##### 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, 2008
 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
 þ o
 o þ
  þ
  Large
accelerated
filer oAccelerated
filer oNon-accelerated
filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



SPHERIS INC.
 TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
 PagePART IFORWARD LOOKING STATEMENTS
    
    
    2Item 1.
    
    Business
    
    
    3Organization and History
    
    
    3Company Overview
    
    
    3Services Provided
    
    
    4Our Customers
    
    
    5Sales and Marketing
    
    
    6Technological Capabilities
    
    
    6Spheris Clinical Documentation Platforms
    
    
    6Intellectual Property
    
    
    7Competition
    
    
    7Employees
    
    
    8Regulatory Matters
    
    
    8Item 1A.
    
    Risk Factors
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    16Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Overview
    
    
    19Critical Accounting Policies and Estimates
    
    
    19Results of Operations
    
    
    22Liquidity and Capital Resources
    
    
    25Contractual Obligations
    
    
    26Off-Balance Sheet Arrangements
    
    
    27Recent Accounting Pronouncements
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 8.
    
    Financial Statements and Supplementary Data
    
    
    28Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28Item 9A(T).
    
    Controls and Procedures
    
    
    28Item 9B.
    
    Other Information
    
    
    29PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    29Item 11.
    
    Executive Compensation
    
    
    32Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    45Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    47Item 14.
    
    Principal Accountant Fees and Services
    
    
    50PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    51SIGNATURES
    


    
    54EX-10.13EX-10.28EX-21EX-31.1EX-31.2
  
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FORWARD LOOKING STATEMENTS
    2




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##### Table of Contents



PART I
 
 Item 1. Business
 
 Organization and History
  
 Company 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;
    
    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.
  Spheris Clinical Documentation Process Flow
 Data Capture
    
    Data Center
    
    Documentation
    
    Data AccessPhysicians 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
complete the
conversion of voice
to text directly
onto our platform.
    
    The medical center
can directly and
securely access
transcribed
reports via fax,
print-out, and/or
secure internet portal.
 3




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Services Provided
    Domestic operations
    4




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Global operations
    
 Our Customers
    5




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Sales and Marketing
     
 Technological Capabilities
   
 Spheris Clinical Documentation Platforms
  6




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
    
    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;
    
    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 HIM 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 health information;
    
    privacy of individually identifiable health information; and
    
    security of individually identifiable health information and electronic signatures.
  8




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Item 1A. Risk Factors
  Risks Related to Our Indebtedness
 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 facility 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.
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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 facility 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. Our financial covenants become more
restrictive over time. Failure to achieve required financial covenants or
breach of other non-financial covenants could result in potential acceleration
of both our senior and subordinate debt obligations.
  
    
    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, repurchase or issue capital stock;
    
    engage in mergers, acquisitions and other business combinations;
    
    prepay, redeem, purchase or modify 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 or incur any additional liabilities);
    
    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.
   10




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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 our senior secured
credit facility and the indenture governing the senior subordinated notes.
   The recent global economic and financial market crisis has had and may continue
to have a negative effect on our business and results of operations.
   Capital markets are currently experiencing a period of dislocation and
instability, which has had and could continue to have a negative impact on the
availability and cost of capital.
  11




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Risks Related to Our Business
 We have a history of losses and accumulated deficit and
could 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 support existing technologies as well
as our ability to adapt and integrate new technology into our clinical
documentation platforms to improve our production capabilities and expand the
breadth of our technology and 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 technology
and services, which may result in lower prices for our technology and services,
reduced operating margins and an inability to increase our market share and
expand our technology and service offerings.
  12




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Potential customers may be reluctant to outsource or change the providers of
their clinical documentation technology and services as a result of the cost
and potential for disruption in services since clinical documentation is a
critical element of their operations.
  Our global operations expose us to financial and operational risk.
  
    
    the possibility of currency controls;
    
    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.
  13




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Our inability to attract, hire or retain necessary technical and managerial
personnel could negatively impact our ability to develop and implement
technology and services to our customers.
  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.
   14




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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.
  15




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We have significant carrying values of intangible assets which may never generate the returns we expect.
  Warburg Pincus controls us, and its interests may conflict with the interests of our security holders.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  16




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Item 3. Legal Proceedings
   
 Item 4. Submission of Matters to a Vote of Security Holders
  17




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
   
 Item 6. Selected Financial Data
   Combined
    
    
    Combined
    
    
    PredecessorNovember 6,
    
    
    January 1,2004 through
    
    
    2004 throughYear Ended December 31,
    
    
    December
    
    
    November2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    31, 2004
    
    
    5, 2004(Amounts in Millions)Statement of Operations:Net revenues
    
    $
    182.8
    
    
    $
    200.4
    
    
    $
    207.1
    
    
    $
    209.0
    
    
    $
    152.7
    
    
    $
    23.9
    
    
    $
    128.8Direct costs of revenues
(exclusive of
depreciation and
amortization below)
    
    
    131.3
    
    
    
    144.1
    
    
    
    152.1
    
    
    
    154.3
    
    
    
    113.8
    
    
    
    18.0
    
    
    
    95.8Gross profit
    
    
    51.5
    
    
    
    56.3
    
    
    
    55.0
    
    
    
    54.7
    
    
    
    38.9
    
    
    
    5.9
    
    
    
    33.0Selling, general and
administrative expenses
    
    
    23.8
    
    
    
    24.7
    
    
    
    24.4
    
    
    
    23.6
    
    
    
    18.8
    
    
    
    2.7
    
    
    
    16.1Depreciation and
amortization
    
    
    21.6
    
    
    
    24.3
    
    
    
    26.6
    
    
    
    26.6
    
    
    
    14.2
    
    
    
    3.4
    
    
    
    10.8Restructuring charges
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    5.6
    
    
    
    7.3
    
    
    
    4.1
    
    
    
    4.5
    
    
    
    5.8
    
    
    
    (0.2
    )
    
    
    6.1Loss on refinance of debt
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    4.6
    
    
    
    0.3
    
    
    
    4.3Interest expense, net
    
    
    19.1
    
    
    
    21.2
    
    
    
    21.1
    
    
    
    20.3
    
    
    
    4.6
    
    
    
    1.5
    
    
    
    3.1Other (income) expense
    
    
    1.8
    
    
    
    1.6
    
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    Net loss before income
taxes
    
    
    (15.3
    )
    
    
    (17.3
    )
    
    
    (16.6
    )
    
    
    (15.4
    )
    
    
    (3.3
    )
    
    
    (2.0
    )
    
    
    (1.3
    )Provision
for (benefit
from) income taxes
    
    
    3.9
    
    
    
    (5.9
    )
    
    
    (4.5
    )
    
    
    (5.1
    )
    
    
    (0.3
    )
    
    
    (0.8
    )
    
    
    0.5Net loss
    
    $
    (19.2
    )
    
    $
    (11.4
    )
    
    $
    (12.2
    )
    
    $
    (10.2
    )
    
    $
    (3.0
    )
    
    $
    (1.3
    )
    
    $
    (1.8
    )Balance Sheet Data (end of period):Unrestricted cash and cash
Equivalents
    
    $
    3.3
    
    
    $
    7.2
    
    
    $
    6.3
    
    
    $
    7.3
    
    
    $
    6.1Total assets
    
    
    275.1
    
    
    
    300.1
    
    
    
    315.7
    
    
    
    320.3
    
    
    
    342.1Total debt and lease
obligations
    
    
    198.9
    
    
    
    195.0
    
    
    
    198.6
    
    
    
    199.6
    
    
    
    201.5Total stockholders equity
    
    
    56.1
    
    
    
    76.7
    
    
    
    86.6
    
    
    
    90.7
    
    
    
    100.6
 18




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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;
    
    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
  19




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Revenue Recognition
  Accounts Receivable and Allowance for Doubtful Accounts
  Goodwill, Intangibles and Other Long-Lived Assets
    20




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Income Taxes
   Stock-Based Compensation
   21




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Self-Insurance
  
 RESULTS OF OPERATIONS
 Net Revenues and Expense Components
  Net Revenues.
 Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Interest Expense.
 22




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Executive Summary
     The Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 Net
Revenues.
 Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Restructuring Charges.
 23




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Interest Expense.
 Income Taxes.
 The Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 Net Revenues.
 Direct Costs of Revenues.
 Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Loss on Refinance of Debt.
 Interest Expense.
 Income Taxes.
 24




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LIQUIDITY
AND CAPITAL RESOURCES
       25




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CONTRACTUAL OBLIGATIONS
  Payments due by period(Amounts in Thousands)2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalLong-term debt obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    198,207
    
    
    $
    
    
    
    $
    
    
    
    $
    198,207Financed lease obligations
    
    
    292
    
    
    
    309
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    708Operating leases
    
    
    3,351
    
    
    
    3,505
    
    
    
    3,388
    
    
    
    3,556
    
    
    
    2,843
    
    
    
    6,264
    
    
    
    22,907Purchase obligations
    
    
    4,246
    
    
    
    4,060
    
    
    
    2,160
    
    
    
    2,160
    
    
    
    2,160
    
    
    
    5,220
    
    
    
    20,006Total
    
    $
    7,889
    
    
    $
    7,874
    
    
    $
    5,655
    
    
    $
    203,923
    
    
    $
    5,003
    
    
    $
    11,484
    
    
    $
    241,828
  26




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OFF-BALANCE SHEET ARRANGEMENTS
  
 RECENT ACCOUNTING PRONOUNCEMENTS
 SFAS No. 157
 SFAS No. 159.
 SFAS No. 141(R).
 SFAS No. 160.
 SFAS No. 161
 27




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A(T). Controls and Procedures
 Disclosure Controls.
 Managements Annual Report on Internal Control Over Financial Reporting
   Changes in Control Over Financial Reporting.
 28




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Limitations on the Effectiveness of Controls
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  Name
    
    Age
    
    PositionKohl, Daniel J.
    
