1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Medaphis Corporation ("Medaphis" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Medaphis undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Quarterly Report on Form
10-Q to which this statement is appended as an exhibit and also include the
following:
FUTURE OPERATING RESULTS. While Medaphis has in the past expanded its
operations through acquisitions and internal growth, the 1997 business plan of
the Company does not provide for further acquisitions and, in any event, any
such acquisitions would require the unanimous consent of the Company's existing
lenders. While the Company has and continues to implement management initiatives
designed to enhance and improve its business and operations, there can be no
assurance that Medaphis will be able to achieve or sustain profitability or
revenue growth on an annual or quarterly basis in the future, that fluctuations
in quarter-to-quarter or year-to-year operating results will not occur or that
any such quarter-to-quarter or year-to-year fluctuations will not be material.
Future operating results of Medaphis will be dependent upon, among other things,
(i) successful integration of certain recently acquired businesses, (ii)
improvement in operations of the Company's operating subsidiaries, (iii)
successful implementation of various management initiatives designed to reduce
costs and increase efficiencies within the Company's core business and (iv)
successful growth in sales of the Company's business management services and
information products.
The Company has consummated a number of significant acquisitions, many of
which the Company is in the process of integrating into its operations. In
addition, the Company announced its intention to focus on its core business of
delivering business management services and information products to healthcare
providers. There can be no assurance that the Company will be able to
successfully integrate any of the recently acquired companies, that Medaphis
will be able to continue to operate recently acquired companies in a profitable
manner or that any of the recently acquired companies will not have a material
adverse effect upon Medaphis' results of operations, particularly while such
acquisitions are being integrated into the Company.
The Company's expansion strategy in the past has involved both acquisitions
and internal growth. In February 1997, the Company announced that it intends to
focus on its core business of delivering business
2
management services and information products to healthcare providers and to
divest non-strategic businesses. Moreover, the Company does not currently
anticipate pursuing any significant acquisitions. There can be no assurance that
such shift in focus will not have an adverse effect upon the Company's revenue
and operations.
During the six months ended December 31, 1996, the Company undertook to
reorganize its wholly owned operating subsidiary, Imonics Corporation
("Imonics"), to integrate the Imonics operations into BSG Corporation ("BSG")
and to discontinue the custom software development business previously pursued
by the Imonics unit. This process involved, among other things, recording large
restructuring and other charges during the relevant period, significant
downsizing of Imonics' employee workforce, renegotiating Imonics' significant
client contracts and other restructuring, reorganization and exit activities.
There can be no assurance that such restructuring and reorganization activities
will not have an adverse effect upon the reputation and standing of Medaphis,
BSG and/or Rapid Systems Solutions, Inc. in the information management and
client/server information technology marketplaces or that such matters will not
have an adverse effect upon the results of operations of Medaphis in future
periods or adversely effect BSG's ability to attract and retain key employees.
One of the major components of the Company's 1997 operating plan is to
reduce costs and increase efficiencies in the core business. During 1996 and
going forward, the Company has and will continue to implement various
initiatives within the Company's Services Division (which includes Medaphis
Physician Services Corporation, a wholly owned operating subsidiary of the
Company ("MPSC"), designed to reduce costs and improve operational efficiency.
These initiatives have included, among other things, downsizing of management
ranks and improvements in operational processes through the implementation of
best practices. Although the preliminary indications from such management
initiatives have been positive, there can be no assurance that the Company will
be able to successfully implement such initiatives throughout MPSC's operations,
that such management initiatives ultimately will be successful, that MPSC's
margins will continue to improve or that MPSC will contribute meaningfully to
the Company's overall results of operations in future periods.
The Company's future operations are dependent upon, among other things,
continued growth in sales of its healthcare information technology ("HIT")
products, including, but not limited to, sales of its clinical information
management system in both domestic and international markets. The markets for
these products are characterized by rapidly changing technology, evolving
industry standards and frequent new products and product enhancements. The
Company's success in its HIT business will depend upon its continued ability (i)
to enhance its existing products, (ii) to effect conversions of existing
products into foreign languages, (iii) to introduce new products on a timely and
cost effective basis to meet evolving customer requirements, (iv) to achieve
market acceptance for new product offerings and (v) to respond to emerging
industry standards and other technological changes. During the past twelve
months, the Company experienced slower than expected sales of certain of its
enterprise-wide and departmental scheduling products. There can be no assurance
that sales of such scheduling products will improve, that Medaphis will be able
to effectively enhance existing products, create new products or respond to
technological changes or new industry standards. Moreover, there can be no
assurance that competitors of Medaphis will not develop competitive products, or
that any such competitive products will not have an adverse effect upon
Medaphis' operating results.
