operations Inc. and Gregory T. Stevens.*^10.7
    
    Employment Agreement, dated as of May 1, 2006, by and between Spheris
Operations Inc. and Brian Callahan.*^10.8
    
    Office Lease, dated as of June 13, 2006, by and between Ford Motor Land
Development Corporation and Spheris Operations Inc.**10.9
    
    Lease Agreement, dated as of March 22, 2004, as amended, by and between Duke
Realty Limited Partnership and Spheris Operations Inc.*10.10
    
    Office Lease Agreement dated October 8, 2001, as amended, by and between
Franklin Templeton Investor Services, LLC and Spheris Operations Inc. (as successor in
interest to EDiX Corporation).*10.11
    
    Lease Deed, dated as of May 6, 2005, by and between Ramananda Adigalar
Foundation and Spheris, India Private Limited.*10.12
    
    Deed of Lease, dated as of October 16, 2002, by and among Reddy Komala,
Akkauamma, Muniyamma, Rathnamma and Spheris, India Private Limited.*10.13
    
    Deed of Lease, dated as of April 27, 2003, by and between Willowbrook
Holdings, Inc. and Spheris Operations Inc. (as successor in interest to HealthScribe,
Inc.).*10.14
    
    Executive and Director Compensation.^10.15
    
    Spheris Operations Amended and Restated Deferred Compensation Plan.*^10.16
    
    Spheris Operations 401(k) Plan, as amended.*^
 47




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##### Table of Contents



10.17
    
    Tax Sharing Agreement dated November 5, 2004, by and among Spheris Holding
III, Inc., Spheris Holding II, Inc., Spheris Inc., and direct and indirect subsidiaries
of Spheris Holding III, Inc. set forth on a schedule.*10.18
    
    Service Agreement, effective December 18, 2003, as amended, by and between
India HealthScribe Private Limited (predecessor of Spheris, India Private Limited) and
Spheris Operations Inc.*10.19
    
    Form of Indemnification Agreement for Directors and Executive Officers.***^10.20
    
    Form of Restricted Stock Agreement under Spheris Holding III, Inc. Stock
Incentive Plan.***^10.21
    
    Form of Non-Qualified Stock Option Agreement under Spheris Holding III, Inc.
Stock Incentive Plan.***^21.1
    
    Subsidiaries of Spheris Inc.31.1
    
    Certification of the Companys Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Companys Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certification of the Companys Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Incorporated by reference to the Companys Registration Statement on Form S-4, as amended
(File No. 333-132641).**
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed on June 16, 2006.***
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006.#
    
    Fourth Amendment to Credit Agreement incorporated by reference to the
Companys Current Report on Form 8-K filed on November 7, 2006.^
    
    Management contract or compensatory plan arrangement. 48




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##### Table of Contents



SIGNATURES
  Date: March 30, 2007
    SPHERIS INC.By:
    /s/ Steven E. SimpsonSteven E. SimpsonPresident and Chief Executive OfficerBy:
    /s/ Brian P. CallahanBrian P. CallahanChief Financial Officer  Signature
    
    Title
    
    Date/s/ STEVEN E. SIMPSON
    
    President and Chief Executive Officer; Director
    
    March 30, 2007Steven E. Simpson
    
    (Principal
Executive Officer)/s/ BRIAN P. CALLAHAN
    
    Chief Financial Officer (Principal Financial and
    
    March 30, 2007Brian P. Callahan
    
    Accounting
Officer)/s/ JOEL ACKERMAN
    
    Director
    
    March 30, 2007Joel Ackerman/s/ JONATHAN BILZIN
    
    Director
    
    March 30, 2007Jonathan Bilzin/s/ ROBERT Z. HENSLEY
    
    Director
    
    March 30, 2007Robert Z. Hensley/s/ JOHN A. KANE
    
    Director
    
    March 30, 2007John A. Kane/s/ MICHAEL J. KING
    
    Director
    
    March 30, 2007Michael J. King/s/ NEAL MOSZKOWSKI
    
    Director
    
    March 30, 2007Neal Moszkowski/s/ WAYNE T. SMITH
    
    Director
    
    March 30, 2007Wayne T. Smith/s/ DAVID J. WENSTRUP
    
    Director
    
    March 30, 2007David J. Wenstrup
 49




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##### Table of Contents



SPHERIS INC.
 FINANCIAL INFORMATION
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2006 and 2005, for the period from
November 6, 2004 through December 31, 2004 and for the period from January 1, 2004 through
November 5, 2004
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2006 and 2005, for the
period from November 6, 2004 through December 31, 2004 and for the period from January 1, 2004
through November 5, 2004
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005, for the period from
November 6, 2004 through December 31, 2004 and for the period from January 1, 2004 through
November 5, 2004
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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Report of Independent Registered Public Accounting Firm
 
     
 F-2




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##### Table of Contents



Spheris Inc.
 
 Consolidated Balance Sheets
 December 31, 2006
    
    
    December 31, 2005(Amounts in Thousands, Except Share Amounts)AssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    6,323
    
    
    $
    7,339Restricted cash
    
    
    529
    
    
    
    1,055Accounts receivable, net of allowance
of $1,191 and $929, respectively
    
    
    33,576
    
    
    
    30,715Deferred taxes
    
    
    2,775
    
    
    
    1,374Other current assets
    
    
    3,463
    
    
    
    2,389Total current assets
    
    
    46,666
    
    
    
    42,872Property and equipment, net
    
    
    12,435
    
    
    
    9,152Internal-use software, net
    
    
    3,679
    
    
    
    8,153Customer contracts, net
    
    
    29,943
    
    
    
    45,799Goodwill
    
    
    219,311
    
    
    
    211,116Other noncurrent assets
    
    
    3,714
    
    
    
