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EXHIBIT 99.13
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 Annual Report on Form 10-K
to which this statement is appended as an exhibit and also include the
following:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. The Company's ability to make payments on its debt
obligations will depend on its future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. If the Company is
unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have important
consequences, including: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other general corporate purposes may be impaired; (ii) a substantial portion
of the Company's cash flow from operations may be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Company for its operations; (iii) the Company's existing indebtedness
contains, and future financings are expected to contain, financial and other
restrictive covenants, including without limitation those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends, sales of assets, capital expenditures, prepayment and those requiring
maintenance of minimum net worth, minimum EBITDA, minimum interest coverage and
maximum leverage requirements; (iv) certain of the Company's borrowings are and
will continue to be at variable rates of interest which expose the Company to
the risk of increases in interest rates; and (v) the Company may be more
leveraged than certain of its competitors, which may place the Company at a
relative competitive disadvantage and make the Company more vulnerable to
changes in its industry and changing economic conditions. As a result of the
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Company's level of indebtedness, its financial capacity to respond to market
conditions, extraordinary capital needs and other factors may be limited.
LITIGATION AND GOVERNMENT INVESTIGATIONS
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") (the "California Investigation"). Medaphis
first became aware of the California 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 for 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.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx). On
February 11, 1998, the United States provided Medaphis with a copy of the
Complaint, Substitution of Attorney, and Order which prohibited the Company from
making any use of the Complaint, including any public disclosure, other than for
the purposes of settlement negotiations, without further order of the Court. On
February 12, 1998, upon the joint application of Medaphis and the United States,
the Court issued an order modifying its February 6, 1998 order to allow Medaphis
to make public disclosures concerning the Complaint and its contents to the
extent that Medaphis determined such disclosures were required by applicable
securities laws, provided that such disclosure did not reveal the Relators'
identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs. No
charges or claims by the government have been made. The Complaint includes
causes of action under the Federal False Claims Act, 31 U.S.C. sec 3729 et seq.,
and the California False Claims Act, Cal. Gov't Code sec. 12650 et seq. The
Complaint also includes causes of action relating to Medaphis's termination of
Relator II, including a count under the state and federal whistleblower
protection statutes. The Complaint alleges overpayments of approximately
$20,500,000 together with treble damages and additional penalties based on
statutory civil penalties. The Complaint alleges that at least 50,000 separate
false claims were filed under federal programs and at least 8,000 separate false
claims were filed under state programs. The Complaint also alleges unspecified
compensatory, general and punitive damages on behalf of Relator II on his or her
employment claims. The allegations in the Complaint are limited to the office of
CompMed (acquired by Medaphis) in Culver City, California. Medaphis believes
that
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this Complaint relates to and concerns the California Investigation. Medaphis is
engaged in discussions with the United States and California, and intends to
pursue settlement discussions with the United States, the State of California,
and the Relators. The Company has agreed with the government to toll applicable
statutes of limitations through September 30, 1998.
Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit 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 third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the California Investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the California Investigation. The
charges are intended to cover only the anticipated expenses of the California
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.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries 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.
The Company is unable to estimate the possible range of loss, if any.
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 currently pending in the Superior Court of Cobb County,
Georgia, described more fully below. On October 29, 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.
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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.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February 1998, the Office of Inspector General of Health and Human Services
has requested information from GFS following an audit of a GFS client. GFS has
complied with these requests. 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 each of the years ended December 31, 1996
and 1997, GFS represented approximately 7% of Medaphis' revenue. During those
years, GFS processed approximately 5.6 million and 6.25 million claims,
respectively, approximately 2 million and 2.3 million of which, respectively,
were made to government programs. The government has requested that GFS
voluntarily produce records, and GFS has complied with that request. Although
the precise scope and subject matter of the GFS Investigation are not known to
the Company, Medaphis believes that the GFS 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. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company or that the GFS
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 GFS 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. 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
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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 entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") 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), 3,955,556
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 which were valued
at $22.3 million using an option pricing model. The Stipulation also includes,
among other things: (i) a complete release of claims against the Company, the
individual defendants and certain related persons and entities; 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 pending or
asserted against the Company, subject to a 5.0 million share basket below which
there will be no dilution adjustments. The Stipulation 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, and the final approval of the settlement by the court. On
December 15, 1997, the court granted preliminary approval to the settlement and
conditionally certified the classes for settlement purposes only. The Company's
insurance carriers consented to the settlement and funded the $20 million cash
portion. On March 25, 1998, the court granted final approval of the settlement
and entered final judgment dismissing the action. The Company recorded a $52.5
million charge in the quarter ended September 30, 1997 for this settlement. Such
amount has been reflected as a non-current liability as the Company does not
anticipate satisfying the obligation with current assets.