The client/server integration businesses (the "BSG Group") have not
significantly contributed to the Company's overall results of operations for the
past year, and for the six months ended June 30, 1997 they have negatively
impacted the Company's results. Management has undertaken certain initiatives to
reduce excess costs within the BSG Group and has implemented incentive programs
designed to retain and attract key personnel. There can be no assurances these
actions will have a positive impact on the BSG Group's operations or that they
will be successful in retaining and attracting key personnel.
In February 1997, the Company announced its operating plan for 1997. As
noted above, the operating plan involves refocusing the Company on its core
business of providing business management services and information products to
healthcare providers. The major components of the plan include (i) exiting
non-core businesses, (ii) achieving improved predictability of business results
through enhanced management accountability and controls, (iii) reducing costs
and increasing efficiencies in the core business, (iv) achieving
2
3
excellence in customer service, and (v) implementing cross-selling initiatives.
Although management believes that the 1997 operating plan reflects the key
action items which will contribute to Medaphis' efforts to improve and enhance
the operations of the Company, there can be no assurance that the operating plan
will result in meaningful improvements to the Company's operating results in
future periods or that the plan will ultimately be successful.
EXISTING SYSTEMS AND TECHNOLOGY. The Company intends to further refine,
enhance and develop certain of the Company's existing software and billing
systems and to migrate over time the Company's billing and accounts receivable
management services operations to the Company's most proven software systems and
technology, so as to reduce the number of systems and technology that must be
maintained and supported. Moreover, management intends to continue to implement
"best practices" and other established process improvements in its operations
going forward. There can be no assurance that the Company will be able to
successfully refine, enhance and develop its software and billing systems going
forward, that the costs associated with maintaining, enhancing and developing
such software and systems will not increase significantly in future periods,
that the Company will be able to successfully migrate the Company's billing and
accounts receivable management services operations to the Company's most proven
software systems and technology or that the Company's existing software and
technology will not become obsolete as a result of ongoing technological
developments in the marketplace.
CASH FLOW FROM OPERATIONS; SECOND AMENDED FACILITY. During the six months
ended June 30, 1997, the Company generated approximately $5.6 million in cash
from operating activities. At June 30, 1997, approximately $137 million in
borrowings were outstanding under the Company's Second Amended and Restated Loan
Facility (the "Second Amended Facility"). The Second Amended Facility matures on
June 30, 1998 and, as such, all amounts outstanding under the Second Amended
Facility have been classified as current in the Company's June 30, 1997 balance
sheet. The Company's previous senior credit facility was amended and restated on
February 4, 1997 to, among other things, increase the loan commitments from $250
million to $285 million and extend the maturity through June 30, 1998. The
Second Amended Facility is secured by substantially all of the Company's assets
and is guaranteed by substantially all of the Company's subsidiaries. The loan
commitment under the Second Amended Facility was reduced to $170 million on May
28, 1997 as a result of the successful sale of Healthcare Recoveries, Inc., and
is required to be reduced to $150 million on January 31, 1998. Certain of the
other material terms of the Second Amended Facility include adjustment of the
interest rates, fees and charges and other compensation to be paid to the
lenders by the Company, including the vesting of certain warrant arrangements
for 1% of the voting Common Stock (the "Common Stock") of the Company on each of
January 1, 1998 and April 1, 1998; modification of the financial reporting
requirement to the lenders; restrictions on new acquisitions and certain
litigation settlement payments; and establishment of a maximum permitted capital
expenditures covenant for the fiscal quarter ending March 31, 1997 and
additional financial covenants for fiscal quarters ending on and after June 30,
1997. This summary of certain terms of the Second Amended Facility and the
warrants are subject to the terms of the agreements which have been incorporated
by reference as exhibits to the Company's Annual Report on Form 10-K filed March
31, 1997 (the "Form 10-K").