    3,194Total assets
    
    $
    315,748
    
    
    $
    320,286Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    2,520
    
    
    $
    3,030Accrued wages and benefits
    
    
    17,066
    
    
    
    14,094Current portion of long-term debt
    
    
    750
    
    
    
    750Current portion of capital lease obligations
    
    
    59
    
    
    
    221Other current liabilities
    
    
    5,838
    
    
    
    4,606Total current liabilities
    
    
    26,233
    
    
    
    22,701Long-term debt, net of current portion
    
    
    193,907
    
    
    
    195,702Capital lease obligations, net of current
portion
    
    
    35
    
    
    
    105Deferred tax liabilities
    
    
    6,180
    
    
    
    10,375Other long-term liabilities
    
    
    2,755
    
    
    
    716Total liabilities
    
    
    229,110
    
    
    
    229,599Commitments and contingenciesCommon stock, $0.01 par value, 100 shares
authorized, 10 shares issued and outstanding
    
    
    
    
    
    
    Other comprehensive loss
    
    
    (474
    )
    
    
    (89
    )Contributed capital
    
    
    110,787
    
    
    
    102,301Accumulated deficit
    
    
    (23,675
    )
    
    
    (11,525
    )Total liabilities and stockholders equity
    
    $
    315,748
    
    
    $
    320,286
  F-3




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Spheris Inc.
 
 Consolidated Statements of Operations
 PredecessorNovember 6
    
    January 1Year Ended
    
    Year Ended
    
    through
    
    throughDecember 31,
    
    December 31,
    
    December 31,
    
    November 5,2006
    
    2005
    
    2004
    
    2004(Amounts in Thousands)Net revenues
    
    $
    207,141
    
    
    $
    209,032
    
    
    $
    23,851
    
    
    $
    128,826Direct costs of revenues
(exclusive of depreciation and
amortization below)
    
    
    152,120
    
    
    
    154,274
    
    
    
    17,960
    
    
    
    95,835Marketing and selling expenses
    
    
    5,392
    
    
    
    5,265
    
    
    
    835
    
    
    
    3,505General and administrative expenses
    
    
    18,974
    
    
    
    18,337
    
    
    
    1,899
    
    
    
    12,605Depreciation and amortization
    
    
    26,553
    
    
    
    26,642
    
    
    
    3,444
    
    
    
    10,797Total operating costs
    
    
    203,039
    
    
    
    204,518
    
    
    
    24,138
    
    
    
    122,742Operating income (loss)
    
    
    4,102
    
    
    
    4,514
    
    
    
    (287
    )
    
    
    6,084Loss on refinance of debt
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    4,304Interest expense, net
    
    
    21,136
    
    
    
    20,307
    
    
    
    1,506
    
    
    
    3,051Foreign currency gain
    
    
    (213
    )
    
    
    (287
    )
    
    
    (31
    )
    
    
    Other (income) loss
    
    
    (188
    )
    
    
    (140
    )
    
    
    (17
    )
    
    
    35Net loss before income taxes
    
    
    (16,633
    )
    
    
    (15,366
    )
    
    
    (2,036
    )
    
    
    (1,306
    )Provision for (benefit from) income
taxes
    
    
    (4,483
    )
    
    
    (5,126
    )
    
    
    (751
    )
    
    
    458Net loss
    
    $
    (12,150
    )
    
    $
    (10,240
    )
    
    $
    (1,285
    )
    
    $
    (1,764
    )
  F-4




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##### Table of Contents



Spheris Inc.
 
 Consolidated Statements of Stockholders Equity
 Other
    
    
    
    
    
    TotalCommon Stock
    
    Contributed
    
    Comprehensive
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Income
    
    Deficit
    
    Equity(Amounts in Thousands, Except Share Amounts)Balance, December 31, 2003
    
    
    10
    
    
    $
    
    
    
    $
    26,618
    
    
    $
    
    
    
    $
    (9,940
    )
    
    $
    16,678Net loss January 1 through
November 5, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,764
    )
    
    
    (1,764
    )Amortization of deferred
compensation on common
units of Predecessor parent
    
    
    
    
    
    
    
    
    
    
    978
    
    
    
    
    
    
    
    
    
    
    
    978Capital contribution from
Predecessor parent
    
    
    
    
    
    
    
    
    
    
    38,277
    
    
    
    
    
    
    
    
    
    
    
    38,277Elimination of Predecessor equity
in connection with recapitalization
    
    
    
    
    
    
    
    
    
    
    (65,873
    )
    
    
    
    
    
    
    11,704
    
    
    
    (54,169
    )Balance, November 5, 2004
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income (loss):Net loss November 6 through
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,285
    )
    
    
    (1,285
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Total comprehensive income
(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    (1,285
    )
    
    
    (1,263
    )Capital contribution from Parent
Investors
    
    
    
    
    
    
    
    
    
    
    101,885
    
    
    
    
    
    
    
    
    
    
    
    101,885Balance, December 31, 2004
    
    
    10
    
    
    
    
    
    
    
    101,885
    
    
    
    22
    
    
    
    (1,285
    )
    
    
    100,622Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,240
    )
    
    
    (10,240
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    (111
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    (10,240
    )
    
    
    (10,351
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Capital contributions
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    350Balance, December 31, 2005
    
    
    10
    
    
    
    
    
    
    
    102,301
    
    
    
    (89
    )
    
    
    (11,525
    )
    
    
    90,687Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,150
    )
    
    
    (12,150
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    
    
    
    
    (385
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    (12,150
    )
    
    
    (12,535
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    
    
    
    
    291Capital contributions from parent
investors
    
    
    
    
    
    
    
    
    
    
    8,195
    
    
    
    
    
    
    
    
    
    
    
    8,195Balance, December 31, 2006
    
    
    10
    
    
    $
    
    
    
    $
    110,787
    
    
    $
    (474
    )
    
    $
    (23,675
    )
    
    $
    86,638
  F-5




---



##### Table of Contents



Spheris Inc.
 