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 "Derivative Suit"). 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, which motion was denied without prejudice. The parties
have reached an agreement in principle to settle the Derivative Suit for
$250,000 in cash to be paid by the Company's directors' and officers' liability
insurance carrier. Such agreement in principle is subject to definitive
documentation, consent and approval of the insurance carrier (which has been
requested by the Company), and preliminary and final approval of the settlement
by the court.
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 restatements 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
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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 May 12, 1998, the court ruled in favor of defendants on the
motions, dismissing all of plaintiffs' claims with prejudice without leave to
amend. On May 15, 1998, the judge signed an order dismissing all of the
plaintiffs' claims.
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 June 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 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 rescission, rescissory and compensatory
damages, and interest, fees and other costs. The parties have reached an
agreement in principle to settle to settle the Stickle complaint. The settlement
provides for $137,500 in cash to be paid by the Company's directors' and
officers' liability insurance carrier and a number of shares of Medaphis Common
Stock to be determined such that the aggregate value of the cash portion of the
settlement and the stock portion of the settlement (with the Medaphis shares
being deemed to have an agreed upon value) will approximate $500,000. Such
agreement in principle is subject to definitive documentation, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), and preliminary and final approval of the settlement by the court.
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.
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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, including without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to any of the unsettled pending claims, the Company
has not accrued any amounts for any contingent liability with respect to such
claims.
PRIOR PERIOD LOSSES
The Company has had net losses in each of 1995, 1996, 1997 and the first
quarter of 1998. Such losses have resulted in substantial part from
restructuring and other charges and litigation settlements and to a lesser
extent from amortization relating to acquisitions. There can be no assurance
when or if the Company will generate net income in the future.
INTANGIBLE ASSETS
As of December 31, 1997, the Company's balance sheet included approximately
$516 million of unamortized intangible assets, which is greater than 59% and
103% of the Company's total assets and stockholders' equity, respectively. The
current amortization rate on the unamortized intangible assets is in excess of
$20 million per year.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of net identificable assets. GAAP requires goodwill and other
intangibles to be amortized over the period benefited, which management has
determined to be no less than 40 years.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant restructuring charges within the Physician Services segment and
(iii) absence of revenue growth within the Physician Services segment.
Therefore, in accordance with applicable accounting rules, management prepared a
40 year undiscounted cash flow analysis to determine if these intangible assets
were still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all
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instances, management believes the assumptions inherent in the analysis were
reasonable and supportable. The following key assumptions were used in
management's undiscounted cash flow analysis: revenue growth was forecasted at
an average rate of 3.4% and the EBITDA margin was forecasted at approximately
3.5 percentage points above the current level. Such analysis indicated that no
impairment of these intangible assets had occurred. However, the Company
recognizes that modest adjustments to the assumptions could have a material
impact on the analysis and related conclusions. For example, if the Physician
Services segment is unable to improve its EBITDA margin, revenue growth of at
least 4.1% would be required to allow for recoverability of these assets over
the 40 year life. If the projected undiscounted cash flows used in the Company's
recoverability analysis decreased to one dollar below the carrying value of the
intangible assets, the Company would be required to record a non-cash impairment
charge that may exceed $300 million to reduce the Physician Services segment's
intangible assets to their fair value, as determined by discounting the future
cash flows of this segment. Management still believes the current intangible
asset balance is recoverable.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in determining that the
amortization period of goodwill is appropriate and that goodwill is not
impaired. Management concluded that, based on the assumptions used, the
anticipated future cash flows associated with the goodwill recognized in the
acquisitions will continue indefinitely, and, based on such assumptions, there
is no persuasive evidence that any material portion will dissipate over a period
shorter than 40 years.