    
    52
    
    
    President and Chief Executive Officer; DirectorCallahan, Brian P.
    
    
    47
    
    
    Chief Financial OfficerJames, Anthony D.
    
    
    42
    
    
    Chief Operating OfficerWhorton, J. Alan
    
    
    50
    
    
    Senior Vice President, Sales and MarketingRehm, M.D., Christopher R.
    
    
    37
    
    
    Chief Medical OfficerBilzin, Jonathan
    
    
    36
    
    
    Director (Independent), Compensation Committee
Chair and Audit Committee memberDoucette, James W.
    
    
    58
    
    
    Director (Independent), Nominating and
Corporate Governance Committee memberHensley, Robert Z.
    
    
    51
    
    
    Director (Independent), Audit Committee Chair
and Compensation Committee memberKane, John A.
    
    
    56
    
    
    Director (Independent), Audit Committee member
and Nominating and Corporate Governance
Committee memberKing, Michael J.
    
    
    70
    
    
    Director (Independent), Nominating and
Corporate Governance Committee Chair and
Compensation Committee memberMoszkowski, Neal
    
    
    43
    
    
    Director (Independent), Nominating and
Corporate Governance Committee memberSchweinhart, Martin G.
    
    
    54
    
    
    Director (Independent), Nominating and
Corporate Governance Committee memberSimpson, Steven E.
    
    
    49
    
    
    Director
 Daniel J. Kohl
 29




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Brian P. Callahan
 Anthony D. James
 J. Alan Whorton
 Christopher R. Rehm, M.D.,
 Jonathan Bilzin
 James W. Doucette
 30




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Robert Z. Hensley
 John A. Kane
 Michael J. King
 Neal Moszkowski
 Martin G. Schweinhart
 Steven E. Simpson
 Audit Committee Financial Expert
  Code of Ethics
  31




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Item 11. Executive Compensation
 Compensation Discussion and Analysis
 Overview of Compensation Process .
    32




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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 2008
  Base Salary
 33




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2008 Base
    
    2007 Base
    
    IncreaseName
    
    Title
    
    Salary
    
    Salary
    
    (%)Daniel J. Kohl (1)
    
    President and Chief Executive Officer
    
    $
    400,000
    
    
    
    
    
    
    
    Brian P. Callahan
    
    Chief Financial Officer
    
    $
    225,750
    
    
    $
    215,000
    
    
    
    5.00
    %Anthony D. James
    
    Chief Operating Officer
    
    $
    231,000
    
    
    $
    220,000
    
    
    
    5.00
    %J. Alan Whorton
    
    Senior Vice President, Sales and Marketing
    
    $
    180,250
    
    
    $
    175,000
    
    
    
    3.00
    %Christopher R. Rehm, M.D.
    
    Chief Medical Officer
    
    $
    180,180
    
    
    $
    171,600
    
    
    
    5.00
    %Steven E. Simpson (2)
    
    Former President and Chief Executive
Officer
    
    $
    350,000
    
    
    $
    336,700
    
    
    
    3.95
    %
 
 (1)
    
    Mr. Kohl began serving as our President and Chief Executive Officer as of November 17, 2008.(2)
    
    Mr. Simpson served as our President and Chief Executive Officer until November 17, 2008. Mr.
Simpson continued to serve as a member of our senior management following his resignation as
President and Chief Executive Officer and will continue to receive his base salary through
January 17, 2010, pursuant to the terms and conditions of the Transition Agreement (as defined
below). Performance-Based Cash Incentive Awards
  Long-Term Stock-Based Incentive Compensation
 34




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##### Table of Contents



Compensation of President and Chief Executive Officer K
  Compensation Programs for 2009 .
 Retirement Plans . .
 35




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Severance and Change of Control Benefits .
 Severance Benefits.
   Change in Control Benefits.
  36




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Non-competition, Non-solicitation and Confidentiality Agreements.
 Perquisites and Other Benefits
 Accounting for Stock-Based Compensation.
 Compensation Committee Report
   COMPENSATION COMMITTEEJonathan Bilzin, ChairmanRobert Z. Hensley
Michael J. King 37




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##### 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)Daniel J. Kohl,
    
    
    2008
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,000President and Chief
Executive OfficerBrian P. Callahan,
    
    
    2008
    
    
    $
    223,958
    
    
    $
    
    
    
    $
    32,543
    
    
    $
    73,518
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    330,019Chief Financial Officer
    
    
    2007
    
    
    
    215,000
    
    
    
    154,251
    
    
    
    15,881
    
    
    
    73,518
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    463,1502006
    
    
    
    136,442
    
    
    
    29,373
    
    
    
    
    
    
    
    49,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,827Anthony D. James,
    
    
    2008
    
    
    $
    229,167
    
    
    $
    
    
    
    $
    9,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    239,026Chief Operating Officer
    
    
    2007
    
    
    
    220,000
    
    
    
    110,000
    
    
    
    10,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    342,9642006
    
    
    
    220,000
    
    
    
    50,169
    
    
    
    8,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,192
    
    
    
    283,090J. Alan Whorton,
    
    
    2008
    
    
    $
    179,375
    
    
    $
    30,000
    
    
    $
    801
    
    
    $
    9,377
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    219,553Senior Vice President,
Sales and Marketing
    
    
    2007
    
    
    
    175,000
    
    
    
    20,000
    
    
    
    799
    
    
    
    9,353
    
    
    
    
    
    
    
    
    
    
    
    2,223
    
    
    
    207,3752006
    
    
    
    171,688
    
    
    
    41,018
    
    
    
    630
    
    
    
    4,396
    
    
    
    
    
    
    
    
    
    
    
    2,081
    
    
    
    219,813Christopher
R. Rehm, M.D.,
    
    
    2008
    
    
    $
    178,750
    
    
    $
    
    
    
    $
    7,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    186,499Chief Medical OfficerSteven E. Simpson,
    
    
    2008
    
    
    $
    347,783
    
    
    $
    
    
    
    $
    23,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    390,317
    
    
    $
    761,580Former President and Chief
Executive Officer
    
    
    2007
    
    
    
    336,700
    
    
    
    303,030
    
    
    
    25,142
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    669,3722006
    
    
    
    334,450
    
    
    
    101,296
    
    
    
    21,209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,200
    
    
    
    461,155
 
 (1)
    
    Includes amounts earned in 2008, 2007 and 2006, respectively, under the executive cash
incentive programs, as well as amounts paid to our Named Executive Officers receiving stock
grants to assist such Named Executive Officers in satisfying their federal income tax
withholding requirements. Although no amounts were earned under the 2008 executive cash
incentive programs, our CEO recommended and the Compensation Committee approved a cash
incentive award of $30,000 to Mr. Whorton for outstanding efforts in improving the sales
department infrastructure and assisting with the signing of our largest customer contract to
date. Amounts earned under the 2007 and 2006 executive cash incentive programs, respectively,
were as follows: Brian P. Callahan ($107,500; $29,373); Anthony D. James ($110,000; $37,400);
J. Alan Whorton ($20,000; $39,375); and Steven E. Simpson ($303,030; $75,758). There were no
restricted stock grants in fiscal 2008 and therefore, there were no payments for tax
withholdings in connection with the restricted stock grant in fiscal 2008. Payments for tax
withholdings in connection with the restricted stock grant in fiscal 2007 were as follows:
Brian P. Callahan ($46,751). Payments for tax withholdings in connection with restricted
stock grants in fiscal 2006 were as follows: Anthony D. James ($12,769); J. Alan Whorton
($1,643); and Steven E. Simpson ($25,538). 38




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##### Table of Contents



(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 years ended
December 31, 2008, 2007 and 2006 respectively, 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 prior years. 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 2008, 2007 and 2006, see Note 1 to the Companys consolidated financial
statements included elsewhere in this Report.(3)
    
    The 2008 amount for Mr. Simpson includes amounts pursuant to the Transition Agreement. Other
amounts are comprised of the following: Company ContributionCompany Contribution
    
    to the DeferredName
    
    Year
    
    to 401(k) Plan ($)
    
    Compensation Plan ($)
    
    Total ($)Daniel J. Kohl
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    Brian P. Callahan
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    4,500
    
    
    
    
    
    
    
    4,5002006
    
    
    
    
    
    
    
    
    
    
    
    Anthony D. James
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    2,197
    
    
    
    374
    
    
    
    2,5712006
    
    
    
    2,094
    
    
    
    2,098
    
    
    
    4,192J. Alan Whorton
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    2,223
    
    
    
    
    
    
    
    2,2232006
    
    
    
    2,081
    
    
    
    
    
    
    
    2,081Christopher R. Rehm, M.D.
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    Steven E. Simpson
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    2,182
    
    
    
    2,318
    
    
    
    4,5002006
    
    
    
    2,063
    
    
    
    2,137
    
    
    
    4,200
 39




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  Stock AwardsEquityIncentiveEquity
    
    PlanIncentive
    
    Awards:Plan
    
    Market orOption Awards
    
    
    
    
    
    
    
    
    
    Awards:
    
    PayoutEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    Value ofIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    UnearnedNumber of
    
    Number of
    
    Plan Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    Number of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Securities
    