 Consolidated Statements of Cash Flows
 PredecessorJanuary 1Year Ended
    
    Year Ended
    
    November 6
    
    throughDecember 31,
    
    December 31,
    
    through December
    
    November 5,2006
    
    2005
    
    31, 2004
    
    2004(Amounts in Thousands)Cash flows from operating activities:Net loss
    
    $
    (12,150
    )
    
    $
    (10,240
    )
    
    $
    (1,285
    )
    
    $
    (1,764
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    26,553
    
    
    
    26,642
    
    
    
    3,444
    
    
    
    10,797Write-off and amortization of acquired technology
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    Deferred taxes
    
    
    (5,489
    )
    
    
    (5,633
    )
    
    
    (782
    )
    
    
    Foreign currency translation gain
    
    
    (385
    )
    
    
    (111
    )
    
    
    22
    
    
    
    Loss on sale or disposal of assets
    
    
    23
    
    
    
    25
    
    
    
    
    
    
    
    38Non-cash equity compensation
    
    
    291
    
    
    
    66
    
    
    
    
    
    
    
    978Amortization of debt discounts and issuance costs
    
    
    756
    
    
    
    721
    
    
    
    161
    
    
    
    281Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    4,304Changes in operating assets and liabilities, net of
acquisitions:Accounts receivable
    
    
    (1,951
    )
    
    
    (1,107
    )
    
    
    947
    
    
    
    1,609Other current assets
    
    
    (424
    )
    
    
    (633
    )
    
    
    (114
    )
    
    
    (8
    )Accounts payable
    
    
    (678
    )
    
    
    324
    
    
    
    (727
    )
    
    
    157Accrued wages and benefits
    
    
    2,908
    
    
    
    1,418
    
    
    
    (1,618
    )
    
    
    3,004Other current liabilities
    
    
    (1,323
    )
    
    
    (2,811
    )
    
    
    1,893
    
    
    
    (1,919
    )Other noncurrent assets and liabilities
    
    
    (1,476
    )
    
    
    569
    
    
    
    672
    
    
    
    (1,861
    )Net cash provided by operating activities
    
    
    7,391
    
    
    
    9,230
    
    
    
    2,904
    
    
    
    15,616Cash flows from investing activitiesPurchases of property and equipment
    
    
    (5,876
    )
    
    
    (5,038
    )
    
    
    (316
    )
    
    
    (2,854
    )Purchase of Vianeta, net of cash acquired
    
    
    (7,788
    )
    
    
    
    
    
    
    
    
    
    
    Purchase of HealthScribe, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (69,443
    )
    
    
    Purchase of Spheris Inc. in connection with the November
2004 Recapitalization, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (217,283
    )
    
    
    Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    175Purchase and development of internal-use software
    
    
    (1,309
    )
    
    
    (1,071
    )
    
    
    (502
    )
    
    
    (1,882
    )Net cash used in investing activities
    
    
    (14,973
    )
    
    
    (6,109
    )
    
    
    (287,521
    )
    
    
    (4,561
    )Cash flows from financing activitiesProceeds from 2003 Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Payments on 2003 Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,540
    )Payments on Exchangeable Subordinated Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,000
    )Proceeds from the Mezzanine Facility
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    Payments on the Mezzanine Facility
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    Proceeds from the 2004 Senior Facility
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    Payments on the 2004 Senior Facility
    
    
    (750
    )
    
    
    (750
    )
    
    
    
    
    
    
    Proceeds from Senior Subordinated Notes
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    Payments on other debt
    
    
    
    
    
    
    (884
    )
    
    
    
    
    
    
    Payments on capital leases
    
    
    (232
    )
    
    
    (212
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (452
    )
    
    
    (337
    )
    
    
    (6,958
    )
    
    
    (2,212
    )Capital contributions from Predecessor
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    36,777Capital contributions from Parent Investors
    
    
    8,000
    
    
    
    350
    
    
    
    96,126
    
    
    
    Net cash provided by (used in) financing activities
    
    
    6,566
    
    
    
    (1,833
    )
    
    
    290,668
    
    
    
    (14,975
    )Net increase (decrease) in unrestricted cash and cash
equivalents
    
    
    (1,016
    )
    
    
    1,288
    
    
    
    6,051
    
    
    
    (3,920
    )Unrestricted cash and cash equivalents, at beginning of period
    
    
    7,339
    
    
    
    6,051
    
    
    
    
    
    
    
    5,897Unrestricted cash and cash equivalents, at end of period
    
    $
    6,323
    
    
    $
    7,339
    
    
    $
    6,051
    
    
    $
    1,977Supplemental cash flow information:Cash paid for interest
    
    $
    22,301
    
    
    $
    18,473
    
    
    $
    247
    
    
    $
    4,048Cash paid for taxes
    
    $
    654
    
    
    $
    619
    
    
    $
    
    
    
    $
    125Supplemental schedule of non-cash transactions:Non-cash capital contributions
    
    $
    195
    
    
    $
    
    
    
    $
    5,759
    
    
    $
    Leasehold improvements and equipment funded through tenant
incentive allowances
    
    $
    2,106
    
    
    $
    
    
    
    $
    
    
    
    $
    Vianeta post-acquisition contingencies
    
    $
    1,911
    
    
    $
    
    
    
    $
    
    
    
    $
    
  F-6




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##### Table of Contents



Spheris Inc.
 