DEPENDENCE ON TURNAROUND; FUTURE OPERATING RESULTS; MANAGEMENT
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the billing and collection practices in two
offices of Medaphis Physicians Services Corporation ("MPSC") (the "California
Investigation"), and (b) the billing procedures and computerized coding system
used in Gottlieb's Financial Services, Inc. ("GFS") to process claims, which may
lead to claims of errors in billing (the "GFS Investigation"); (ii) the failure
of prior managements' acquisition strategy to integrate companies acquired;
(iii) several restatements of various financial statements of the Company,
including restatements of the Company's fiscal 1994, 1995, 1996 and interim 1997
financial statements; (iv) the discontinuance of the operations of one of the
businesses acquired; (v) the abandonment of an extensive reengineering program
that failed to realize the improvement in customer service and reduction of
costs that were expected; (vi) a steep drop in the price of its common stock;
and (vii) the filing of various lawsuits and claims made against the Company,
including multiple putative shareholder class action lawsuits alleging
violations of the federal securities laws. Consequently, the Company has been
operating 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 its
existing businesses efficiently and profitably; (iii) successfully completing
the combination of the operations of BSG Corporation ("BSG") and Healthcare
Information Technologies ("HIT") under the Per-Se name, following the
reorganization of its Imonics Corporation ("Imonics"), BSG and BSG Government
Solutions, Inc. (formerly Rapid Systems Solutions, Inc.) ("BSG Government")
subsidiaries and the shutdown of Imonics; (iv) managing existing customers'
perceptions of the Company's continued viability and refocusing on the high
levels of customer service required to develop new customers and retain existing
customers; (v) combating employee turnover, particularly in light of declines in
the market value of the Company's common stock (the value of which often plays a
role in compensation of employees); (vi) reducing costs and increasing
efficiencies; and (vii) reevaluating the efficiency of its operations following
the Company's 1996 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 subsequently determined to outweigh
the benefits.
There can be no assurance that the Company will successfully meet these or
other operating challenges or that the Company's operating plans ultimately will
be successful. Any failure with respect to the foregoing could have a material
adverse effect on the Company.
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The Company's success in general, and the successful implementation of its
operating plans in particular, is dependent upon, among other things, the
continued contributions of the Company's senior management. There can be no
assurance that the Company's management will be successful and the loss of
services of those members could have a material adverse effect on the Company's
businesses.
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 side letter relating to a license agreement entered into by Imonics in
December 1995, which created a contingency upon license fees payable under the
agreement. The contingency occurred, entitling the purchaser to a refund and
cancellation of the contract. 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.
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 for such errors and irregularities and consequently restated such
interim financial statements. 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 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 Deloitte & Touche, the Company's then-present auditors, and a
number of other 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 ("Price Waterhouse") as the Company's
new principal accountants.
During the third quarter of 1997, in connection with a refinancing effort
of the Company's then credit agreement, management evaluated certain revenue
practices at Health Data Sciences Corporation ("HDS"), a wholly-owned subsidiary
of the Company which was acquired by the Company in a merger transaction in June
1996 that was accounted for as a pooling of interests. These practices related
principally to revenue recognized in fiscal years 1994, 1995 and 1996. As
disclosed by the Company in its Form 10-Q for its fiscal quarter ending
September 30, 1997, management determined that certain revenue of HDS was
improperly recognized and, accordingly, determined to restate its financial
statements for its 1994, 1995 and 1996 fiscal years and the first two fiscal
quarters of its 1997 fiscal year. The effect of such restatements on the
Company's
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net income (loss) for the years ended December 31, 1994, 1995 and 1996 was
($5.8) million, $(1.1) million and $(7.3) million, respectively. The cumulative
reduction in assets caused by such restatement was $20.5 million.