    
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    Rights
    
    RightsOptions
    
    Options
    
    Unexercised
    
    Option
    
    Option
    
    Stock That
    
    Stock That
    
    That Have
    
    That HaveExercisable
    
    Unexercisable
    
    Unearned
    
    Exercise
    
    Expiration
    
    Have Not
    
    Have Not
    
    Not Vested
    
    Not VestedName
    
    (#)
    
    (#)
    
    Options (#)
    
    Price ($)
    
    Date
    
    Vested (#)
    
    Vested ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)(1)
    
    (d)
    
    (e)
    
    (f)
    
    (g)(2)
    
    (h)(3)
    
    (i)
    
    (j)Daniel J. Kohl,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and Chief
Executive OfficerBrian P. Callahan,
    
    
    435,000
    
    
    
    435,000
    
    
    
    
    
    
    $
    0.36
    
    
    July 2, 2016
    
    
    
    187,500
    
    
    $
    52,500
    
    
    
    
    
    
    
    Chief Financial OfficerAnthony D. James,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    $
    10,500
    
    
    
    
    
    
    
    Chief Operating OfficerJ. Alan Whorton,
    
    
    150,000
    
    
    
    150,000
    
    
    
    
    
    
    $
    0.36
    
    
    July 2, 2016
    
    
    
    16,250
    
    
    $
    4,550
    
    
    
    
    
    
    
    Senior Vice President,
Sales and MarketingChristopher
R. Rehm, M.D.,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    $
    10,500
    
    
    
    
    
    
    
    Chief Medical OfficerSteven E. Simpson,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    $
    21,000
    
    
    
    
    
    
    
    Former President and Chief
Executive Officer
 
 (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 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 as of December 31, 2008 using
third-party valuations. 40




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##### Table of Contents



Option Exercises and Stock Vested
  Option Awards
    
    Stock AwardsNumber of
    
    
    
    
    
    Number ofShares
    
    
    
    
    
    SharesAcquired
    
    Value Realized
    
    Acquired
    
    Value Realizedon Exercise
    
    on Exercise
    
    on Vesting
    
    on VestingName
    
    (#)
    
    ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)(1)
    
    (e)(2)Daniel J. Kohl,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and Chief
Executive OfficerBrian P. Callahan,
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    $
    19,375Chief Financial
OfficerAnthony D. James,
    
    
    
    
    
    
    
    
    
    
    353,947
    
    
    $
    104,884Chief Operating
OfficerJ. Alan Whorton,
    
    
    
    
    
    
    
    
    
    
    14,375
    
    
    $
    7,619Senior Vice
President, Sales
and MarketingChristopher
R. Rehm, M.D.,
    
    
    
    
    
    
    
    
    
    
    125,869
    
    
    $
    40,320Chief
Medical OfficerSteven E. Simpson,
    
    
    
    
    
    
    
    
    
    
    1,108,691
    
    
    $
    323,704Former President
and Chief Executive
Officer
 
 (1)
    
    Represents shares of common stock of Spheris Holding III.(2)
    
    Reflects the aggregate dollar amount realized upon vesting based on the market value of
the underlying shares on the vesting date. 41




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##### Table of Contents



Nonqualified Deferred Compensation
  Executive
    
    Registrant
    
    Aggregate Earnings
    
    AggregateContributions in
    
    Contributions in
    
    (Losses) in
    
    Withdrawals/
    
    Aggregate Balance2008
    
    2008 (1)
    
    2008
    
    Distributions
    
    at December 31, 2008Name
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)Daniel J. Kohl,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and Chief
Executive OfficerBrian P. Callahan,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Financial
OfficerAnthony D. James,
    
    
    
    
    
    
    
    
    
    $
    (4,474
    )
    
    
    
    
    
    $
    15,354Chief Operating
OfficerJ. Alan Whorton,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice
President, Sales
and MarketingChristopher
R. Rehm, M.D.,
    
    
    
    
    
    
    
    
    
    $
    (8,657
    )
    
    
    
    
    
    $
    15,188Chief
Medical OfficerSteven E. Simpson,
    
    $
    17,345
    
    
    
    
    
    
    $
    (34,495
    )
    
    
    
    
    
    $
    63,489Former President
and Chief Executive
Officer
 
 (1)
    
    All amounts reported are also reported as compensation to our Named Executive Officers in the
Summary Compensation Table. 42




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##### Table of Contents



Potential Payments Upon Termination or Change In Control
  Involuntary Not for
    
    
    
    
    
    
    
    
    
    Disability orExecutive Benefits
    
    Voluntary
    
    Cause Termination
    
    Change In Control
    
    By Employee for
    
    Deathand Payments upon
    
    Termination on
    
    on December 31,
    
    on December 31,
    
    Good Reason on
    
    onSeparation (1)
    
    December 31, 2008
    
    2008
    
    2008
    
    December 31, 2008
    
    December 31, 2008Compensation:Daniel J. Kohl,
    
    
    
    
    
    $
    617,335
    
    
    
    
    
    
    $
    617,335
    
    
    
    President and Chief
Executive OfficerBrian P. Callahan,
    
    
    
    
    
    $
    283,568
    
    
    
    
    
    
    $
    283,568
    
    
    $
    53,750Chief Financial
OfficerAnthony D. James,
    
    
    
    
    
    $
    289,818
    
    
    
    
    
    
    $
    289,818
    
    
    $
    55,000Chief Operating
OfficerJ. Alan Whorton,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice
President, Sales
and MarketingChristopher
R. Rehm, M.D.,
    
    
    
    
    
    $
    90,269
    
    
    
    
    
    
    
    
    
    
    
    Chief
Medical OfficerBenefits &
Perquisites:Daniel J. Kohl,
    
    
    
    
    
    $
    17,335
    (2)
    
    
    
    
    
    $
    17,335
    (2)
    
    
    President and Chief
Executive OfficerBrian P. Callahan,
    
    
    
    
    
    $
    14,818
    (2)
    
    $
    174,300
    (3)
    
    $
    14,818
    (2)
    
    
    Chief
Financial OfficerAnthony D. James,
    
    
    
    
    
    $
    14,818
    (2)
    
    $
    10,500
    (3)
    
    $
    14,818
    (2)
    
    
    Chief Operating
OfficerJ. Alan Whorton,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice
President, Sales
and MarketingChristopher
R. Rehm, M.D.,
    
    
    
    
    
    $
    179
    (2)
    
    $
    10,500
    (3)
    
    
    
    
    
    
    Chief
Medical Officer
 
 (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, or in the case of Mr. Kohl, 18 months,
following the date of termination.(3)
    
    Represents the value of restricted stock and option grants that would vest upon a
change in control.  43




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##### Table of Contents



Director Compensation
  Annual Retainer.
 Meeting Fees.
 Committee Chairmen.
 Equity Incentives.
 Election. st
  Change inPensionValue andNonqualifiedFees Earned or
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    DeferredPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)(1)
    
    (b)
    
    (c)(3)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Joel Ackerman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jonathan Bilzin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James W. Doucette
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert Z. Hensley
    
    $
    49,000
    
    
    $
    10,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    59,600John A. Kane
    
    $
    37,500
    
    
    $
    10,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,100Daniel J. Kohl
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Michael J. King
    
    $
    34,250
    
    
    $
    10,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,850Neal Moszkowski
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Martin G. Schweinhart
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Steven E. Simpson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wayne T. Smith
    
    
    
    (2)
    
    $
    78,685
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    78,685Tenno Tsai
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David J. Wenstrup
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 44




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##### Table of Contents



(1)
    
    Mr. Wenstrup resigned from the Board of Directors effective February 13, 2008. Messrs.
Ackerman and Tsai resigned from the Board of Directors effective July 11, 2008. Mr. Smith
resigned from the Board of Directors effective October 3, 2008. Messrs. Doucette and
Schweinhart were appointed to the Board of Directors on October 3, 2008.(2)
    
    Mr. Smith elected to receive 44,500 shares of Series A Convertible Stock of Spheris
Holding III in lieu of receiving the retainers and fees set forth above under the
compensation program for our outside directors.(3)
    
    These restricted stock grants were valued at fair market value on the date of grant
computed in accordance with SFAS No. 123(R). 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 inOutstanding Options
    
    
    Outstanding Options
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved
by security holders
    
    
    2,392,500
    
    
    $
    0.36
    
    
    
    952,541Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,392,500
    
    
    $
    0.36
    
    
    
    952,541
 Security Ownership of Certain Beneficial Owners and Management
    45




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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)
    
    
    173,547,300
    
    
    
    55.8
    %Spheris Investment LLC (3)
    
    
    172,990,747
    
    
    
    55.7
    %TowerBrook Investors L.P. (4)
    
    
    86,773,650
    
    
    
    27.9
    %CHS/Community Health Systems, Inc (5)
    
    
    20,437,545
    
    
    
    6.6
    %Daniel J. Kohl
    
    
    
    
    
    
    Brian P. Callahan (6)
    
    
    902,500
    
    
    
    *Anthony D. James (7)
    
    
    3,448,586
    
    
    
    1.1
    %J. Alan Whorton (8)
    
    
    207,500
    
    
    
    *Christopher R. Rehm, M.D. (14)
    
    
    903,143
    
    
    
    *Steven E. Simpson (9)
    
    
    12,719,348
    
    
    
    4.1
    %Jonathan Bilzin (4) (10)
    
    
    86,773,650
    
    
    
    27.9
    %James W. Doucette (5) (11)
    
    
    20,437,545
    
    
    
    6.6
    %Robert Z. Hensley (12)
    
    
    50,000
    
    
    
    *John A. Kane (13)
    
    
    50,000
    
    
    
    *Michael J. King
    
    
    80,000
    
    
    
    *Neal Moszkowski (4) (10)
    
    
    86,773,650
    
    
    