 Notes to Consolidated Financial Statements
December 31, 2006
 1. Description of Business and Summary of Significant Accounting Policies
 Organization and Operations
   Reporting Unit and Principles of Consolidation
  Revenue Recognition
  F-7




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Cash and Cash Equivalents
  Restricted Cash
  Allowance for Doubtful Accounts
   PredecessorNovember 6
    
    
    January 1Year ended
    
    
    Year ended
    
    
    through
    
    
    throughDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    November 5,2006
    
    
    2005
    
    
    2004
    
    
    2004Balance at beginning of period
    
    $
    929
    
    
    $
    1,356
    
    
    $
    1,311
    
    
    $
    1,010Additions charged to costs and expense
    
    
    410
    
    
    
    725
    
    
    
    (10
    )
    
    
    236Additions resulting from acquisitions
    
    
    150
    
    
    
    
    
    
    
    57
    
    
    
    462Write-offs and adjustments, net of
recoveries
    
    
    (298
    )
    
    
    (1,152
    )
    
    
    (2
    )
    
    
    (397
    )Balance at end of period
    
    $
    1,191
    
    
    $
    929
    
    
    $
    1,356
    
    
    $
    1,311
  Concentration of Credit Risk
  Property and Equipment
  F-8




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  Software Costs
   Accounting for Goodwill, Intangibles and Other Long-lived Assets
   Income Taxes
  Advertising Costs
  F-9




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Fair Value of Financial Instruments
  Stock-Based Compensation
   Self-Insurance
  Comprehensive Income and Foreign Currency Translation
   F-10




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Derivatives and Financial Instruments
    Use of Estimates
  Recent Accounting Pronouncements
 SFAS No. 157
 FIN No. 48.
 SFAS No. 123(R).
 F-11




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  2. Vianeta Acquisition
     3. November 2004 Recapitalization
    F-12




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
   Purchase price
    
    $
    227,700Direct cost of acquisition
    
    
    4,954Total purchase price
    
    $
    232,654Value assigned to assets and liabilities:Assets:Cash and cash equivalents
    
    $
    9,612Accounts receivable, net
    
    
    23,701Prepaids and other current assets
    
    
    2,110Internal-use software
    
    
    7,097Property and equipment
    
    
    6,806Customer contracts
    
    
    50,685Other noncurrent assets
    
    
    2,251Goodwill
    
    
    160,727Total assets
    
    
    262,989Liabilities:Accounts payable
    
    
    2,453Accrued expenses and other current liabilities
    
    
    11,803Noncurrent deferred tax liability, net
    
    
    15,636Other noncurrent liabilities
    
    
    443Total liabilities
    
    
    30,335Total value assigned to assets and liabilities
    
    $
    232,654
   4. HealthScribe Acquisition
  
 F-13




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 HealthScribe(December 22, 2004)Purchase price
    
    $
    73,550Direct cost of acquisition
    
    
    1,584Total purchase price
    
    $
    75,134Value assigned to assets and liabilities:Assets:Cash and cash equivalents
    
    $
    5,691Restricted cash
    
    
    6,189Accounts receivable, net
    
    
    6,855Prepaids and other current assets
    
    
    2,364Internal-use software
    
    
    5,129Property and equipment
    
    
    3,523Customer contracts
    
    
    13,069Other noncurrent assets
    
    
    258Goodwill
    
    
    50,389Total assets
    
    
    93,467Liabilities:Accounts payable
    
    
    1,160Accrued expenses and other current liabilities
    
    
    13,142Noncurrent deferred tax liability, net
    
    
    2,610Other noncurrent liabilities
    
    
    1,421Total liabilities
    
    
    18,333Total value assigned to assets and liabilities
    
    $
    75,134
    F-14




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 5. Property and Equipment, Net
  2006
    
    
    2005Furniture and equipment
    
    $
    1,522
    
    
    $
    1,462Leasehold improvements
    
    
    4,576
    
    
    
    2,250Computer equipment and software
    
    
    17,526
    
    
    
    11,91123,624
    
    
    
    15,623Less accumulated depreciation and amortization
    
    
    (11,189
    )
    
    
    (6,471
    )Property and equipment, net
    
    $
    12,435
    
    
    $
    9,152
   6. Internal-Use Software, Net of Amortization
  2006
    
    
    2005Software under development
    
    $
    621
    
    
    $
    349Software placed in service
    
    
    14,441
    
    
    
    13,40515,062
    
    
    
    13,754Less accumulated amortization
    
    
    (11,383
    )
    
    
    (5,601
    )Internal-use software, net
    
    $
    3,679
    
    
    $
    8,153
   F-15




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  7. Customer Contracts
   December 31, 2006
    
    December 31 ,2005Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationCustomer contracts
    
    $
    63,864
    
    
    $
    (33,921
    )
    
    $
    63,754
    
    
    $
    (17,955
    )
  2007
    
    $
    15,9752008
    
    
    13,9592009
    
    
    92010
    
    
    2011
    
    
    
 8. Other Noncurrent Assets
  2006
    
    
    2005Debt issuance costs
    
    $
    2,607
    
    
    $
    1,951Less: accumulated amortization
    
    
    (392
    )
    
    
    (176
    )Debt issuance costs, net
    
    
    2,215
    
    
    
    1,775Other
    
    
    1,499
    
    
    
    1,419Total other noncurrent assets
    
    $
    3,714
    
    
    $
    3,194
  F-16




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 9. Other Current Liabilities
  2006
    
    
    2005Accrued Vianeta acquisition contingencies
    
    $
    1,954
    
    
    $
    Income taxes payable
    
    
    635
    
    
    
    567Accrued interest
    
    
    611
    
    
    
    611Short-term deferred revenue
    
    
    480
    
    
    
    9Professional services
    
    
    435
    
    
    
    243Accrued group purchasing organization fees
    
    
    400
    
    
    
    306Severance
    
    
    228
    
    
    
    679Amounts held for payment to former HealthScribe shareholders
    
    
    75
    
    
    
    1,051Other
    
    
    1,020
    
    
    