As a result of the HDS-related restatements, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, 1995 and
1996 fiscal years. Consequently, the Company engaged Price Waterhouse to
re-audit the Company's 1995 and 1996 fiscal years and audit the Company's
nine-month period ending September 30, 1997. The Company determined to further
restate the results of such periods to account for the December 1995 acquisition
by the Company of Medical Management Sciences, Inc. ("MMS") on a purchase
accounting basis. Such acquisition had previously been accounted for as a
pooling of interests.
Financial statements for the Company's 1995, 1996 and 1997 fiscal years
reflecting the HDS and MMS related restatements are being filed by the Company
as an exhibit to the Annual Report on Form 10-K to which this exhibit is
appended. Such financial statements were audited by Price Waterhouse and
accompanied by their audit opinion which was unqualified and was not subject to
any modifying paragraphs.
While the Company restated its 1994 financial statements, it has not
reaudited such financial statements. Consequently, the Company may not be in
full compliance with the reporting requirements of applicable securities laws.
There can be no assurances that any such failure to be in compliance will not
have a material adverse consequence for the Company.
In addition, the Company received a subpoena from the Securities and
Exchange Commission (the "Commission") in connection with an on-going Commission
investigation on January 2, 1998. The subpoena seeks information in connection
with the November 19 and December 23, 1997 restatements and certain charges
taken by the Company in the third quarter of 1997. There can be no assurances
that the results of such inquiry will not have a material adverse effect on the
Company or that further restatements of the Company's financial statements will
not be required.
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.
EVOLVING INDUSTRY STANDARDS; RAPID TECHNOLOGICAL CHANGES
The markets for Medaphis' software products and services are characterized
by rapidly changing technology, evolving industry standards and frequent new
product introductions. Medaphis' success in its business will depend in part
upon its continued ability to enhance its existing products and services, to
introduce new products and services quickly and cost-effectively to meet
evolving customer needs, to achieve market acceptance for new product and
service 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 further to refine, enhance and develop certain of the
Company's existing software and billing systems and to change all of the
Company's billing and accounts receivable management services operations over to
the Company's most proven software systems and technology to reduce the number
of systems and technologies 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 successful in refining, enhancing and
developing its software and billing systems going forward, that the costs
associated with refining, enhancing and developing such software and systems
will not increase significantly in future periods, that the Company will be able
successfully to 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.
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CLIENT/SERVER INFORMATION TECHNOLOGY PRODUCTS
Medaphis' client/server information technology business involves, among
other things, projects designed to reengineer significant customer 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
customer, jeopardize the Company's ability to collect for services already
performed on the project and otherwise adversely affect its results of
operations.
POTENTIAL "YEAR 2000" PROBLEMS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. However, there can be no assurance that the Company
will identify all such Year 2000 problems in its computer systems or those of
its customers, vendors or resellers in advance of their occurrence or that the
Company will be able to successfully remedy any problems that are discovered.
The expenses of the Company's efforts to identify and address such problems, or
the expenses or liabilities to which the Company may become subject as a result
of such problems, could have a material adverse effect on the Company's
business, financial condition and results of operations. The revenue stream and
financial stability of existing customers may be adversely impacted by Year 2000
problems, which could cause fluctuations in the Company's revenues. In addition,
failure of the Company to identify and remedy Year 2000 problems could put the
Company at a competitive disadvantage relative to companies that have corrected
such problems.
COMPETITION; INDUSTRY AND MARKET CHANGES
The business of providing management services and information technology to
physicians and hospitals is highly competitive. Medaphis competes with certain
national and regional physician and hospital reimbursement organizations and
collection businesses (including local independent operating companies), certain
national information and data processing organizations and certain physician
groups and hospitals that provide their own business management services.
Potential industry and market changes that could adversely affect the billing
and collection aspects of Medaphis' business include (i) a significant increase
in managed care providers relative to conventional fee-for-service providers,
potentially resulting in substantial changes in the medical reimbursement
process, or the Company's failure to respond to such changes and (ii) new
alliances between healthcare providers and third-party payors in which
healthcare providers are employed by such third-party payors. The business of
providing application software, information technology and consulting services
is also highly competitive and Medaphis faces competition from certain national
and regional companies in connection with its technology operations. 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 future competitors will not have a material adverse
effect upon Medaphis.