While management presently anticipates that the liquidity provided in the
Second Amended Facility (together with anticipated results from operations based
on the 1997 business plan) will be sufficient to fund the Company's anticipated
operating and capital expenditure requirements during 1997, there can be no
assurance that there will not be material deviations in actual operations from
the 1997 business plan which would make it necessary for the Company to seek
either further modifications to the Second Amended Facility or other sources of
liquidity. While the Second Amended Facility incorporates an extension of
maturity through June 30, 1998, the Company will be required to renegotiate the
Second Amended Facility prior to maturity, obtain alternative financing or
generate sufficient proceeds from a sale of assets in order to provide adequate
liquidity for the Company's 1998 business plan. There can be no assurance that
the Company's lenders will agree to further modifications of the Second Amended
Facility or that the Company will obtain alternative financing or generate
sufficient proceeds from a sale of assets. Finally, the Company may also be
required to consider other alternative financing arrangements and/or equity
transactions, which could prove costly and/or involve further dilution to the
Company's stockholders. There can be no assurance
3
4
that any such alternative financing arrangements and/or equity transactions will
be available to the Company on acceptable terms or at all.
PENDING FEDERAL INVESTIGATION; PUTATIVE CLASS ACTION LAWSUITS. Numerous
federal and state civil and criminal laws govern medical billing and collection
activities. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Although the
precise scope of the investigation is not known to the Company at this time,
Medaphis believes that the U.S. Attorney's Office is investigating allegations
of billing fraud and that the inquiry is focused upon billing and collection
practices in the Designated Offices. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance that the
investigation will be resolved promptly, that additional subpoenas or search
warrants will not be received by Medaphis or MPSC or that the investigation will
not have a material adverse effect on the Company. The Company recorded charges
of $12 million in the third quarter of 1995 and $2 million in the fourth quarter
of 1996, solely for administrative fees, costs and expenses it anticipates
incurring in connection with the investigation and the putative class action
lawsuits described below which were filed in 1995 following the Company's
announcement of the investigation. The charges are intended to cover only the
anticipated expenses of the investigation and the related lawsuits and do not
include any provision for fines, penalties, damages, assessments, judgments or
sanctions that may arise out of such matters.
Following the announcement of the investigation, Medaphis, various of its
current and former officers and directors and the lead underwriters associated
with Medaphis' public offering of Common Stock in April 1995, were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On April 11, 1996, certain of the named plaintiffs to
the Consolidated Complaint voluntarily dismissed with prejudice all of their
claims. As a result of these dismissals, the Consolidated Complaint no longer
contains any claims based on the Securities Act of 1933, as amended (the "1933
Act"), and the Company's underwriters and outside directors are no longer named
as defendants. The plaintiffs and the defendants have reached an agreement to
settle this action on a class-wide basis for $4.75 million, subject to court
approval (the "1995 Class Action Settlement"). The 1995 Class Action Settlement
would also include the related putative class action lawsuit currently pending
in the Superior Court of Cobb County, Georgia, described more fully below. The
court conditionally has certified a class for settlement purposes and has
scheduled a hearing for October 6, 1997 to determine whether to approve the
settlement and enter final judgment dismissing the action with prejudice. The
Company has reached agreement with one of its directors and officers' liability
insurance carriers to fund $3.7 million of the 1995 Class Action Settlement. The
Company accrued approximately $1.2 million in the quarter ending December 31,
1996 to fund the anticipated balance of the 1995 Class Action Settlement and to
pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
is brought on behalf of a putative class of purchasers of Medaphis Common Stock
during the period from March 29, 1995 through June 15, 1995. Plaintiffs seek
compensatory damages and costs. To date, defendants have not been served with
this complaint. Pursuant to the consummation of the
4
5
1995 Class Action Settlement, the claims in this state action also will be
settled. Pursuant to the settlement agreement, plaintiffs have filed a motion to
dismiss this action without prejudice.