    1,140Total other current liabilities
    
    $
    5,838
    
    
    $
    4,606
 10. Debt
  2006
    
    
    20052004 Senior Facility, with fixed quarterly
principal payments and unpaid balance due November
2010; interest payable periodically at variable
rates. The interest rate was 9.4% and 8.2% at
December 31, 2006 and 2005, respectively
    
    $
    72,073
    
    
    $
    74,11011.0% Senior Subordinated Notes, principal due at
maturity in December 2012; interest payable
semi-annually in June and December
    
    
    122,584
    
    
    
    122,342194,657
    
    
    
    196,452Less: Current portion of long-term debt obligations
    
    
    (750
    )
    
    
    (750
    )Long-term portion of total debt obligations
    
    $
    193,907
    
    
    $
    195,702
 Exchangeable Subordinated Notes
  2003 Credit Facility
  F-17




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  2004 Senior Facility
      F-18




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Senior Subordinated Notes
      2007
    
    $
    7502008
    
    
    7502009
    
    
    7502010
    
    
    71,2502011
    
    
    Thereafter
    
    
    125,000Total
    
    $
    198,500
 11. Leases
   F-19




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  OperatingLeases
    
    
    Capital Leases2007
    
    $
    1,543
    
    
    $
    682008
    
    
    2,076
    
    
    
    422009
    
    
    1,954
    
    
    
    2010
    
    
    1,978
    
    
    
    2011
    
    
    2,020
    
    
    
    Thereafter
    
    
    9,361
    
    
    
    Total minimum lease payments
    
    $
    18,932
    
    
    
    110Less: amounts representing interest
    
    
    
    
    
    
    (16
    )Present value of net minimum capital lease payments
    
    
    
    
    
    
    94Less: current installments of obligations under capital leases
    
    
    
    
    
    
    59Long-term capital lease obligations
    
    
    
    
    
    $
    35
   12. Stockholders Equity
   F-20




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 13. Income Taxes
  PredecessorNovember 6
    
    
    January 1Year Ended
    
    
    Year Ended
    
    
    through
    
    
    throughDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    November 5,2006
    
    
    2005
    
    
    2004
    
    
    2004Current:Federal
    
    $
    93
    
    
    $
    23
    
    
    $
    
    
    
    $
    121State
    
    
    512
    
    
    
    498
    
    
    
    31
    
    
    
    337Foreign
    
    
    403
    
    
    
    
    
    
    
    
    
    
    
    Total current provision
    
    
    1,008
    
    
    
    521
    
    
    
    31
    
    
    
    458Deferred:Federal
    
    
    (4,256
    )
    
    
    (5,303
    )
    
    
    (714
    )
    
    
    State
    
    
    (971
    )
    
    
    (312
    )
    
    
    (68
    )
    
    
    Foreign
    
    
    (264
    )
    
    
    (32
    )
    
    
    
    
    
    
    Total deferred benefit
    
    
    (5,491
    )
    
    
    (5,647
    )
    
    
    (782
    )
    
    
    Total provision
(benefit) for income
taxes
    
    $
    (4,483
    )
    
    $
    (5,126
    )
    
    $
    (751
    )
    
    $
    458
  PredecessorNovember 6Year Ended
    
    
    Year Ended
    
    
    through
    
    
    January 1 throughDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    November 5,2006
    
    
    2005
    
    
    2004
    
    
    2004Federal tax at statutory rate
    
    $
    (5,674
    )
    
    $
    (5,224
    )
    
    $
    (692
    )
    
    $
    (444
    )State income taxes
    
    
    (641
    )
    
    
    (608
    )
    
    
    (129
    )
    
    
    189Permanent differences
    
    
    82
    
    
    
    763
    
    
    
    (19
    )
    
    
    388Foreign tax / tax holiday
    
    
    349
    
    
    
    (685
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    1,424
    
    
    
    662
    
    
    
    89
    
    
    
    325Other
    
    
    (23
    )
    
    
    (34
    )
    
    
    
    
    
    
    Total provision (benefit)
for income taxes
    
    $
    (4,483
    )
    
    $
    (5,126
    )
    
    $
    (751
    )
    
    $
    458
 F-21




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  2006
    
    
    2005Deferred tax assets:Allowance for doubtful accounts
    
    $
    455
    
    
    $
    356Accrued liabilities
    
    
    2,660
    
    
    
    1,513Depreciation
    
    
    868
    
    
    
    710Net operating losses  federal
    
    
    33,890
    
    
    
    35,494Net operating losses  state
    
    
    3,357
    
    
    
    3,265Net operating losses  foreign
    
    
    410
    
    
    
    492Tax credits
    
    
    380
    
    
    
    287Amortization expense  goodwill and start-up costs
    
    
    939
    
    
    
    1,246Other
    
    
    574
    
    
    
    370Total deferred tax assets
    
    
    43,533
    
    
    
    43,733Valuation allowance
    
    
    (34,706
    )
    
    
    (33,389
    )Net deferred tax assets
    
    
    8,827
    
    
    
    10,344Deferred tax liabilities:Amortization expense  customer list and technology
    
    
    (11,330
    )
    
    
    (19,037
    )Other
    
    
    (902
    )
    
    
    (308
    )Total deferred tax liabilities
    
    
    (12,232
    )
    
    
    (19,345
    )Net deferred tax liabilities
    
    $
    (3,405
    )
    
    $
    (9,001
    )
     F-22




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
   14. Employee Benefit Plans
    15. Commitments and Contingencies
 Litigation
  Employment Agreements
  F-23




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Lease Agreements
  Tax Assessment
  16. Related Party Transactions
   17. Termination Benefits
   F-24