    27.9
    %Martin G. Schweinhart (5) (11)
    
    
    20,437,545
    
    
    
    6.6
    %All directors and executive officers as a group (13 persons) (15)
    
    
    125,572,271
    
    
    
    40.4
    %
 
 *
    
    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)
    
    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-WP VIII Investors L.P., which,
together, are referred to as (WP VIII). Address is 466 Lexington Avenue, New York, NY
10017-3147. These holdings include approximately 173,547,300 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.(3)
    
    Includes approximately 172,990,747 shares of common stock issuable upon conversion of
69,141,455 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.(4)
    
    Includes approximately 86,773,650 shares of common stock 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 46




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##### Table of Contents



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 deemed to have shared voting and dispositive power over
securities held for the account of TowerBrook Investors L.P. Mr. Bilzin is a Senior
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.(5)
    
    Includes approximately 20,437,545 shares of common stock issuable upon conversion of
10,000,000 shares of Series A Convertible Preferred Stock. Address is 4000 Meridian
Boulevard, Franklin, Tennessee 37067. CHS/Community Health Systems, Inc. is a Delaware
corporation. Each of Mr. Doucette and Mr. Schweinhart disclaims beneficial ownership of
such securities except to the extent of any pecuniary interest therein.(6)
    
    Includes 187,500 shares of restricted common stock for which the restrictions have not
lapsed and 652,500 shares of common stock issuable upon the exercise of stock options that
are exercisable within 60 days of March 17, 2009.(7)
    
    Includes 18,750 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 1,912,872 shares of common stock issuable upon
conversion of the shares of Series A Convertible Preferred Stock held by Spheris
Investment.(8)
    
    Includes 1,875 shares of restricted common stock for which the restrictions have not
lapsed and 150,000 shares of common stock issuable upon the exercise of stock options that
are exercisable within 60 days of March 17, 2009.(9)
    
    Includes 37,500 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 7,895,062 shares of common stock issuable upon
conversion of the shares of Series A Convertible Preferred Stock held by Spheris
Investment.(10)
    
    Represents shares held by TowerBrook Investors L.P., as described in note (4).(11)
    
    Represents shares held by CHS/Community Health Systems, Inc., as described in note (5)(12)
    
    Includes 10,000 shares of restricted common stock for which the restrictions have not lapsed.(13)
    
    Includes 10,000 shares of restricted common stock for which the restrictions have not lapsed.(14)
    
    Includes 18,750 shares of restricted common stock for which the restrictions have not
lapsed. Dr. Rehm also holds 143,377 Class A Units of Spheris Investment, representing an
economic interest in approximately 360,714 shares of common stock issuable upon conversion
of the shares of Series A Convertible Preferred Stock held by Spheris Investment.(15)
    
    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)
86,773,650 shares which Mr. Bilzin and Mr. Moszkowski may be deemed to beneficially own by
virtue of their affiliation with TowerBrook Investors L.P. and, (ii) 20,437,545 shares
which Mr. Doucette and Mr. Schweinhart may be deemed to beneficially own by virtue of their
affiliation with CHS/Community Health Systems, Inc. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
 Tax Sharing Agreement
  47




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Operating Agreement of Spheris Investment LLC
    Amended and Restated Stockholders Agreement of Spheris Holding III, Inc.
    48




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##### Table of Contents



Amended and Restated Registration Rights Agreement of Spheris Holding III, Inc.
  Services Agreement
  Director Independence
  Related Party Transactions
   49




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Item 14. Principal Accountant Fees and Services
 Audit and Audit Related Fees
  2008
    
    
    2007Audit fees (1)
    
    $
    327,750
    
    
    $
    369,400Audit related fees (2)
    
    
    581,395
    
    
    
    54,500Tax fees (3)
    
    
    75,931
    
    
    
    145,600All other fees
    
    
    
    
    
    
    Total fees
    
    $
    985,076
    
    
    $
    569,500
 
 (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. Audit fees include some amounts in foreign currencies that have
been translated to U.S. dollars as of the date such fees were approved.
Amounts do not include any potential adjustments which may be subject to Audit Committee approval in the future.(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
   50




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    
    F-3Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2008
    
    
    F-4Consolidated Statements of Stockholders Equity for each of the three years in the period ended
December 31, 2008
    
    
    F-5Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
     ExhibitNumber
    
    Description of Exhibits2.1
    
    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 LLC, incorporated by
reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 2006.3.4
    
    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
    
    First Supplemental Indenture dated as of November 13, 2007, among
Vianeta Communications, Spheris Inc. and The Bank of New York, as
trustee, incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007.4.3
    
    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.*
 51




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits4.4
    
    Financing Agreement, dated as of July 17, 2007, by and among Spheris
Holding II, Inc., Spheris Inc., Spheris Operations LLC, the
guarantors (as defined therein), the lenders (as defined therein),
Ableco Finance LLC, as collateral agent, and Cratos Capital
Management, LLC, as administrative agent, incorporated by reference
to the Companys Current Report on Form 8-K filed on July 23, 2007.4.5
    
    Spheris, India Private Limited Line of Credit, dated October 7, 2005.*10.1
    
    Amended and Restated Spheris Holding III, Inc. Stock Incentive Plan,
incorporated by reference to the Companys Current Report on Form 8-K
filed on June 27, 2007.^10.2
    
    Amended and Restated Stockholders Agreement, dated as of October 3,
2008, by and among Spheris Holding III, Inc. and the Warburg
Investors (as defined therein), the Towerbrook Investors (as defined
therein), Spheris Investment LLC and CHS (as defined herein),
incorporated by reference to the Companys Current Report on Form 8-K
filed on October 8, 2008.^10.3
    
    Amended and Restated Registration Rights Agreement, dated as of
October 3, 2008, among the investors listed on Schedule 1 thereto and
Spheris Holding III, Inc., incorporated by reference to the Companys
Current Report on Form 8-K filed on October 8, 2008.^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, incorporated
by reference to the Companys Current Report on Form 8-K filed on
June 16, 2006.10.9
    
    Lease Deed, dated as of May 6, 2005, by and between Ramananda
Adigalar Foundation and Spheris, India Private Limited.*10.10
    
    Deed of Lease, dated as of October 16, 2002, by and among Reddy
Komala, Akkauamma, Muniyamma, Rathnamma and Spheris, India Private
Limited.*10.11
    
    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.).*10.12
    
    Lease Deed, dated as of July 5, 2007, by and between VITP Private
Limited and Spheris, India Private Limited, incorporated by reference
to the Companys Annual Report on Form 10-K for the year ended
December 31, 2007.10.13
    
    Executive and Director Compensation.^10.14
    
    Spheris Operations Amended and Restated Deferred Compensation Plan.*^10.15
    
    Spheris Operations 401(k) Plan, as amended.*^10.16
    
    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.*10.17
    
    Services Agreement, effective January 1, 2005, by and between Spheris
Operations Inc. (predecessor of Spheris Operations LLC) and
HealthScribe (India) Private Limited (predecessor of Spheris, India
Private Limited), incorporated by reference to the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.10.18
    
    Services Agreement, effective June 1, 2005, by and between Spheris
Operations Inc. (predecessor of Spheris Operations LLC) and
HealthScribe (India) Private Limited (predecessor of Spheris, India
Private Limited), incorporated by reference to the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.10.19
    
    Services Agreement, effective January 1, 2008, by and between Spheris
Operations LLC and Spheris, India Private Limited, incorporated by
reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 2007.10.20
    
    Form of Indemnification Agreement for Directors and Executive
Officers, incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2006.^10.21
    
    Form of Restricted Stock Agreement under Spheris Holding III, Inc.
Stock Incentive Plan, incorporated by reference to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.^10.22
    
    Form of Non-Qualified Stock Option Agreement under Spheris Holding
III, Inc. Stock Incentive Plan, incorporated by reference to the
Companys Quarterly Report on Form 10-Q for the quarter ended March
31, 2006.^
 52




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.23
    
    Transition Agreement, dated as of November 17, 2008, by and between
Spheris Inc. and Steven E. Simpson, incorporated by reference to the
Companys Current Report on Form 8-K filed on November 19, 2008.10.24
    
    Employment Agreement, dated as of November 17, 2008, by and between
Spheris Inc. and Daniel J. Kohl, incorporated by reference to the
Companys Current Report on Form 8-K filed on November 19, 2008.10.25
    
    Agreement for Health Information Processing Services, dated as of
October 3, 2008, by and between Spheris Operations LLC and Community
Health Systems Professional Services Corporation, incorporated by
reference to the Companys Current Report on Form 8-K field on
October 8, 2008.10.26
    
    Form of Independent Contractor Agreement, incorporated by reference
to the Companys Current Report on Form 8-K filed on July 9, 2008.10.27
    
    Lease Deed, dated as of March 26, 2008, by and between Narayan Reddy,
N. Srinivas Reddy and N. Keshava Reddy and Spheris, India Private
Limited, incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2008.10.28
    
    Amended and Restated Employment Agreement, dated as of November 5,
2004, by and between Spheris Operations Inc. and Christopher R. Rehm,
M.D.21
    
    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.
 
