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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. The Company suffered several setbacks in recent
years, including (i) previously described government investigations: (a)
principally focused on the billing and collection practices in two offices of
Medaphis Physician Services Corporation, and (b) concerning the billing
procedures and computerized coding system used in GFS to process claims which
may lead to claims of errors in billing; (ii) difficulties encountered with the
integration of acquired companies; (iii) the restatement of the Company's fiscal
1995 and interim 1996 financial statements; (iv) the discontinuance of the
operations of certain acquired businesses; (v) the abandonment of an extensive
reengineering program that failed to realize the improvement in client service
and reduction of costs that were expected; and (vi) the filing of various
lawsuits and claims made against the Company. Consequently, the Company has
operated during 1997 in what is commonly described as a "turnaround" situation.
In addition to the risks generally associated with any entity in a turnaround
situation, the Company faces certain challenges more specific to its operations,
including (i) integrating several recent acquisitions into its ongoing
operations; (ii) shifting its strategic focus from acquiring compatible
businesses to running those businesses efficiently and profitably; (iii)
successfully operating BSG and integrating it with HIT within Per-Se
Technologies; (iv) managing existing clients' perceptions of the Company's
continued viability and refocusing on the high levels of client service required
to develop new clients and retain existing clients; (v) combating employee
turnover, particularly in light of recent declines in the market value of the
Company's common stock (such declines often play a role in compensation of
employees); and (vi) reevaluating the efficiency of its operations following the
Company's recent abandonment of its reengineering initiative to develop a
unified billing and information hardware and software system across all of its
operating platforms, the costs of which were determined to outweigh the
benefits.
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
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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.
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 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
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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 nine months ended September 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 August 1997, the Company adopted a plan to combine the operations of the
BSG Group and its HIT Group into Per-Se Technologies. The combination will
assist the Company to attain its operating plan by reducing duplication costs
and creating efficiencies via the combination. There can be no assurance that
the combination will reduce costs, create efficiencies or enhance the BSG
Group's or HIT's business.
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 business, (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 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.
RAPID TECHNOLOGICAL CHANGES; EXISTING SYSTEMS AND TECHNOLOGY. The markets
for Medaphis' software products are characterized by rapidly changing
technology, evolving industry standards and frequent new products and product
enhancements. Medaphis' success in its business will depend in part upon its
continued ability to enhance its existing products, to introduce new products on
a timely and cost effective basis to meet evolving client requirements, to
achieve market acceptance for new product offerings and to respond to emerging
industry standards and other technological changes. There can be no assurance
that Medaphis will be able to respond effectively 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
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 nine months
ended September 30, 1997, the Company used approximately $4.8 million in cash
from operating activities. At September 30, 1997, approximately $147.9 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 September 30,
1997 balance sheet.
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On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. Borrowings under
the Second Amended Facility are secured by substantially all of the Company's
assets and are guaranteed by substantially all of the Company's subsidiaries.
The Second Amended Facility effectively refinanced the loans outstanding under
the Company's previous senior credit facility and can be used to finance working
capital and other general corporate needs with restrictions on new acquisitions,
certain litigation settlement payments, capital expenditures and the Company's
ability to declare or pay cash dividends on its common stock. The Second Amended
Facility provides for "base rate" loans that bear interest equal to prime plus
1% so long as certain financial covenants are met. At September 30, 1997, the
Company $147.9 million in borrowings outstanding under the Second Amended
Facility that bore interest at 9.5%.
The Second Amended Facility required mandatory loan commitment reductions
to $200 million and $150 million on July 31, 1997 and January 31, 1998,
respectively. On May 28, 1997, in connection with the divestiture of HRI through
an initial public offering of 100% of its stock, the Company used the net
proceeds from the HRI sale in the amount of approximately $115 million to reduce
the Company's borrowings under the Second Amended Facility and the loan
commitment under the Second Amended Facility to $170 million. Subsequently, the
Company further reduced the loan commitment under the Second Amended Facility to
$168 million. On November 19, 1997, the Company entered into the First
Modification of the Second Amended Facility (the "First Modification"), which
among other things: (1) waived any defaults or events of default which might
otherwise result from the restatement of the Company's financial statements as
reported in its Form 10-Q for the quarter ended September 30, 1997 or any
withdrawal by the Company's former independent accountants of its opinions on or
certifications of the Company's annual financial statements for its 1995 and
1996 fiscal years; (2) eliminated the step-down in loan commitments to $150
million scheduled to occur on January 31, 1998; and (3) reinstated the stated
maturity of the Second Amended Facility to June 30, 1998, which maturity date
may be extended or otherwise amended pursuant to the agreement. The First
Modification also establishes certain financial covenants for the fiscal year
1997 and for monthly and quarterly periods in fiscal year 1998.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the September 30, 1997 balance sheets. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $51.3 million of working
capital, which included $6.7 million of cash at September 30, 1997. Also at
September 30, 1997, the Company had approximately $21 million available under
the Second Amended Facility. The Company used $4.8 million of cash for operating
activities during the nine months ended September 30, 1997 as compared with $7.5
million during the nine months ended September 30, 1996. The increase in the
Company's operating cash flow resulted primarily from the collection of
outstanding receivables and management's cash control initiatives.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of Medaphis' voting common stock (the
"Common Stock") on each of January 1, 1998 and April 1, 1998, provided that the
Second Amended Facility has not been repaid and terminated prior to such vesting
date.