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
    2003
    
    
    2003
    
    
    2004EDiX
    
    
    Executive
    
    
    HealthScribeAcquisition Plan
    
    
    Founder Plan
    
    
    Acquisition PlanBalance, December 31, 2002
    
    $
    299
    
    
    $
    107
    
    
    $
    Additions
    
    
    
    
    
    
    
    
    
    
    1,849Payments and adjustments
    
    
    (299
    )
    
    
    (107
    )
    
    
    Balance, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    1,849Additions
    
    
    
    
    
    
    
    
    
    
    Payments and adjustments
    
    
    
    
    
    
    
    
    
    
    (1,323
    )Balance, December 31, 2005
    
    
    
    
    
    
    
    
    
    
    526Additions
    
    
    
    
    
    
    
    
    
    
    Payments and adjustments
    
    
    
    
    
    
    
    
    
    
    (526
    )Balance, December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
 18. Information Concerning Guarantor and Non-Guarantor Subsidiaries
  F-25




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
  Consolidating Balance Sheet
(Amounts in Thousands)
 December 31, 2006Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    4
    
    
    $
    4,918
    
    
    $
    1,401
    
    
    $
    
    
    
    $
    6,323Restricted cash
    
    
    
    
    
    
    529
    
    
    
    
    
    
    
    
    
    
    
    529Accounts receivable, net of allowance
    
    
    
    
    
    
    33,576
    
    
    
    
    
    
    
    
    
    
    
    33,576Intercompany receivables
    
    
    72,371
    
    
    
    45,079
    
    
    
    6,968
    
    
    
    (124,418
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    2,775
    
    
    
    
    
    
    
    
    
    
    
    2,775Other current assets
    
    
    125
    
    
    
    3,015
    
    
    
    323
    
    
    
    
    
    
    
    3,463Total current assets
    
    
    72,500
    
    
    
    89,892
    
    
    
    8,692
    
    
    
    (124,418
    )
    
    
    46,666Property and equipment, net
    
    
    
    
    
    
    10,039
    
    
    
    2,396
    
    
    
    
    
    
    
    12,435Internally generated software, net
    
    
    
    
    
    
    3,679
    
    
    
    
    
    
    
    
    
    
    
    3,679Customer contracts, net
    
    
    
    
    
    
    29,943
    
    
    
    
    
    
    
    
    
    
    
    29,943Goodwill
    
    
    
    
    
    
    219,311
    
    
    
    
    
    
    
    
    
    
    
    219,311Investment in subsidiaries
    
    
    305,285
    
    
    
    
    
    
    
    
    
    
    
    (305,285
    )
    
    
    Other noncurrent assets
    
    
    2,215
    
    
    
    1,183
    
    
    
    316
    
    
    
    
    
    
    
    3,714Total assets
    
    $
    380,000
    
    
    $
    354,047
    
    
    $
    11,404
    
    
    $
    (429,703
    )
    
    $
    315,748Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    2,071
    
    
    $
    449
    
    
    $
    
    
    
    $
    2,520Accrued wages and benefits
    
    
    
    
    
    
    14,329
    
    
    
    2,737
    
    
    
    
    
    
    
    17,066Intercompany payables
    
    
    45,079
    
    
    
    79,339
    
    
    
    
    
    
    
    (124,418
    )
    
    
    Current portion of long-term debt
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Current portion of capital lease obligations
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    59Other current liabilities
    
    
    610
    
    
    
    5,058
    
    
    
    170
    
    
    
    
    
    
    
    5,838Total current liabilities
    
    
    46,439
    
    
    
    100,856
    
    
    
    3,356
    
    
    
    (124,418
    )
    
    
    26,233Long-term debt, net of current portion
    
    
    193,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193,907Capital lease obligations, net of current portion
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Deferred tax liabilities
    
    
    
    
    
    
    6,624
    
    
    
    (444
    )
    
    
    
    
    
    
    6,180Other long-term liabilities
    
    
    
    
    
    
    2,755
    
    
    
    
    
    
    
    
    
    
    
    2,755Total liabilities
    
    
    240,346
    
    
    
    110,270
    
    
    
    2,912
    
    
    
    (124,418
    )
    
    
    229,110Stockholders equity
    
    
    139,654
    
    
    
    243,777
    
    
    
    8,492
    
    
    
    (305,285
    )
    
    
    86,638Total stockholders equity
    
    
    139,654
    
    
    
    243,777
    
    
    
    8,492
    
    
    
    (305,285
    )
    
    
    86,638Total liabilities and stockholders equity
    
    $
    380,000
    
    
    $
    354,047
    
    
    $
    11,404
    
    
    $
    (429,703
    )
    
    $
    315,748
 F-26




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Consolidating Balance Sheet
(Amounts in Thousands)
 December 31, 2005Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    1
    
    
    $
    6,820
    
    
    $
    518
    
    
    $
    
    
    
    $
    7,339Restricted cash
    
    
    
    
    
    
    1,055
    
    
    
    
    
    
    
    
    
    
    
    1,055Accounts receivable, net of allowance
    
    
    
    
    
    
    30,715
    
    
    
    
    
    
    
    
    
    
    
    30,715Intercompany receivables
    
    
    60,624
    
    
    
    22,829
    
    
    
    7,256
    
    
    
    (90,709
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    1,374
    
    
    
    
    
    
    
    
    
    
    
    1,374Other current assets
    
    
    83
    
    
    
    2,100
    
    
    
    206
    
    
    
    
    
    
    
    2,389Total current assets
    
    
    60,708
    
    
    
    64,893
    
    
    
    7,980
    
    
    
    (90,709
    )
    
    
    42,872Property and equipment, net
    
    
    
    
    
    
    6,772
    
    
    
    2,380
    
    
    
    
    
    
    
    9,152Internal-use software, net
    
    
    
    
    
    
    8,153
    
    
    
    
    
    
    
    
    
    
    
    8,153Customer contracts, net
    
    
    