 *
    
    Incorporated by reference to the Companys Registration Statement on
Form S-4, as amended (File No. 333-132641).^
    
    Management contract or compensatory plan arrangement. 53




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SIGNATURES
  SPHERIS INC.Date: March 20, 2009
    By:
    /s/ Daniel J. KohlDaniel J. KohlPresident and Chief Executive OfficerBy:
    /s/ Brian P. CallahanBrian P. CallahanChief Financial Officer  Signature
    
    Title
    
    Date/s/ DANIEL J. KOHL

Daniel J. Kohl
    
    President and Chief Executive Officer; Director
(Principal Executive Officer)
    
    March 20, 2009/s/ BRIAN P. CALLAHAN

Brian P. Callahan
    
    Chief Financial Officer (Principal Financial and
Accounting Officer)
    
    March 20, 2009/s/ STEVEN E. SIMPSON

Steven E. Simpson
    
    Director
    
    March 20, 2009/s/ JONATHAN BILZIN
Jonathan Bilzin
    
    Director
    
    March 20, 2009/s/ ROBERT Z. HENSLEY

Robert Z. Hensley
    
    Director
    
    March 20, 2009/s/ JOHN A. KANE

John A. Kane
    
    Director
    
    March 20, 2009/s/ MICHAEL J. KING

Michael J. King
    
    Director
    
    March 20, 2009/s/ NEAL MOSZKOWSKI
Neal Moszkowski
    
    Director
    
    March 20, 2009/s/ JAMES W. DOUCETTE

James W. Doucette
    
    Director
    
    March 20, 2009/s/ MARTIN G. SCHWEINHART

Martin G. Schweinhart
    
    Director
    
    March 20, 2009
 54




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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, 2008 and 2007
    
    
    F-3Consolidated Statements of Operations for each of the three years in the period ended December 31, 2008
    
    
    F-4Consolidated Statements of Stockholders Equity for each of the three years in the period ended December 31, 2008
    
    
    F-5Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008
    
    
    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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Spheris Inc.
Consolidated Balance Sheets
 December 31,2008
    
    2007(Amounts in Thousands, Except Share Amounts)AssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    3,262
    
    
    $
    7,195Restricted cash
    
    
    309
    
    
    
    309Accounts receivable, net of allowance
of $1,332 and $1,569, respectively
    
    
    28,510
    
    
    
    33,595Deferred taxes
    
    
    372
    
    
    
    3,386Prepaid expenses and other current assets
    
    
    4,430
    
    
    
    4,460Total current assets
    
    
    36,883
    
    
    
    48,945Property and equipment, net
    
    
    12,309
    
    
    
    12,747Internal-use software, net
    
    
    1,586
    
    
    
    1,932Customer contracts, net
    
    
    9
    
    
    
    13,968Goodwill
    
    
    218,841
    
    
    
    218,841Other noncurrent assets
    
    
    5,450
    
    
    
    3,689Total assets
    
    $
    275,078
    
    
    $
    300,122Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    2,893
    
    
    $
    4,237Accrued wages and benefits
    
    
    8,545
    
    
    
    18,130Current portion of long-term debt and lease
obligations
    
    
    683
    
    
    
    35Other current liabilities
    
    
    5,327
    
    
    
    4,324Total current liabilities
    
    
    17,448
    
    
    
    26,726Long-term debt and lease obligations, net of
current portion
    
    
    195,499
    
    
    
    191,761Deferred tax liabilities
    
    
    300
    
    
    
    92Other long-term liabilities
    
    
    5,710
    
    
    
    4,857Total liabilities
    
    
    218,957
    
    
    
    223,436Commitments and contingenciesCommon stock, $0.01 par value, 100 shares
authorized, 10 shares issued and outstanding
    
    
    
    
    
    
    Other comprehensive income (loss)
    
    
    (1,344
    )
    
    
    564Contributed capital
    
    
    111,680
    
    
    
    111,158Accumulated deficit
    
    
    (54,215
    )
    
    
    (35,036
    )Total stockholders equity
    
    
    56,121
    
    
    
    76,686Total liabilities and stockholders equity
    
    $
    275,078
    
    
    $
    300,122
  F-3




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Spheris Inc.
Consolidated Statements of Operations
 Year ended December 31,2008
    
    2007
    
    2006(Amounts in Thousands)Net revenues
    
    $
    182,843
    
    
    $
    200,392
    
    
    $
    207,141Direct costs of revenues (exclusive of
depreciation and amortization below)
    
    
    131,266
    
    
    
    144,094
    
    
    
    152,120Marketing and selling expenses
    
    
    2,790
    
    
    
    4,781
    
    
    
    5,392General and administrative expenses
    
    
    21,043
    
    
    
    19,892
    
    
    
    18,974Depreciation and amortization
    
    
    21,613
    
    
    
    24,273
    
    
    
    26,553Restructuring charges
    
    
    484
    
    
    
    
    
    
    
    Total operating costs
    
    
    177,196
    
    
    
    193,040
    
    
    
    203,039Operating income
    
    
    5,647
    
    
    
    7,352
    
    
    
    4,102Interest expense, net
    
    
    19,104
    
    
    
    21,171
    
    
    
    21,136Loss on debt refinancing
    
    
    
    
    
    
    1,828
    
    
    
    Foreign currency (gain) loss
    
    
    (1,338
    )
    
    
    559
    
    
    
    (213
    )Other expense (income)
    
    
    3,190
    
    
    
    1,011
    
    
    
    (188
    )Net loss before income taxes
    
    
    (15,309
    )
    
    
    (17,217
    )
    
    
    (16,633
    )Provision for (benefit from) income taxes
    
    
    3,870
    
    
    
    (5,856
    )
    
    
    (4,483
    )Net loss
    
    $
    (19,179
    )
    
    $
    (11,361
    )
    
    $
    (12,150
    )
  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 (Loss)
    
    Deficit
    
    Equity(Amounts in Thousands, Except Share Amounts)Balance, 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
    )
    
    $
    86,638Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,361
    )
    
    
    (11,361
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,038
    
    
    
    
    
    
    
    1,038Total comprehensive
income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,038
    
    
    
    (11,361
    )
    
    
    (10,323
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    371Balance, December 31, 2007
    
    
    10
    
    
    $
    
    
    
    $
    111,158
    
    
    $
    564
    
    
    $
    (35,036
    )
    
    $
    76,686Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,179
    )
    
    
    (19,179
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,908
    )
    
    
    
    
    
    
    (1,908
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,908
    )
    
    
    (19,179
    )
    
    
    (21,087
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    522Balance, December 31, 2008
    
    
    10
    
    
    $
    
    
    
    $
    111,680
    
    
    $
    (1,344
    )
    
    $
    (54,215
    )
    
    $
    56,121
  F-5




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##### Table of Contents



Spheris Inc.
Consolidated Statements of Cash Flows
 Year Ended December 31,2008
    
    2007
    
    2006(Amounts in Thousands)Cash flows from operating activities:Net loss
    
    $
    (19,179
    )
    
    $
    (11,361
    )
    
    $
    (12,150
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    21,613
    
    
    
    24,273
    
    
    
    26,553Amortization of acquired technology
    
    
    162
    
    
    
    648
    
    
    
    736Deferred taxes
    
    
    3,222
    
    
    
    (6,435
    )
    
    
    (5,489
    )Change in fair value of derivative financial
instruments
    
    
    2,593
    
    
    
    1,112
    
    
    
    (202
    )Loss on sale or disposal of assets
    
    
    68
    
    
    
    37
    
    
    
    23Non-cash equity compensation
    
    
    522
    
    
    
    371
    
    
    
    291Amortization of debt discounts and issuance costs
    
    
    851
    
    
    
    833
    
    
    
    756Restructuring charges
    
    
    484
    
    
    
    
    
    
    
    Loss on debt refinancing
    
    
    
    
    
    
    1,828
    
    
    
    Changes in operating assets and liabilities, net of
acquisitions:Accounts receivable
    
    
    5,085
    
    
    
    (19
    )
    
    
    (1,951
    )Prepaid expenses and other current assets
    
    
    (53
    )
    
    
    (476
    )
    
    
    (264
    )Accounts payable
    
    
    (1,450
    )
    
    
    1,717
    
    
    
    (678
    )Accrued wages and benefits
    
    
    (10,069
    )
    
    
    1,556
    
    
    
    2,908Other current liabilities
    
    
    (13
    )
    
    
    (57
    )
    
    
    (1,323
    )Other noncurrent assets and liabilities
    
    
    (2,402
    )
    
    
    (417
    )
    
    
    (1,434
    )Net cash provided by operating activities
    
    
    1,434
    
    
    
    13,610
    
    
    
    7,776Cash flows from investing activities:Purchases of property and equipment
    
    
    (5,423
    )
    
    
    (5,699
    )
    
    
    (5,876
    )Purchase and development of internal-use software
    
    
    (873
    )
    
    
    (1,201
    )
    
    
    (1,309
    )Purchase of Vianeta, net of cash acquired
    
    
    
    
    
    
    (1,547
    )
    
    
    (7,788
    )Net cash used in investing activities
    
    
    (6,296
    )
    
    
    (8,447
    )
    
    
    (14,973
    )Cash flows from financing activities:Proceeds from the 2007 Senior Credit Facility
    
    
    7,288
    
    
    
    71,320
    
    
    
    Payments on the 2007 Senior Credit Facility
    
    
    (4,081
    )
    
    
    (2,507
    )
    
    
    Payments on the 2004 Senior Facility
    
    
    
    
    
    
    (73,500
    )
    
    
    (750
    )Payments on lease obligations
    
    
    (370
    )
    
    
    (59
    )
    
    
    (232
    )Debt issuance costs
    
    
    
    
    
    
    (583
    )
    
    
    (452
    )Capital contributions from Parent Investors
    
    
    
    
    
    
    
    
    
    
    8,000Net cash provided by (used in) financing
activities
    
    
    2,837
    
    
    
    (5,329
    )
    
    
    6,566Effect of exchange rate change on cash and cash
equivalents
    
    
    (1,908
    )
    
    
    1,038
    
    
    