As originally disclosed in the Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual revenue. During that year, GFS processed approximately 5.6
million claims, approximately 2 million of which were made to government
programs. The government has requested that GFS voluntarily produce records, and
GFS is complying with that request. Although the precise scope and subject
matter of the investigation are not known, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for administrative fees, costs and expenses in connection with the
investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between January 6, 1996 and October 21, 1996. The
Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). On
February 14, 1997, the defendants moved to dismiss the Consolidated Second
Amended Complaint in its entirety. On May 27, 1997, the court denied defendants'
motion to dismiss. Discovery currently is proceeding. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (payable
by the Company's insurance carriers), 3,355,556 shares of Medaphis Common Stock,
and warrants to purchase 5,309,523 shares of Medaphis Common Stock at $12 per
share for a five-year period. The Memorandum of Understanding also includes: (i)
an obligation on the part of Medaphis to contribute up to 600,000 additional
shares of Common Stock to the settlement under certain conditions if the
aggregate value of the Medaphis Common Stock proposed to be issued in the
settlement falls below $30.2 million during a specified time period; and (ii)
certain anti-dilution rights to plaintiffs with respect to certain future
issuances of shares of Medaphis Common Stock or warrants or rights to acquire
Medaphis Common Stock to settle existing civil litigation and claims currently
pending against the Company, subject to a 5.0 million share basket below which
5
6
there will be no dilution adjustments. The Memorandum of Understanding also
contains other customary terms and conditions including, but not limited to,
consent and approval of the Company's insurance carriers and the insurance
carriers' payment of the cash portion of the settlement, the Company's receiving
assurances from its independent accountants that the treatment of class members
in connection with the proposed settlement will not jeopardize
pooling-of-interests accounting treatment on previous acquisitions, the
execution of mutually acceptable settlement papers and the approval of the
settlement by the court. While the Company is presently unable to determine
when, or if, the contingencies in the Memorandum of Understanding may be
resolved and a charge recorded, management presently anticipates that the
Memorandum of Understanding should not have a material adverse effect on: (i)
the Company's current efforts to refinance the Second Amended Facility; or (ii)
the Company's operating cash flow or liquidity position, provided that any such
charge, if and when recorded, does not then violate the covenants of the Second
Amended Facility or any then applicable debt facility or such covenant
violations, if any, are waived.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. The demurrer was denied on February 5, 1997. On March 18, 1997, the
court denied the plaintiff's motion for a preliminary injunction. On July 16,
1997, plaintiff filed an amended complaint adding several new parties, including
current and former directors and former officers of Medaphis. These newly added
defendants have not yet responded to the amended complaint. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). On April 18,
1997, the Medaphis defendants and BSG defendants filed motions to dismiss the
complaint. On or about July 3, 1997, in lieu of responding to these motions, the
plaintiffs filed an amended complaint, adding new claims under the 1933 Act and
new parties, including former officers of Medaphis. Defendants have not yet
responded to the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
6
7
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
HEALTHCARE FRAUD INITIATIVES; HEALTHCARE REFORM MEASURES
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations of the
Medicare program. This heightened examination has resulted in a number of high
profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (the
"Health Insurance Act"), which includes an expansion of certain fraud and abuse
provisions, such as expanding the application of Medicare and Medicaid fraud
penalties to other federal healthcare programs, and creating additional criminal
offenses relating to "healthcare benefit programs," which are defined to include
both public and private payor programs. The Health Insurance Act also provides
for forfeitures and asset freezing orders in connection with such healthcare
offenses. Civil monetary penalties and program exclusion authority available to
the OIG also have been expanded. The Health Insurance Act contains provisions
for instituting greater coordination of federal, state and local enforcement
agency resources and actions through the OIG. There also have been several
recent
7
8
healthcare reform proposals which have included an expansion of the
anti-kickback laws to include referrals of any patients regardless of payor
source.
In addition to the provisions of the Health Insurance Act, submission of
claims for services or procedures that are not provided as claimed may lead to
civil monetary penalties, criminal fines, imprisonment and/or exclusion from
participation in Medicare, Medicaid and other federally funded healthcare
programs. Specifically, the Federal False Claims Act allows a private person to
bring suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and for such person to share in any amounts paid to
the government in damages and civil penalties. Successful plaintiffs can receive
up to between 25% and 30% of the total recovery from the defendant. Such qui tam
actions or "whistleblower lawsuits" have increased significantly in recent years
and have increased the risk that a company engaged in the healthcare industry
such as Medaphis and many of its customers may become the subject of a federal
or state investigation or may ultimately be required to defend a false claims
action, may be subjected to government investigation and possible criminal
fines, may be sued by private payors, and may be excluded from Medicare,
Medicaid and/or other federally funded healthcare programs as a result of such
an action. The government on its own may also institute a Civil False Claims Act
case, either in conjunction with a criminal prosecution or as a stand alone
civil case. Whether instituted by a qui tam plaintiff or by the government, the
government can recover triple its damages together with civil penalties of
between $5,000 and $10,000 per false claim. Under applicable case law, a party
successfully sued under the False Claims Act may be jointly and severally liable
for the damages and penalties. Some state laws also provide for false claims
actions, including actions initiated by a qui tam plaintiff. There can be no
assurance that Medaphis will not be the subject of false claims or qui tam
proceedings relating to its billing and collection activities or that Medaphis
will not be the subject of further government scrutiny or investigations
relating to its billing and accounts receivable management services operations.