    
    
    
    45,799
    
    
    
    
    
    
    
    
    
    
    
    45,799Goodwill
    
    
    
    
    
    
    211,116
    
    
    
    
    
    
    
    
    
    
    
    211,116Investment in subsidiaries
    
    
    296,740
    
    
    
    
    
    
    
    
    
    
    
    (296,740
    )
    
    
    Other noncurrent assets
    
    
    1,775
    
    
    
    1,185
    
    
    
    234
    
    
    
    
    
    
    
    3,194Total assets
    
    $
    359,223
    
    
    $
    337,918
    
    
    $
    10,594
    
    
    $
    (387,449
    )
    
    $
    320,286Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    2,044
    
    
    $
    986
    
    
    $
    
    
    
    $
    3,030Accrued wages and benefits
    
    
    
    
    
    
    12,306
    
    
    
    1,788
    
    
    
    
    
    
    
    14,094Intercompany payables
    
    
    22,829
    
    
    
    67,880
    
    
    
    
    
    
    
    (90,709
    )
    
    
    Current portion of long-term debt
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Current portion of capital lease obligations
    
    
    
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    221Other current liabilities
    
    
    611
    
    
    
    3,623
    
    
    
    372
    
    
    
    
    
    
    
    4,606Total current liabilities
    
    
    24,190
    
    
    
    86,074
    
    
    
    3,146
    
    
    
    (90,709
    )
    
    
    22,701Long-term debt, net of current portion
    
    
    195,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,702Capital lease obligations, net of current portion
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Deferred tax liabilities
    
    
    
    
    
    
    10,551
    
    
    
    (176
    )
    
    
    
    
    
    
    10,375Other long-term liabilities
    
    
    
    
    
    
    716
    
    
    
    
    
    
    
    
    
    
    
    716Total liabilities
    
    
    219,892
    
    
    
    97,446
    
    
    
    2,970
    
    
    
    (90,709
    )
    
    
    229,599Stockholders equity
    
    
    139,331
    
    
    
    240,472
    
    
    
    7,624
    
    
    
    (296,740
    )
    
    
    90,687Total stockholders equity
    
    
    139,331
    
    
    
    240,472
    
    
    
    7,624
    
    
    
    (296,740
    )
    
    
    90,687Total liabilities and stockholders equity
    
    $
    359,223
    
    
    $
    337,918
    
    
    $
    10,594
    
    
    $
    (387,449
    )
    
    $
    320,286
 F-27




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Consolidating Statement of Operations
(Amounts in Thousands)
 For the Year Ended December 31, 2006Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    207,141
    
    
    $
    17,313
    
    
    $
    (17,313
    )
    
    $
    207,141Operating expenses:Direct costs of revenues (exclusive of
depreciation and amortization below)
    
    
    
    
    
    
    154,179
    
    
    
    15,254
    
    
    
    (17,313
    )
    
    
    152,120Marketing and selling expenses
    
    
    
    
    
    
    5,392
    
    
    
    
    
    
    
    
    
    
    
    5,392General and administrative expenses
    
    
    116
    
    
    
    18,858
    
    
    
    
    
    
    
    
    
    
    
    18,974Depreciation and amortization
    
    
    
    
    
    
    25,706
    
    
    
    847
    
    
    
    
    
    
    
    26,553Total operating costs
    
    
    116
    
    
    
    204,135
    
    
    
    16,101
    
    
    
    (17,313
    )
    
    
    203,039Operating income (loss)
    
    
    (116
    )
    
    
    3,006
    
    
    
    1,212
    
    
    
    
    
    
    
    4,102Interest expense, net of income
    
    
    16,015
    
    
    
    5,132
    
    
    
    (11
    )
    
    
    
    
    
    
    21,136Other income
    
    
    
    
    
    
    (186
    )
    
    
    (215
    )
    
    
    
    
    
    
    (401
    )Net income (loss) before income taxes
    
    
    (16,131
    )
    
    
    (1,940
    )
    
    
    1,438
    
    
    
    
    
    
    
    (16,633
    )Provision for (benefit from) income taxes
    
    
    (6,245
    )
    
    
    1,577
    
    
    
    185
    
    
    
    
    
    
    
    (4,483
    )Net income (loss)
    
    $
    (9,886
    )
    
    $
    (3,517
    )
    
    $
    1,253
    
    
    $
    
    
    
    $
    (12,150
    )
 Consolidating Statement of Operations
(Amounts in Thousands)
 For the Year Ended December 31, 2005Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    209,032
    
    
    $
    17,660
    
    
    $
    (17,660
    )
    
    $
    209,032Operating expenses:Direct costs of revenues (exclusive of
depreciation and amortization below)
    
    
    
    
    
    
    156,469
    
    
    
    15,465
    
    
    
    (17,660
    )
    
    
    154,274Marketing and selling expenses
    
    
    
    
    
    
    5,265
    
    
    
    
    
    
    
    
    
    
    
    5,265General and administrative expenses
    
    
    112
    
    
    
    18,225
    
    
    
    
    
    
    
    
    
    
    
    18,337Depreciation and amortization
    
    
    
    
    
    
    26,059
    
    
    
    583
    
    
    
    
    
    
    
    26,642Total operating costs
    
    
    112
    
    
    
    206,018
    
    
    
    16,048
    
    
    
    (17,660
    )
    
    
    204,518Operating income (loss)
    
    
    (112
    )
    
    
    3,014
    
    
    
    1,612
    
    
    
    
    
    
    
    4,514Interest expense, net of income
    
    
    14,736
    
    
    
    5,600
    
    
    
    (29
    )
    
    
    
    
    
    
    20,307Other income
    
    
    
    
    
    
    (142
    )
    
    
    (285
    )
    
    
    
    
    
    
    (427
    )Net income (loss) before income taxes
    
    
    (14,848
    )
    
