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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:
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, and prepayment of indebtedness
and those requiring maintenance of minimum net worth, minimum EBITDA and minimum
interest coverage and limiting leverage; (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
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conditions. As a result of the Company's level of indebtedness, its financial
capacity to respond to market conditions, extraordinary capital needs and other
factors may be limited.
LIQUIDITY
The Company expects to consummate the sale of its Hospital Services segment
prior to December 15, 1998 and to use a portion of the net proceeds from the
sale to pay off the Credit Facility. There can be no assurance that the sale
will close by such date or at all. If the sale is not consummated prior to
December 15, 1998, the Company will not have sufficient liquidity without
obtaining an additional waiver from the requisite lenders under the Credit
Facility or alternate sources of liquidity. There can be no assurance that any
required waiver or alternate source of liquidity will be available to the
Company or can be obtained on terms and conditions satisfactory to the Company.
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
conducted 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 complied. The subpoena required,
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 federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the appropriate state or states may elect to intervene fully or partially in
qui tam litigation and proceed with the action.
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)(the
"Complaint"). 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 disclosures 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.
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' termination of Relator II, including a count under the state and
federal whistleblower protection statutes.
The Company recorded charges of $12 million in the third quarter of 1995
solely for legal and administrative fees, costs and expenses it anticipates
incurring in connection with the California Investigation and certain putative
class action lawsuits which were filed in 1995 following the Company's
announcement of the California Investigation. Since the third quarter of 1995,
the Company has periodically adjusted this reserve, as necessary, including a
$0.3 million increase in the second quarter of 1998. Such adjustments to the
reserve have aggregated to a net reduction of $0.5 million. The reserve
currently covers only the anticipated expenses of the California Investigation
and the related lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgments or sanctions that may arise out of
such matters, as such amounts are not currently estimable.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provide for the payment by the Company of $3.6
million in the aggregate, the dismissal of all pending proceedings against the
Company and the release of various other claims arising out of the California
Investigation. As a part of these settlements, CompMed, Inc., a company acquired
by the Company in 1992, pled guilty to a single criminal count.
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, which primarily impacts certain managed care
plans, 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 cannot be determined by the Company, 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.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
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 the Inspector General of Health and Human
Services requested information from GFS following an audit of a GFS client. GFS
has complied with those 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 requested that GFS voluntarily
produce records, and GFS complied with that request. The Company recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, and $0.7 million and $0.1 million in the second and third quarters
of 1998, respectively, solely for legal and administrative fees, costs and
expenses in connection with the GFS
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Investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
While the Company denies the contentions of the government, the Company has
determined it is in its best interest to settle such claims. Accordingly, the
Company has reached an agreement in principle with the United States to settle
the matters related to the GFS Investigation on an ability to pay basis. The
settlement, which is subject to definitive documentation, requires the Company
to pay to the United States and the various states a total of $15 million, of
which $8 million will be paid within 10 days of the execution of a definitive
Settlement Agreement among the parties, with the balance of $7 million being
paid in eight equal quarterly installments over 1999 and 2000. The deferred
portion of the settlement payment will bear interest at the one year Treasury
Bill rate. The Settlement Agreement will provide for the dismissal with
prejudice of claims against the Company and the release by the United States of
civil and administrative claims arising out of the emergency room billing of
government programs services provided by GFS from 1993 through the date of the
Settlement Agreement.
The Company recorded a litigation settlement charge of $19.5 million in
the quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement of the California and GFS
Investigations, the Company entered into a Corporate Integrity Agreement with
the Office of the Inspector General of the Department of Health and Human
Services. This Agreement, which has a term of sixty-five months, provides that
the government will not seek to exclude the Company from participation in
governmental health care programs based on the conduct alleged in the
California and GFS Investigations and requires the Company to continue its
existing compliance program, augmented by an annual third party review and
additional reporting requirements.
In addition, the Company decided in April 1998 to transition GFS from a
computerized coding system to manual coding. There can be no assurances that
the Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources."
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.
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
unspecified 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 entered into a Stipulation and Settlement Agreement dated June 26, 1998
(the "Derivative Stipulation") to settle the Derivative Suit. The Derivative
Stipulation provides for the enactment of procedures for governance of the Audit
Committee of the Board of Directors and for such attorney's fees and expenses as
may be awarded by the court in an amount not to exceed $250,000 (to be paid by
the Company's directors' and officers' liability insurance carrier). The court
granted final approval to the settlement on September 29, 1998, and ordered all
claims dismissed.