See "Pending Federal Investigation; Putative Class Action Lawsuits." Any such
proceeding or investigation could have a material adverse effect upon the
Company.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program (Medicare), have projected that the
Medicare "trust fund" is likely to become insolvent by the year 2002 if the
current growth rate of approximately 10% per annum in Medicare expenditures
continues. Similarly, federal and state expenditures under the Medicaid program
are projected to increase significantly during the same seven-year period. In
response to these projected expenditure increases, and as part of an effort to
balance the federal budget, both the Congress and the Clinton Administration
have made proposals to reduce the rate of increase in projected Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of both
programs. In late 1995, Congress passed legislation that would substantially
reduce projected expenditure increases substantially and would make significant
changes in the Medicare and the Medicaid programs. The Clinton Administration
has proposed alternate measures to reduce, to a lesser extent, projected
increases in Medicare and Medicaid expenditures. Neither proposal became law
prior to Congress' 1996 adjournment. Medaphis anticipates that both the Clinton
Administration and the Republican majorities in Congress will introduce
legislation in 1997 designed to reduce projected increases in Medicare and
Medicaid expenditures and to make other changes in the Medicare and Medicaid
programs. Medaphis anticipates that such proposed legislation would, if adopted,
change aspects of the present methods of paying physicians under such programs
and provide incentives for Medicare and Medicaid beneficiaries to enroll in
health maintenance organizations and other managed care plans. Medaphis cannot
predict the effect of any such legislation, if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These market reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing
8
9
among healthcare providers and managed care companies through capitated
contracts and integration among hospitals and physicians into comprehensive
delivery systems. Consolidation of management and billing services by integrated
delivery systems may result in a decrease in demand for Medaphis' billing and
collection services for particular physician practices, but this decrease may be
offset by an increase in demand for Medaphis' consulting and comprehensive
business management services (including billing and collection services) for the
new provider systems.
CLIENT/SERVER INFORMATION TECHNOLOGY PROJECTS. Medaphis' client/server
information technology business involves, among other things, projects designed
to reengineer significant client operations through the strategic use of
imaging, client/server and other advanced technologies. Failure to meet
expectations with respect to a major project could damage the Company's
reputation and standing in the client/server information technology marketplace,
affect its ability to attract new client/server information technology business,
result in the payment of damages to the client and jeopardize the Company's
ability to collect for services already performed on the project.
VOLATILITY OF STOCK PRICE. Medaphis believes factors such as announcements
with respect to the investigation of the billing practices of certain offices of
MPSC by the United States Attorney's Office for the Central District of
California, the Company's liquidity and financial resources, divestiture of
businesses, the ongoing governmental investigations, putative class action
lawsuits, other lawsuits or demands, healthcare reform measures and
quarter-to-quarter and year-to-year variations in financial results could cause
the market price of Medaphis Common Stock to fluctuate substantially. Any
adverse announcement with respect to such matters or any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
material adverse effect on the trading price of Medaphis Common Stock in any
given period. As a result, the market for Medaphis Common Stock may experience
material adverse price and volume fluctuations and an investment in the
Company's Common Stock is not suitable for any investor who is unwilling to
assume the risk associated with any such price and volume fluctuations.
COMPETITION. Medaphis faces intense competition in each of the areas in
which it does business. In providing business management systems and services to
physicians and hospitals, Medaphis competes with certain national information
management systems and transaction processing organizations, certain regional
companies which provide such systems or services and certain physician groups
and hospitals which provide their own business management services. In providing
subrogation and recovery services, Medaphis competes primarily with the internal
recovery operations of potential customers and with certain regional subrogation
recovery vendors. In terms of providing client/server information technology
services, Medaphis competes with national, regional and local companies
specializing in information technology and systems integration consulting
services, national and regional application development companies and the
software development and systems integration units of national computer
equipment manufacturers, large information systems facilities management and
outsourcing organizations, national "Big Six" accounting firms and the
information systems groups of large general management consulting firms. Certain
of Medaphis' competitors have longer operating histories and greater financial,
technical and marketing resources than Medaphis. There can be no assurance that
competition from current or potential competitors will not have a material
adverse effect upon Medaphis.
This Safe Harbor Statement supersedes the Safe Harbor Statements filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 and as Exhibit 99.6 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
9