    (385
    )Net (decrease) increase in unrestricted cash and
cash equivalents
    
    
    (3,933
    )
    
    
    872
    
    
    
    (1,016
    )Unrestricted cash and cash equivalents, at beginning of
period
    
    
    7,195
    
    
    
    6,323
    
    
    
    7,339Unrestricted cash and cash equivalents, at end of period
    
    $
    3,262
    
    
    $
    7,195
    
    
    $
    6,323Supplemental cash flow information:Cash paid for interest
    
    $
    18,425
    
    
    $
    20,432
    
    
    $
    22,301Cash paid for taxes
    
    $
    906
    
    
    $
    1,312
    
    
    $
    654Supplemental schedule of non-cash transactions:Purchase of property and equipment and internal-use
software through lease obligations
    
    $
    1,019
    
    
    $
    
    
    
    $
    Non-cash capital contributions
    
    
    
    
    
    
    
    
    
    
    195Leasehold improvements and equipment funded through
tenant incentive allowances
    
    
    
    
    
    
    
    
    
    
    2,106Vianeta post-acquisition contingencies
    
    
    
    
    
    
    
    
    
    
    1,911
  F-6




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##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2008
 1. Description of Business and Summary of Significant Accounting Policies
 Organization and Operations
   Reporting Unit and Principles of Consolidation
   Revenue Recognition
  Cash and Cash Equivalents
  F-7




---



##### Table of Contents



Restricted Cash
  Accounts Receivable and Allowance for Doubtful Accounts
   Year Ended December 31,2008
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    1,569
    
    
    $
    1,191
    
    
    $
    929Provisions and adjustments to expense
    
    
    (55
    )
    
    
    476
    
    
    
    410Additions resulting from acquisitions
    
    
    
    
    
    
    
    
    
    
    150Write-offs and adjustments, net of
recoveries
    
    
    (182
    )
    
    
    (98
    )
    
    
    (298
    )Balance at end of period
    
    $
    1,332
    
    
    $
    1,569
    
    
    $
    1,191
 Concentration of Credit Risk
  Property and Equipment
  Software Costs
   F-8




---



##### Table of Contents



Goodwill, Intangibles and Other Long-lived Assets
     Income Taxes
   F-9




---



##### Table of Contents



Advertising Costs
  Fair Value of Financial Instruments
        F-10




---



##### Table of Contents



Stock-Based Compensation
    Self-Insurance
  Comprehensive Income (Loss) and Foreign Currency Translation
   Use of Estimates
  F-11




---



##### Table of Contents



Recent Accounting Pronouncements
 SFAS No. 157
 SFAS No. 159
 SFAS No. 141(R)
 SFAS No. 160
 SFAS No. 161
 F-12




---



##### Table of Contents



2. Vianeta Acquisition
     3. Prepaid Expenses and Other Current Assets
  2008
    
    
    2007Prepaid expenses
    
    $
    1,381
    
    
    $
    1,437Income taxes receivable
    
    
    752
    
    
    
    781Due from affiliate
    
    
    832
    
    
    
    251Other receivables
    
    
    1,254
    
    
    
    1,357Other
    
    
    211
    
    
    
    634Total prepaid expenses and other current assets
    
    $
    4,430
    
    
    $
    4,460
 4. Property and Equipment, Net
  2008
    
    
    2007Furniture and equipment
    
    $
    2,550
    
    
    $
    2,030Leasehold improvements
    
    
    5,874
    
    
    
    4,846Computer equipment and software
    
    
    25,427
    
    
    
    22,06633,851
    
    
    
    28,942Less accumulated depreciation and amortization
    
    
    (21,542
    )
    
    
    (16,195
    )Property and equipment, net
    
    $
    12,309
    
    
    $
    12,747
 F-13




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##### Table of Contents



5. Internal-Use Software, Net of Amortization
  2008
    
    
    2007Software under development
    
    $
    933
    
    
    $
    690Software placed in service
    
    
    16,363
    
    
    
    15,57317,296
    
    
    
    16,263Less accumulated amortization
    
    
    (15,710
    )
    
    
    (14,331
    )Internal-use software, net
    
    $
    1,586
    
    
    $
    1,932
   6. Customer Contracts
   December 31, 2008
    
    December 31, 2007Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationCustomer contracts
    
    $
    63,864
    
    
    $
    (63,855
    )
    
    $
    63,864
    
    
    $
    (49,896
    )
 F-14




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##### Table of Contents



7. Other Noncurrent Assets
  2008
    
    
    2007Debt issuance costs
    
    $
    2,660
    
    
    $
    2,660Less: accumulated amortization
    
    
    (1,017
    )
    
    
    (696
    )Debt issuance costs, net
    
    
    1,643
    
    
    
    1,964Cash surrender value of key man life insurance policies
    
    
    248
    
    
    
    546Security deposits
    
    
    3,330
    
    
    
    900Other
    
    
    229
    
    
    
    279Total other noncurrent assets
    
    $
    5,450
    
    
    $
    3,689
  8. Other Current Liabilities
  2008
    
    
    2007Accrued Vianeta acquisition liabilities
    
    $
    234
    
    
    $
    234Taxes payable
    
    
    514
    
    
    
    239Accrued interest
    
    
    573
    
    
    
    799Accrued fees for professional services
    
    
    209
    
    
    
    381Accrued group purchasing organization fees
    
    
    867
    
    
    
    468Reserve for sales credits and adjustments
    
    
    568
    
    
    
    1,173Restructuring charges
    
    
    484
    
    
    
    Deferred rent
    
    
    606
    
    
    
    186Derivative financial instruments
    
    
    1,016
    
    
    
    Other
    
    
    256
    
    
    
    844Total other current liabilities
    
    $
    5,327
    
    
    $
    4,324
 9. Debt
  December 31,
    
    
    December 31,2008
    
    
    20072007 Senior Credit Facility, net of discount, with
principal due at maturity on July 17, 2012; interest
payable periodically at variable rates. The
weighted average interest rate was 4.7% at
December 31, 2008
    
    $
    72,290
    
    
    $
    68,88311.0% Senior Subordinated Notes, net of discount,
with principal due at maturity in December 2012;
interest payable semi-annually in June and December
    
    
    123,208
    
    
    
    122,878Financed lease obligations
    
    
    684
    
    
    
    35196,182
    
    
    
    191,796Less: Current portion of long-term debt and financed
lease obligations
    
    
    (683
    )
    
    
    (35
    )Long-term debt and financed lease obligations, net of
current portion
    
    $
    195,499
    
    
    $
    191,761
 F-15




---



##### Table of Contents



2007 Senior Credit Facility
      F-16




---



##### Table of Contents



Senior Subordinated Notes
      2012
    
    $
    198,207Total
    
    $
    198,207
 10. Contractual Obligations
  Operating
    
    
    Financed Lease
    
    
    PurchaseLeases
    
    
    Obligations
    
    
    Obligations2009
    
    $
    3,351
    
    
    $
    292
    
    
    $
    4,2462010
    
    
    3,505
    
    
    
    309
    
    
    
    4,0602011
    
    
    3,388
    
    
    
    107
    
    
    
    2,1602012
    
    
    3,556
    
    
    
    
    
    
    
    2,1602013
    
    
    2,843
    
    
    
    
    
    
    
    2,160Thereafter
    
    
    6,264
    
    
    
    
    
    
    
    5,220Total minimum payments
    
    $
    22,907
    
    
    $
    708
    
    
    $
    20,006
  F-17




---



##### Table of Contents



11. Stockholders Equity
   12. Income Taxes
  Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006Current:Federal
    
    $
    
    
    
    $
    17
    
    
    $
    93State
    
    
    117
    
    
    
    226
    
    
    
    512Foreign
    
    
    531
    
    
    
    59
    
    
    
    403Total current provision
    
    
    648
    
    
    
    302
    
    
    
    1,008Deferred:Federal
    
    
    2,800
    
    
    
    (6,680
    )
    
    
    (4,256
    )State
    
    
    465
    
    
    
    384
    
    
    
    (971
    )Foreign
    
    
    (43
    )
    
    
    138
    
    
    
    (264
    )Total deferred expense (benefit)
    
    
    3,222
    
    
    
    (6,158
    )
    
    
    (5,491
    )Total provision for (benefit from) income taxes
    
    $
    3,870
    
    
    $
    (5,856
    )
    
    $
    (4,483
    )
 F-18




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##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006Federal tax at statutory rate
    
    $
    (5,206
    )
    
    $
    (5,854
    )
    
    $
    (5,674
    )State income taxes
    
    
    (442
    )
    
    
    (90
    )
    
    
    (641
    )Permanent differences
    
    
    378
    
    
    
    285
    
    
    
    82Foreign tax / tax holiday
    
    
    (47
    )
    
    
    (18
    )
    
    
    349Increase in valuation allowance
    
    
    9,192
    
    
    
    47
    
    
    
    1,424Tax credits
    
    
    9
    
    
    
    (219
    )
    
    
    (93
    )Other
    
    
    (14
    )
    
    
    (7
    )
    
    
    70Total provision for (benefit from) income taxes
    
    $
    3,870
    
    
    $
    (5,856
    )
    
    $
    (4,483
    )
  2008
    
    
    2007Deferred tax assets:Allowance for doubtful accounts
    
    $
    505
    
    
    $
    599Accrued liabilities
    
    
    2,751
    
    
    
    3,008Depreciation
    
    
    861
    
    
    
    625Net operating losses  federal
    
    
    35,539
    
    
    
    33,875Net operating losses  state
    
    
    2,824
    
    
    
    2,781Tax credits
    
    
    591
    
    
    