The Company continues to explore financing resources to refinance the
Second Amended Facility in order to provide longer term liquidity on more
customary market terms and conditions and to assure that the warrants will not
vest. These refinancing efforts include, but are not necessarily limited to: (1)
the previously announced discussions with its existing lending syndicate for a
longer term committed facility and increased liquidity; and (2) a $250 million
refinancing package, the components of which are a $100 million senior bank
financing facility and the completion of an offering of at least $125 million in
senior subordinated notes. The Company previously announced that the senior bank
refinancing commitment letter expired on November 15, 1997 and the planned
closing of the $250 million refinancing package would be delayed beyond November
30, 1997.
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While these refinancing efforts are continuing, the Company can give no
assurance that it will be able to refinance or otherwise pay in full the amounts
owed under the Second Amended Facility prior to either of the warrant vesting
dates on January 1, 1998 and April 1, 1998, prior to the maturity date of June
30, 1998, or at all. If the Company is unsuccessful in refinancing the Second
Amended Facility, the Company [may] attempt to generate the cash needed to repay
the borrowings under the Second Amended Facility through the sale of one or more
of its assets; however, the Company does not believe that the proceeds of asset
divestitures alone would be sufficient to both repay the Second Amended Facility
and provide sufficient operating liquidity for the Company's operating needs.
Based on facts and circumstances presently known to the Company, the
Company believes that the current unused availability under the existing credit
agreement, together with the continuation of stringent cash management policies,
should provide the Company with sufficient liquidity pending the satisfactory
renegotiation of the financing alternatives presently being pursued by the
Company to resolve longer term liquidity needs.
While the Second Amended Facility extends through June 30, 1998 without
required reduction, the Company will be required to renegotiate the Second
Amended Facility prior to maturity, obtain alternative financing, issue equity,
or generate sufficient proceeds from the sale of assets in order to provide
adequate liquidity for the Company's 1998 business plan. However, there can be
no assurance that the Company's existing lenders will agree to renegotiate the
Second Amended Facility. The Company may be required to consider alternative
financing arrangements, equity transactions, or both, which could prove costly
or involve further dilution to the Company's stockholders. There can be no
assurance that alternative financing arrangements, equity transactions or asset
sales will be available to the Company on acceptable terms or at all.
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"), the Waiver Letter dated September 18, 1997 filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the Quarterly
Period ended September 30, 1997 (the "Third Quarter 10-Q"), the Waiver Letter
dated October 24, 1997 incorporated by reference as an exhibit to the Third
Quarter 10-Q and the First Modification of Second Amended and Restated Credit
Agreement filed as an exhibit to the Third Quarter 10-Q.
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. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally from
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices. 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. No charges or claims by the government have
been made. Although the Company continues to believe that the principal focus of
the investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the investigation will not
expand to other offices, 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, $2 million in the fourth quarter of 1996 and a credit of $2.8 million in
the
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third quarter of 1997, solely for legal and 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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors have caused overpayments on certain claims submitted on behalf of clients
in the State of California. The full extent of overpayments by carriers and
beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged 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 January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. 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 contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed 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 included the related putative
class action lawsuit in the Superior Court of Cobb County, Georgia, described
more fully below. On October 18, 1997, the court certified a class for
settlement purposes, approved the settlement and entered final judgment
dismissing the action with prejudice. One of Medaphis' directors and officers'
liability insurance carriers has paid $3.7 million of the 1995 Class Action
Settlement. The Company accrued approximately $1.2 million in the quarter ended
December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was 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 sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
As originally disclosed in its 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 year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
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
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produce records, and GFS is complying with that request. Although the precise
scope and subject matter of the investigation are not known to the Company,
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. No charges or claims by the government have been made. Currently, the
Company has recorded charges of $2 million and $1 million in the second and
third quarters of 1997, respectively, solely for legal and 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 February 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"). The
Consolidated Second Amended Complaint seeks compensatory and rescissory damages,
as well as fees, interest and other costs. 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 (to be
paid by the Company's directors' and officers' liability 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 in favor
of 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 or asserted against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The aggregate value of the Medaphis Common Stock during
the specified time period is now known, and, as a result, all of the additional
600,000 shares of Medaphis Common Stock will be included in the settlement. The
Memorandum of Understanding also contains other 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 proposed
settlement will not adversely affect pooling-of-interests accounting treatment
on previous acquisitions (which assurances have been received by the Company),
the execution of mutually acceptable settlement papers and the approval of the
settlement by the
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court. The Company recorded a $52.5 million charge in the quarter ended
September 30, 1997 for this settlement.