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 Health Data
Sciences Corporation ("HDS"). Plaintiff seeks rescissory, compensatory and
punitive damages in excess of $100 million, rescission, injunctive relief and
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cost. 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 Securities Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such Securities Act
claims. The Company is unable to estimate a possible range of loss.
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
unspecified 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 Securities Act and common law and new parties, including
former officers of Medaphis, Medaphis' former independent accountants 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 and without
leave to amend. On May 15, 1998, the Judge signed an order to that effect. The
plaintiffs have appealed from this order, and that appeal is pending. The
Company is unable to estimate a possible range of loss.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 March 31, 1999. The standstill and tolling
agreement extends any applicable statute of limitations for claims by the former
BSG shareholders and provides that neither party will file suit against the
other prior to the expiration of the agreement. In June 1998, the Company and
the BSG Principals reached an agreement in principle to settle the claims made
on behalf of the former BSG shareholders in exchange for approximately 3.2
million shares of Medaphis Common Stock, subject to negotiation and definitive
documentation of other terms and conditions of the settlement. The Company
recorded a litigation settlement charge of $21.3 million in the quarter ended
June 30, 1998 in connection with this agreement in principle. The charge
reflects 3.2 million shares of Medaphis Common Stock valued at the fair value
per share on the date on which the material terms of the agreement in principle
was reached. The Company classified the entire $21.3 million liability
associated with the proposed settlement as noncurrent since such obligation will
be settled with Common Stock rather than current assets and the exact timing of
the payments of claims pursuant to such settlement is not determinable.
On November 9, 1998, the parties entered into a letter of intent with
respect to the settlement of the BSG Principals' claims. The terms of the letter
of intent, which vary from the previously announced agreement in principle,
provide for the payment by the Company to the BSG Principals of 4.5 million
shares of the Company's Common Stock and $2.5 million in cash, to be funded by
the Company's directors' and officers' liability insurance. The settlement is
subject to the consent and approval of the Company's insurer and its funding of
the cash portion of the settlement. Based on the price of the Company's Common
Stock on the date of the letter of intent, the settlement would result in a
charge of approximately $17.7 million, $2.5 million of which would be funded by
insurance. Since the Company had previously estimated this liability at $21.3
million, the Company will reduce this liability in the fourth quarter of 1998
by $3.6 million.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shaumaker,
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 was 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 alleged
common law fraud and violations of the federal securities laws in connection
with the merger. In addition, the complaint alleged
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breaches of contract relating to the merger agreement and a registration rights
agreement, as well as tortious interference with economic advantage and
declartory judgment. Defendants filed a motion to dismiss the complaint. On
September 29, 1998, the Court granted Defendants' motion to dismiss with respect
to all securities law, fraud and tort claims. Plaintiffs' claims for breach of
contract and declaratory judgement remain outstanding. Plaintiffs have sought
leave to file a supplemental amended complaint asserting solely the contract and
declaratory judgment claims, and seeking rescission of the merger agreement and
return of all MMS shares, damages in excess of $100 million, and voiding of
various non-compete covenants and contract provisions between Medaphis and
plaintiffs. The Company expects that discovery, which had been stayed pending
resolution of the motion to dismiss, will commence in the near term. The Company
is unable to estimate a possible range of loss.
On August 12, 1997, George D. Stickle filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglas in the United States District Court for the Northern District of
Georgia. The complaint asserted claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserted claims under
the Securities Act on behalf of a subclass 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, unspecified recissory and
compensatory damages, and interest, fees and other costs. The parties entered
into a Stipulation and Agreement of Settlement dated June 26, 1998 (the "Stickle
Stipulation") to settle the Stickle putative class action suit on a class wide
basis for $137,500 in cash (to be paid by the Company's directors' and officers'
liability insurance carrier) and 61,553, shares of Medaphis Common Stock (based
on a price per share of Medaphis Common Stock of approximately $7). The Company
recorded a litigation settlement charge of approximately $0.4 million in the
quarter ended June 30, 1998 in connection with this agreement. On June 26, 1998,
the court entered an order substituting Peter Gladkin as lead plaintiff in lieu
of George Stickle, granted preliminary approval of the settlement and
conditionally certified the class for settlement purposes only. On September 29,
1998, the court granted final approval to the settlement and ordered all claims
dismissed.