    599Amortization expense  goodwill and start-up costs
    
    
    681
    
    
    
    539Other
    
    
    2,316
    
    
    
    1,239Total deferred tax assets
    
    
    46,068
    
    
    
    43,265Valuation allowance  federal
    
    
    (40,116
    )
    
    
    (31,908
    )Valuation allowance  state
    
    
    (3,288
    )
    
    
    (2,304
    )Net deferred tax assets
    
    
    2,664
    
    
    
    9,053Deferred tax liabilities:Amortization expense  customer list and technology
    
    
    (557
    )
    
    
    (4,468
    )Other
    
    
    (2,035
    )
    
    
    (1,291
    )Total deferred tax liabilities
    
    
    (2,592
    )
    
    
    (5,759
    )Net deferred tax liabilities
    
    $
    72
    
    
    $
    3,294
  2008
    
    
    2007Deferred taxes (current assets)
    
    $
    372
    
    
    $
    3,386Deferred tax liabilities (long-term liabilities)
    
    
    (300
    )
    
    
    (92
    )Net deferred tax liabilities
    
    $
    72
    
    
    $
    3,294
  F-19




---



##### Table of Contents



13. Employee Benefit Plans
  F-20




---



##### Table of Contents



14. Commitments and Contingencies
 Litigation
   Employment Agreements
  Tax Assessment
   F-21




---



##### Table of Contents



15. Related Party Transactions
    16. Restructuring Charges
   PersonnelBalance at December 31, 2007
    
    $
    Restructuring charges
    
    
    484Cash payments
    
    
    Balance at December 31, 2008
    
    $
    484
  F-22




---



##### Table of Contents



17. Information Concerning Guarantor and Non-Guarantor Subsidiaries
   Consolidating Balance Sheet
(Amounts in Thousands)
 December 31, 2008Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    1
    
    
    $
    952
    
    
    $
    2,309
    
    
    $
    
    
    
    $
    3,262Restricted cash
    
    
    
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    309Accounts receivable, net of allowance
    
    
    
    
    
    
    28,510
    
    
    
    
    
    
    
    
    
    
    
    28,510Intercompany receivables
    
    
    
    
    
    
    141,074
    
    
    
    6,309
    
    
    
    (147,383
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    372Prepaid expenses and other current assets
    
    
    
    
    
    
    2,854
    
    
    
    1,576
    
    
    
    
    
    
    
    4,430Total current assets
    
    
    1
    
    
    
    173,699
    
    
    
    10,566
    
    
    
    (147,383
    )
    
    
    36,883Property and equipment, net
    
    
    
    
    
    
    9,969
    
    
    
    2,340
    
    
    
    
    
    
    
    12,309Internal-use software, net
    
    
    
    
    
    
    1,586
    
    
    
    
    
    
    
    
    
    
    
    1,586Customer contracts, net
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Goodwill
    
    
    
    
    
    
    218,841
    
    
    
    
    
    
    
    
    
    
    
    218,841Investment in subsidiaries
    
    
    305,285
    
    
    
    
    
    
    
    
    
    
    
    (305,285
    )
    
    
    Deferred Taxes
    
    
    
    
    
    
    (257
    )
    
    
    257
    
    
    
    
    
    
    
    Other noncurrent assets
    
    
    1,191
    
    
    
    3,317
    
    
    
    942
    
    
    
    
    
    
    
    5,450Total assets
    
    $
    306,477
    
    
    $
    407,164
    
    
    $
    14,105
    
    
    $
    (452,668
    )
    
    $
    275,078Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    2,520
    
    
    $
    373
    
    
    $
    
    
    
    $
    2,893Accrued wages and benefits
    
    
    
    
    
    
    5,768
    
    
    
    2,777
    
    
    
    
    
    
    
    8,545Intercompany payables
    
    
    141,074
    
    
    
    6,309
    
    
    
    
    
    
    
    (147,383
    )
    
    
    Current portion of long-term debt and lease
obligations
    
    
    
    
    
    
    683
    
    
    
    
    
    
    
    
    
    
    
    683Other current liabilities
    
    
    573
    
    
    
    3,367
    
    
    
    1,387
    
    
    
    
    
    
    
    5,327Total current liabilities
    
    
    141,647
    
    
    
    18,647
    
    
    
    4,537
    
    
    
    (147,383
    )
    
    
    17,448Long-term debt and lease obligations, net of
current portion
    
    
    123,208
    
    
    
    72,291
    
    
    
    
    
    
    
    
    
    
    
    195,499Deferred tax liabilities
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    300Other long-term liabilities
    
    
    
    
    
    
    5,710
    
    
    
    
    
    
    
    
    
    
    
    5,710Total liabilities
    
    
    264,855
    
    
    
    96,948
    
    
    
    4,537
    
    
    
    (147,383
    )
    
    
    218,957Stockholders equity
    
    
    41,622
    
    
    
    310,216
    
    
    
    9,568
    
    
    
    (305,285
    )
    
    
    56,121Total stockholders equity
    
    
    41,622
    
    
    
    310,216
    
    
    
    9,568
    
    
    
    (305,285
    )
    
    
    56,121Total liabilities and stockholders equity
    
    $
    306,477
    
    
    $
    407,164
    
    
    $
    14,105
    
    
    $
    (452,668
    )
    
    $
    275,078
 F-23




---



##### Table of Contents



Consolidating Balance Sheet
(Amounts in Thousands)
 December 31, 2007Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assetsUnrestricted cash and cash equivalents
    
    $
    5
    
    
    $
    4,967
    
    
    $
    2,223
    
    
    $
    
    
    
    $
    7,195Restricted cash
    
    
    
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    309Accounts receivable, net of allowance
    
    
    
    
    
    
    33,595
    
    
    
    
    
    
    
    
    
    
    
    33,595Intercompany receivables
    
    
    66,500
    
    
    
    119,394
    
    
    
    7,303
    
    
    
    (193,197
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    3,386
    
    
    
    
    
    
    
    
    
    
    
    3,386Prepaid expenses and other current assets
    
    
    
    
    
    
    2,467
    
    
    
    1,993
    
    
    
    
    
    
    
    4,460Total current assets
    
    
    66,505
    
    
    
    164,118
    
    
    
    11,519
    
    
    
    (193,197
    )
    
    
    48,945Property and equipment, net
    
    
    
    
    
    
    10,536
    
    
    
    2,211
    
    
    
    
    
    
    
    12,747Internal-use software, net
    
    
    
    
    
    
    1,932
    
    
    
    
    
    
    
    
    
    
    
    1,932Customer contracts, net
    
    
    
    
    
    
    13,968
    
    
    
    
    
    
    
    
    
    
    
    13,968Goodwill
    
    
    
    
    
    
    218,841
    
    
    
    
    
    
    
    
    
    
    
    218,841Investment in subsidiaries
    
    
    305,285
    
    
    
    
    
    
    
    
    
    
    
    (305,285
    )
    
    
    Other noncurrent assets
    
    
    1,412
    
    
    
    1,528
    
    
    
    749
    
    
    
    
    
    
    
    3,689Total assets
    
    $
    373,202
    
    
    $
    410,923
    
    
    $
    14,479
    
    
    $
    (498,482
    )
    
    $
    300,122Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    3,858
    
    
    $
    379
    
    
    $
    
    
    
    $
    4,237Accrued wages and benefits
    
    
    
    
    
    
    14,082
    
    
    
    4,048
    
    
    
    
    
    
    
    18,130Intercompany payables
    
    
    119,394
    
    
    
    73,803
    
    
    
    
    
    
    
    (193,197
    )
    
    
    Current portion of long-term debt and lease
obligations
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Other current liabilities
    
    
    573
    
    
    
    3,614
    
    
    
    137
    
    
    
    
    
    
    
    4,324Total current liabilities
    
    
    119,967
    
    
    
    95,392
    
    
    
    4,564
    
    
    
    (193,197
    )
    
    
    26,726Long-term debt and lease obligations, net of
current portion
    
    
    122,878
    
    
    
    68,883
    
    
    
    
    
    
    
    
    
    
    
    191,761Deferred tax liabilities
    
    
    
    
    
    
    678
    
    
    
    (586
    )
    
    
    
    
    
    
    92Other long-term liabilities
    
    
    
    
    
    
    4,801
    
    
    
    56
    
    
    
    
    
    
    
    4,857Total liabilities
    
    
    242,845
    
    
    
    169,754
    
    
    
    4,034
    
    
    
    (193,197
    )
    
    
    223,436Stockholders equity
    
    
    130,357
    
    
    
    241,169
    
    
    
    10,445
    
    
    
    (305,285
    )
    
    
    76,686Total stockholders equity
    
    
    130,357
    
    
    
    241,169
    
    
    
    10,445
    
    
    
    (305,285
    )
    
    
    76,686Total liabilities and stockholders equity
    
    $
    373,202
    
    
    $
    410,923
    
    
    $
    14,479
    
    
    $
    (498,482
    )
    
    $
    300,122
 F-24




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2008
 Consolidating Statement of Operations
(Amounts in Thousands)
 For the Year Ended December 31, 2008Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    182,843
    
    
    $
    22,491
    
    
    $
    (22,491
    )
    
    $
    182,843Operating expenses:Direct costs of revenues (exclusive of
depreciation and amortization below)
    
    
    
    
    
    
    134,441
    
    
    
    19,316
    
    
    
    (22,491
    )
    
    
    131,266Marketing and selling expenses
    
    
    
    
    
    
    2,790
    
    
    
    
    
    
    
    
    
    
    
    2,790General and administrative expenses
    
    
    11
    
    
    
    20,260
    
    
    
    772
    
    
    