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 all other defendants filed 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. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under 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). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. 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 common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss 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
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 December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
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
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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 non-compete covenants and contract provisions between
Medaphis and plaintiffs. Defendants have filed a motion to dismiss the
complaint. Discovery has been stayed pending resolution of the motion to
dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks recission, recissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
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.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
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
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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 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 August 1997, Congress enacted the Balanced Budget Act of 1997 (the
"Budget Act"). The Medicare-related provisions of the Budget Act are designed to
reduce Medicare expenditures over the next five years by $115 billion, compared
to projected Medicare expenditures before adoption of the Budget Act. The
Congressional Budget Office projected in July 1997 that $43.8 billion of the
reductions would come from reduced payments to hospitals, $21.8 billion from
increased enrollment in managed care plans and $11.7 from reduced payments to
physicians and ambulatory care providers. The five-year savings in projected
Medicare payments to physicians and hospitals would be achieved under the Budget
Act by reduced fee-for-service reimbursement and by changes in managed care
programs designed to increase enrollment of Medicare beneficiaries in managed
care plans. The increase in Medicare enrollment in managed care plans would be
achieved in part by allowing provider-sponsored organizations and preferred
provider organizations to compete with Medicare health maintenance organizations
for Medicare enrollees. Medaphis cannot predict the effect of the Budget Act 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 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
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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.
YEAR 2000 COMPLIANCE. The Company has numerous computer systems and
software programs which were developed employing six digit date structures.
Where date logic requires the year 2000 or beyond, such date structures may
produce inaccurate results. There can be no assurance that the Company will be
successful in implementing a program to comply with year 2000 requirements. Each
of the Company's systems has a solution that is potentially unique and often
dependent on third-party software providers and developers. A failure on the
part of the Company to ensure that its computer systems are year 2000 compliant
could have a material adverse effect on the Company's operations.
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.
Restatement of Financial Statements; Accounting Issues
In October 1996, the Company restated its financial results for the year
and three months ended December 31, 1995. This restatement related primarily to
a license agreement entered into by the Company's wholly-owned operating
subsidiary, Imonics Corporation ("Imonics"), in December 1995 which created a
contingency upon license fees payable under the agreement. The license fee
revenue payable under the agreement and recognized by the Company during the
fourth quarter of 1995, together with previously deemed immaterial amounts,
resulted in an aggregate reduction to net income for the quarter and year ended
December 31, 1995 of $5.1 million. After appropriate adjustments for such items,
the Company's restated results for the year ended December 31, 1995 was a net
loss of $8.5 million as compared with a previously reported net loss of $3.4
million. In addition, the restated results for the quarter ended December 31,
1995 reflected a net loss of $1.1 million, as compared with a previously
reported net income of $4.0 million.
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year, information was developed
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the issuance of Deloitte & Touche's audit report dated March 31,
1997 on the Company's financial statements for the year ended December 31, 1996,
the Company recorded all adjustments to its interim financial statements deemed
appropriate and consequently restated such interim financial statements, so that
such interim financial statements, taken as a whole, presented fairly in all
material respects the Company's financial position, results of operations, and
cash flows for each interim fiscal period during the fiscal year ended December
31, 1996, and in conformity with generally accepted accounting principles. All
adjustments were for interim period transactions and had no effect on the
Company's 1996 annual pro forma net loss.
The reports of Deloitte & Touche on the Company's financial statements for
the fiscal year ended December 31, 1996, dated March 31, 1997, included an
unqualified opinion with an explanatory paragraph
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that stated Deloitte & Touche's conclusion that uncertainty then existed
regarding the ability of the Company to continue as a going concern due to a
mandatory commitment reduction in the Company's Existing Credit Facility that
was required by July 31, 1997. However, the Company satisfied such commitment
reduction on May 28, 1997 by applying the proceeds of the sale of HRI.
On June 30, 1997, following a competitive review and request for proposal
process in which the Company's present auditors and a number of nationally
recognized accounting firms participated, the Company notified Deloitte & Touche
that it had been dismissed as the Company's principal accountants and that the
Company intended to engage new principal accountants. This action was
recommended by the Audit Committee of the Company's Board of Directors, and the
Board approved such change on June 27, 1997. On July 9, 1997, the Company
engaged Price Waterhouse LLP as the Company's new principal accountants.
There can be no assurance that there will not be additional adjustments to
or reserves taken in the Company's financial statements in respect of the
pending or future lawsuits and government investigations.
There can be no assurance that there will not be any additional
restatements of the Company's financial statements as a result of the Company's
change in auditors and their continued review of the Company's financial
statements. Such restatement could relate to items which may be material,
including the use of pooling-of-interest accounting in respect of prior
acquisitions by the Company.
NASD ACTIONS. There can be no assurances that the NASD will not suspend
trading in the Company's common stock or de-list the Company's Common Stock as a
result of either the restatements described in this 10-Q or the withdrawal by
Deloitte & Touche LLP of its opinions in respect of the financial statements for
the Company's 1994, 1995 and 1996 fiscal years.
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.
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