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. A number of the former
stockholders of Rapid Systems Solutions, Inc. ("RSSI"), a company acquired by
the Company in 1996, opted out of the settlement of the 1996 Class Action
against the Company and made claims against the Company, alleging securities
fraud and other potential causes of action in connection with the acquisition.
The Company has settled with each of such former RSSI stockholders for a total
of $444,000 in cash, in the aggregate, to be funded by the Company's directors'
and officers' liability insurer, and the forgiveness of certain indebtedness.
The Company recorded a litigation settlement charge of $1.2 million in the
quarter ended September 30, 1998 in connection with this settlement.
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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended 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 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company has cooperated with the Commission
in its investigation and will continue to do so.
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 investigation 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 certain of the pending claims, the Company has not
accrued any amounts for any damages, settlements, penalties or awards with
respect to such unsettled claims, except as otherwise disclosed.
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PRIOR PERIOD LOSSES
The Company has had net losses in each of 1995, 1996, 1997 and the first
nine months of 1998. Such losses have resulted in substantial part from
restructuring and other charges, litigation settlements and intangible asset
impairment 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
At September 30, 1998, the Company recorded an intangible asset
impairment charge of $390.6 million to adjust the intangible assets of the
Physician Services segment to their fair value. As previously disclosed,
management continually monitors its results of operations and other developments
within the industry to adjust its cash flow forecast, as necessary, to determine
if an adjustment is necessary to the carrying value of the Company's intangible
assets.
During the third quarter of 1998, 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 for the Physician Services
segment was still recoverable. These events included: (i) a continual increase
in the segment's operating losses due primarily to client losses; (ii)
significant litigation 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 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: (i) revenue was forecasted to decline over the
next five years and then remain flat; (ii) EBITDA margin was forecasted to
continue to decrease in 1999, increase slightly over the following four years
and then stabilize at a moderate margin over the remaining life of the asset;
and (iii) capital spending would be maintained in the range of 3% of revenue.
Since the undiscounted cash flow model showed an impairment of the Company's
long-lived assets, the Company used a discounted cash flow model to measure the
fair value of these long-lived assets which was consistent with the Company's
policy. The fair value calculation determined that the fair value of the
long-lived assets was approximately $63 million. The Company wrote-off the value
of its longest lived assets first, which resulted in the write-off of all of the
Physician Services segment's goodwill and a portion of the value of its client
lists. As a result of this impairment charge, the Company reduced the estimated
useful life of its remaining intangible assets for the Physician Services
segment to 10 years.
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DEPENDENCE ON TURNAROUND; FUTURE OPERATING RESULTS; MANAGEMENT
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the California Investigation, and (b) 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) 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; (iv) 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); (v) reducing costs and increasing efficiencies; and (vi)
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
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could have a material adverse effect on the Company which could require the
Company to seek appropriate amendments to its existing credit facility.
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.
ACCOUNTING ISSUES
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.
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.
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YEAR 2000
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. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. GFS's computerized coding system is one of the legacy
systems from which the Company has transitioned. The Company believes that it
is on target to complete substantially all of these system migration efforts
with respect to its Physician Services business in the first half of 1999. The
detail planning and inventory for the majority of the Company's legacy systems
that are being modified for Year 2000 compatibility has been completed and such
systems are in remediation. In the third quarter of 1998, Per-Se Technologies
released Year 2000 compatible versions for its scheduling products. Customers,
vendors and resellers have been identified and requests for information
distributed regarding the Year 2000 readiness of such parties. Responses are
expected through the first quarter of 1999. The Company will develop
contingency plans during the fourth quarter of 1998 through the second quarter
of 1999 in response to assessments of the Year 2000 readiness of customers,
vendors and resellers. The estimated cost of the Company's Year 2000 efforts is
$10 million to $15 million over 1998 and 1999, the majority of which represents
redirection of internal resources. 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
revenue. 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.
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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
complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increase 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 scruting 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 Sat. 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.
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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 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 subject 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.
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 June 30, 1998 and as Exhibit 99.13 to the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1997.
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