    
    
    
    
    21,043Depreciation and amortization
    
    
    
    
    
    
    20,655
    
    
    
    958
    
    
    
    
    
    
    
    21,613Restructuring charges
    
    
    
    
    
    
    484
    
    
    
    
    
    
    
    
    
    
    
    484Total operating costs
    
    
    11
    
    
    
    178,630
    
    
    
    21,046
    
    
    
    (22,491
    )
    
    
    177,196Operating income (loss)
    
    
    (11
    )
    
    
    4,213
    
    
    
    1,445
    
    
    
    
    
    
    
    5,647Interest expense, net
    
    
    25,302
    
    
    
    (6,157
    )
    
    
    (41
    )
    
    
    
    
    
    
    19,104Other (income) expense
    
    
    5,500
    
    
    
    (3,689
    )
    
    
    41
    
    
    
    
    
    
    
    1,852Net income (loss) before income taxes
    
    
    (30,813
    )
    
    
    14,059
    
    
    
    1,445
    
    
    
    
    
    
    
    (15,309
    )Provision for (benefit from) income taxes
    
    
    7,922
    
    
    
    (4,466
    )
    
    
    414
    
    
    
    
    
    
    
    3,870Net income (loss)
    
    $
    (38,735
    )
    
    $
    18,525
    
    
    $
    1,031
    
    
    $
    
    
    
    $
    (19,179
    )
 Consolidating Statement of Operations
(Amounts in Thousands)
 For the Year Ended December 31, 2007Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    200,392
    
    
    $
    22,237
    
    
    $
    (22,237
    )
    
    $
    200,392Operating expenses:Direct costs of revenues (exclusive of
depreciation and amortization below)
    
    
    
    
    
    
    147,122
    
    
    
    19,209
    
    
    
    (22,237
    )
    
    
    144,094Marketing and selling expenses
    
    
    
    
    
    
    4,781
    
    
    
    
    
    
    
    
    
    
    
    4,781General and administrative expenses
    
    
    57
    
    
    
    19,446
    
    
    
    389
    
    
    
    
    
    
    
    19,892Depreciation and amortization
    
    
    
    
    
    
    23,203
    
    
    
    1,070
    
    
    
    
    
    
    
    24,273Total operating costs
    
    
    57
    
    
    
    194,552
    
    
    
    20,668
    
    
    
    (22,237
    )
    
    
    193,040Operating income (loss)
    
    
    (57
    )
    
    
    5,840
    
    
    
    1,569
    
    
    
    
    
    
    
    7,352Loss on refinance of debt
    
    
    1,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,828Interest expense, net
    
    
    18,540
    
    
    
    2,645
    
    
    
    (14
    )
    
    
    
    
    
    
    21,171Other (income) expense
    
    
    (5,500
    )
    
    
    6,512
    
    
    
    558
    
    
    
    
    
    
    
    1,570Net income (loss) before income taxes
    
    
    (14,925
    )
    
    
    (3,317
    )
    
    
    1,025
    
    
    
    
    
    
    
    (17,217
    )Provision for (benefit from) income taxes
    
    
    (5,628
    )
    
    
    (338
    )
    
    
    110
    
    
    
    
    
    
    
    (5,856
    )Net income (loss)
    
    $
    (9,297
    )
    
    $
    (2,979
    )
    
    $
    915
    
    
    $
    
    
    
    $
    (11,361
    )
 F-25




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2008
 Consolidating Statement of Cash Flows
(Amounts in Thousands)
 For the Year Ended December 31, 2008Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net cash provided by (used in) operating activities
    
    $
    4,245
    
    
    $
    (5,030
    )
    
    $
    2,219
    
    
    $
    
    
    
    $
    1,434Net cash provided by (used in) operating activities
    
    
    4,245
    
    
    
    (5,030
    )
    
    
    2,219
    
    
    
    
    
    
    
    1,434Cash flows from investing activities:Purchases of property and equipment
    
    
    
    
    
    
    (5,198
    )
    
    
    (225
    )
    
    
    
    
    
    
    (5,423
    )Purchase of Vianeta, net of cash acquired
    
    
    
    
    
    
    (873
    )
    
    
    
    
    
    
    
    
    
    
    (873
    )Net cash used in investing activities
    
    
    
    
    
    
    (6,071
    )
    
    
    (225
    )
    
    
    
    
    
    
    (6,296
    )Cash flows from financing activities:Proceeds from debt
    
    
    
    
    
    
    7,288
    
    
    
    
    
    
    
    
    
    
    
    7,288Payments on debt and capital leases
    
    
    (4,249
    )
    
    
    (202
    )
    
    
    
    
    
    
    
    
    
    
    (4,451
    )Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -Net cash provided by (used in) financing activities
    
    
    (4,249
    )
    
    
    7,086
    
    
    
    
    
    
    
    
    
    
    
    2,837Effect of exchange rate change on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (1,908
    )
    
    
    
    
    
    
    (1,908
    )Net increase (decrease) in unrestricted cash and
cash equivalents
    
    
    (4
    )
    
    
    (4,015
    )
    
    
    86
    
    
    
    
    
    
    
    (3,933
    )Unrestricted cash and cash equivalents, at beginning of
period
    
    
    5
    
    
    
    4,967
    
    
    
    2,223
    
    
    
    
    
    
    
    7,195Unrestricted cash and cash equivalents, at end of period
    
    $
    1
    
    
    $
    952
    
    
    $
    2,309
    
    
    $
    
    
    
    $
    3,262
 Consolidating Statement of Cash Flows
(Amounts in Thousands)
 For the Year Ended December 31, 2007Issuer
    
    
    
    
    
    
    Non-(Spheris)
    
    
    Guarantors
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net cash provided by (used in) operating activities
    
    $
    73,501
    
    
    $
    (60,563
    )
    
    $
    672
    
    
    $
    
    
    
    $
    13,610Net cash provided by (used in) operating activities
    
    
    73,501
    
    
    
    (60,563
    )
    
    
    672
    
    
    
    
    
    
    
    13,610Cash flows from investing activities:Purchases of property and equipment
    
    
    
    
    
    
    (6,012
    )
    
    
    (888
    )
    
    
    
    
    
    
    (6,900
    )Purchase of Vianeta, net of cash acquired
    
    
    
    
    
    
    (1,547
    )
    
    
    
    
    
    
    
    
    
    
    (1,547
    )Net cash used in investing activities
    
    
    
    
    
    
    (7,559
    )
    
    
    (888
    )
    
    
    
    
    
    
    (8,447
    )Cash flows from financing activities:Proceeds from debt
    
    
    
    
    
    
    71,320
    
    
    
    
    
    
    
    
    
    
    
    71,320Payments on debt and capital leases
    
    
    (73,500
    )
    
    
    (2,566
    )
    
    
    
    
    
    
    
    
    
    
    (76,066
    )Debt issuance costs
    
    
    
    
    
    
    (583
    )
    
    
    
    
    
    
    
    
    
    
    (583
    )Net cash provided by (used in) financing activities
    
    
    (73,500
    )
    
    
    68,171
    
    
    
    
    
    
    
    
    
    
    
    (5,329
    )Effect of exchange rate change on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    1,038
    
    
    
    
    
    
    
    1,038Net increase in unrestricted cash and
cash equivalents
    
    
    1
    
    
    
    49
    
    
    
    822
    
    
    
    
    
    
    
    872Unrestricted cash and cash equivalents, at beginning of
period
    
    
    4
    
    
    
    4,918
    
    
    
    1,401
    
    
    
    
    
    
    
    6,323Unrestricted cash and cash equivalents, at end of period
    
    $
    5
    
    
    $
    4,967
    
    
    $
    2,223
    
    
    $
    
    
    
    $
    7,195
 F-26




---



##### Table of Contents



Spheris Inc.
Notes to Consolidated Financial Statements
December 31, 2008
 18. Selected Quarterly Financial Information (Unaudited)
  March 31,
    
    June 30,
    
    September 30,
    
    December 31,2008
    
    2008
    
    2008
    
    2008Net revenues
    
    $
    49,270
    
    
    $
    47,055
    
    
    $
    44,749
    
    
    $
    41,769Depreciation and amortization
    
    
    5,910
    
    
    
    5,948
    
    
    
    5,862
    
    
    
    3,893Operating income
    
    
    (727
    )
    
    
    519
    
    
    
    1,174
    
    
    
    4,681Interest expense, net
    
    
    4,930
    
    
    
    4,768
    
    
    
    4,681
    
    
    
    4,725Provision for (benefit from) income taxes
    
    
    (2,188
    )
    
    
    (1,645
    )
    
    
    (1,736
    )
    
    
    9,439Net loss
    
    
    (4,823
    )
    
    
    (1,868
    )
    
    
    (2,591
    )
    
    
    (9,897
    )
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,2007
    
    2007
    
    2007
    
    2007Net revenues
    
    $
    52,347
    
    
    $
    50,505
    
    
    $
    48,943
    
    
    $
    48,597Depreciation and amortization
    
    
    6,111
    
    
    
    6,022
    
    
    
    6,039
    
    
    
    6,101Operating income
    
    
    2,126
    
    
    
    2,453
    
    
    
    1,546
    
    
    
    1,227Interest expense, net
    
    
    5,434
    
    
    
    5,419
    
    
    
    5,280
    
    
    
    5,038Benefit from income taxes
    
    
    (1,184
    )
    
    
    (1,582
    )
    
    
    (1,872
    )
    
    
    (1,218
    )Net loss
    
    
    (2,149
    )
    
    
    (1,838
    )
    
    
    (3,541
    )
    
    
    (3,833
    )
 F-27