The Company's business is affected by, among other things, trends in the
U.S. healthcare industry. As healthcare expenditures have grown as a percentage
of the U.S. Gross National Product, public and private healthcare cost
containment measures have applied pressure to the margins of healthcare
providers. Historically, some healthcare payors have paid the prices established
by providers while other healthcare payors, notably government agencies and
managed care companies, have paid less than established prices (in many cases
less than the average cost of providing the services). As a consequence, prices
charged to healthcare payors willing to pay established prices have increased in
order to recover the cost of services purchased by government agencies and
others but not paid for by them (i.e., "cost shifting"). The increasing
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complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increased accounts receivable and bad debt levels and higher business office
costs. Healthcare providers historically have addressed these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures and by cost
shifting. Notwithstanding the providers' responses to these pressures,
management believes that the revenue growth rate experienced by the Company's
clients continues to be adversely affected by increased managed care and other
industry factors affecting healthcare providers in the United States. At the
same time, the process of submitting healthcare claims for reimbursement to
third party payors in accordance with applicable industry and regulatory
standards continues to grow in complexity and to become more costly. Management
believes that these trends have adversely affected and could continue to
adversely affect the revenues and profit margins of the Company's operations.
GOVERNMENTAL INVESTIGATORY RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities,
and particularly on possibly fraudulent billing practices. This heightened
scrutiny has resulted in a number of high profile civil and criminal
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) (codified
in scattered sections of the United States Code, including 18, 26, 29 and 42
U.S.C.), which includes an expansion of provisions relating to fraud and abuse,
creates additional criminal offenses relating to healthcare benefit programs,
provides for forfeitures and asset-freezing orders in connection with such
healthcare offenses and contains provisions for instituting greater coordination
of federal, state and local enforcement agency resources and actions.
In recent years, the focus of healthcare legislation has been on budgetary
and related funding mechanism issues. 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 and would make significant
changes in the Medicare and Medicaid programs. The Clinton Administration has
proposed alternate measures to reduce, to a lesser extent, projected increases
in Medicare and Medicaid expenditures. Neither proposal has become law and
Medaphis anticipates that both the Clinton Administration and the Republican
majorities in Congress will introduce legislation in 1998 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, including 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 services through integrated delivery systems may result in a decrease in
demand for Medaphis billing and collection services for particular physician
practices.
EXISTING GOVERNMENT REGULATION
Existing government regulation can adversely affect Medaphis' business
through, among other things, its potential to reduce the amount of reimbursement
received by Medaphis' clients for healthcare services. Medaphis' medical billing
and collection activities are also governed by numerous federal and state civil
and
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criminal laws. 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.
Submission of claims for services or procedures that are not provided as
claimed, or which otherwise violate the regulations, 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 25-30% of
the total recovery from the defendant. Such qui tam actions or "whistle-blower"
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, 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. Some state
laws also provide for false claims actions, including actions initiated by a qui
tam plaintiff. Medaphis is currently the subject of several federal
investigations, and 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. Any such proceeding or investigation
could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. Various
states have also promulgated laws and regulations that govern credit collection
practices. AssetCare, Inc. a subsidiary of the Company, is registered as a debt
collector in 26 states; however, there can be no assurance that the Company and
its subsidiaries (other than AssetCare), will not be subjected to regulation as
a "debt collector" under the Federal Fair Debt Act or as a "collection agency"
under certain state collection agency laws and regulations. In the event that
the Company or a subsidiary of the Company other than AssetCare is subjected to
such regulation, its impact on the Company cannot be predicted.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Such regulation could have an adverse effect on the operations of
hospitals in general, and consequently reduce the amount of the Company's
revenue related to its hospital clients.
There can be no assurance that current or future government regulations or
healthcare reform measures will not have a material adverse effect upon
Medaphis' business.
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 Form 10-K 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.
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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 September 30, 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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