    
    (2,444
    )
    
    
    1,926
    
    
    
    
    
    
    
    (15,366
    )Provision for (benefit from) income taxes
    
    
    (5,126
    )
    
    
    31
    
    
    
    (31
    )
    
    
    
    
    
    
    (5,126
    )Net income (loss)
    
    $
    (9,722
    )
    
    $
    (2,475
    )
    
    $
    1,957
    
    
    $
    
    
    
    $
    (10,240
    )
 F-28




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 Consolidating Statement of Cash Flows
(Amounts in Thousands)
 For the Year Ended December 31, 2006Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net cash provided by operating activities
    
    $
    1,205
    
    
    $
    4,438
    
    
    $
    1,748
    
    
    $
    
    
    
    $
    7,391Net cash provided by operating activities
    
    
    1,205
    
    
    
    4,438
    
    
    
    1,748
    
    
    
    
    
    
    
    7,391Cash flows from investing activities:Purchases of property and equipment
    
    
    
    
    
    
    (6,320
    )
    
    
    (865
    )
    
    
    
    
    
    
    (7,185
    )Investment in affiliates
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    Purchase of Vianeta, net of cash acquired
    
    
    
    
    
    
    (7,788
    )
    
    
    
    
    
    
    
    
    
    
    (7,788
    )Net cash used in investing activities
    
    
    (8,000
    )
    
    
    (14,108
    )
    
    
    (865
    )
    
    
    8,000
    
    
    
    (14,973
    )Cash flows from financing activities:Payments on debt and capital leases
    
    
    (750
    )
    
    
    (232
    )
    
    
    
    
    
    
    
    
    
    
    (982
    )Debt issuance costs
    
    
    (452
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (452
    )Contributed capital
    
    
    8,000
    
    
    
    8,000
    
    
    
    
    
    
    
    (8,000
    )
    
    
    8,000Net cash provided by financing activities
    
    
    6,798
    
    
    
    7,768
    
    
    
    
    
    
    
    (8,000
    )
    
    
    6,566Net increase (decrease) in unrestricted cash and
cash equivalents
    
    
    3
    
    
    
    (1,902
    )
    
    
    883
    
    
    
    
    
    
    
    (1,016
    )Cash and cash equivalents, at beginning of period
    
    
    1
    
    
    
    6,820
    
    
    
    518
    
    
    
    
    
    
    
    7,339Cash and cash equivalents, at end of period
    
    $
    4
    
    
    $
    4,918
    
    
    $
    1,401
    
    
    $
    
    
    
    $
    6,323
 Consolidating Statement of Cash Flows
(Amounts in Thousands)
 For the Year Ended December 31, 2005Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net cash provided by operating activities
    
    $
    738
    
    
    $
    7,345
    
    
    $
    1,147
    
    
    $
    
    
    
    $
    9,230Net cash provided by operating activities
    
    
    738
    
    
    
    7,345
    
    
    
    1,147
    
    
    
    
    
    
    
    9,230Cash flows from investing activities:Purchases of property, equipment, and
internal-use software
    
    
    
    
    
    
    (4,199
    )
    
    
    (1,910
    )
    
    
    
    
    
    
    (6,109
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,199
    )
    
    
    (1,910
    )
    
    
    
    
    
    
    (6,109
    )Cash flows from financing activities:Payments on debt and capital leases
    
    
    (750
    )
    
    
    (1,096
    )
    
    
    
    
    
    
    
    
    
    
    (1,846
    )Debt issuance costs
    
    
    (337
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (337
    )Capital contributions
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Net cash used in financing activities
    
    
    (737
    )
    
    
    (1,096
    )
    
    
    
    
    
    
    
    
    
    
    (1,833
    )Net increase (decrease) in unrestricted cash and
cash equivalents
    
    
    1
    
    
    
    2,050
    
    
    
    (763
    )
    
    
    
    
    
    
    1,288Cash and cash equivalents, at beginning of period
    
    
    
    
    
    
    4,770
    
    
    
    1,281
    
    
    
    
    
    
    
    6,051Cash and cash equivalents, at end of period
    
    $
    1
    
    
    $
    6,820
    
    
    $
    518
    
    
    $
    
    
    
    $
    7,339
 F-29




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2006
 18. Selected Quarterly Financial Information (Unaudited)
  March 31,
    
    June 30,
    
    September 30,
    
    December 31,2006
    
    2006
    
    2006
    
    2006Net revenues
    
    $
    51,973
    
    
    $
    52,335
    
    
    $
    51,458
    
    
    $
    51,375Operating income
    
    
    1,146
    
    
    
    1,061
    
    
    
    638
    
    
    
    1,257Interest expense, net
    
    
    5,140
    
    
    
    5,156
    
    
    
    5,353
    
    
    
    5,487Benefit from income taxes
    
    
    (1,147
    )
    
    
    (1,303
    )
    
    
    (1,446
    )
    
    
    (587
    )Net loss
    
    
    (2,914
    )
    
    
    (2,787
    )
    
    
    (3,067
    )
    
    
    (3,382
    )
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,2005
    
    2005
    
    2005
    
    2005Net revenues
    
    $
    53,344
    
    
    $
    53,059
    
    
    $
    51,862
    
    
    $
    50,767Operating income
    
    
    493
    
    
    
    1,780
    
    
    
    1,287
    
    
    
    954Interest expense, net
    
    
    4,880
    
    
    
    5,186
    
    
    
    5,000
    
    
    
    5,241Benefit from income taxes
    
    
    (1,655
    )
    
    
    (1,505
    )
    
    
    (1,239
    )
    
    
    (727
    )Net loss
    
    
    (2,697
    )
    
    
    (1,881
    )
    
    
    (2,297
    )
    
    
    (3,365
    )
  F-30