1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996MARCH 5, 1998
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MEDAPHIS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 7374 58-1651222
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)No.)
2700 CUMBERLAND PARKWAY, SUITE 300
ATLANTA, GEORGIA 30339
(770) 319-3300444-5300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
RANDOLPH G. BROWN
2700 CUMBERLAND PARKWAY, SUITE 300
ATLANTA, GEORGIA 30339
(770) 319-3300
RANDOLPH L.M. HUTTO COPY TO:
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL PAUL T. SCHNELL
MEDAPHIS CORPORATION SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
2700 CUMBERLAND PARKWAY, SUITE 300 919 THIRD AVENUE
ATLANTA, GEORGIA 30339 NEW YORK, NEW YORK 10022
(770) 444-5300 (312) 735-3000
(Name, address, including zip code, and
telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
JURISDICTION PRIMARY STANDARD I.R.S. EMPLOYER
OF INDUSTRIAL IDENTIFICATION
EXACT NAME OF ADDITIONAL REGISTRANTS* INCORPORATION CLASSIFICATION CODE NUMBER NUMBER
- ------------------------------------- ------------- -------------------------- ---------------
ROBERT W. MILLER WILLIAM R. SPALDING EDWARD J. PIERCE
KING & SPALDING SENIOR VICE PRESIDENT-- ROBERT F. WEBER
191 PEACHTREE STREET ADMINISTRATION, GENERAL COUNSEL SEYFARTH, SHAW, FAIRWEATHER &
ATLANTA, GEORGIA 30303 AND SECRETARY GERALDSON
(404) 572-4600 MEDAPHIS CORPORATION 2029 CENTURY PARK EAST
2700 CUMBERLAND PARKWAY SUITE 3300
SUITE 300 LOS ANGELES, CALIFORNIA 90067
ATLANTA, GEORGIA 30339 (310) 277-7200
(770) 319-3300
Medaphis Physician Services Corporation............ Georgia 7374 58-1953146
Gottlieb's Financial Services, Inc. ............... Georgia 7374 58-2062951
Medical Management Sciences, Inc. ................. Maryland 7374 52-1068115
Medaphis Services Corporation...................... Georgia 7374 58-1996009
Medaphis Healthcare Information Technology
Company.......................................... Georgia 7371 58-2195433
Automation Atwork.................................. California 7371 94-2895826
Consort Technologies, Inc. ........................ Georgia 7371 58-1769437
Health Data Sciences Corporation................... Delaware 7371 95-3846477
BSG Corporation.................................... Delaware 7373 51-0333775
AssetCare, Inc. ................................... Georgia 7322 58-1893956
National Healthcare Technologies, Inc. ............ Indiana 7374 35-1865406
BSG Alliance/IT, Inc. ............................. Delaware 7373 51-0333999
BSG Government Solutions, Inc. .................... Maryland 7373 52-1726810
---------------------* Address and telephone number of principal executive offices are the same as
those of Medaphis Corporation.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness ofafter this Registration Statement.Statement becomes effective.
If anythe securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /[ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATIONOFFERING AMOUNT OF SECURITIES
TO BE REGISTERED REGISTERED(2)BE REGISTERED PER SHARE(1) OFFERINGUNIT(1) PRICE(1) FEE(1)REGISTRATION FEE
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Common Stock, $.01 par value per share... 6,548,382 $6.84 $44,781,000 $15,442.00Series B 9 1/2% Senior Notes due
2005............................. $175,000,000 100% $175,000,000 $51,625
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- ------------------------------------------------------------------------------------------------------------------Guarantees of Series B 9 1/2%
Senior Notes due 2005............ $175,000,000 (2) (2) None
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(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) No further fee and
computedis payable pursuant to Rule 457(f)(2) under the Securities Act of 1933, as
amended, based on the sum of the book values of the Common Stock, par value
$0.10 per share, of Health Data Sciences Corporation ("HDS"), the book value
of the Series B Convertible Preferred Stock, par value $0.10 per share, of
HDS, the book value of the Series C Convertible Stock, par value $0.10 per
share, of HDS, and the book value of the Series F Convertible Preferred
Stock, par value $0.10 per share, of HDS to be converted into the right to
receive shares of Common Stock of Medaphis Corporation upon consummation of
the Merger. The aggregate book value of such shares of Common Stock, Series
B Convertible Preferred Stock, Series C Convertible Preferred Stock and
Series F Convertible Preferred Stock of HDS as of March 31, 1996 was
$44,781,000.
(2) Includes 6,125,000 shares of the Common Stock, $.01 par value per share (the
"Medaphis Common Stock"), of Medaphis Corporation to be issued pursuant to
the Merger Agreement and 423,382 shares of Medaphis Common Stock that may be
issued in exchange for shares of the Common Stock of HDS issued pursuant to
the terms of options previously issued by HDS and exercised prior to the
consummation of the transaction contemplated by the Merger Agreement, all as
described in the Registration Statement.457(n).
THE REGISTRANTREGISTRANTS HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTREGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICHTHAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THISTHE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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MEDAPHIS CORPORATION
CROSS REFERENCE TABLE
LOCATION IN PROXY STATEMENT/PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OFSHEET
FORM S-4 ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and
Outside FrontBack Cover PagePages of Prospectus... Outside Front Cover of Proxy
Statement/Prospectus; Facing Page of the
Registration StatementPages
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Available Information; Incorporation of
Certain Documents by Reference; Table of
ContentsInside Front Cover Page; Outside Back Cover
Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ SummarySummary; Risk Factors; Selected Historical
Consolidated Financial Data; Unaudited
Pro Forma Consolidated Financial Data
4. Terms of the Transaction................... Summary; The MergerExchange Offer; Description of
Notes; Certain Federal Income Tax
Consequences; Plan of Distribution
5. Pro Forma Financial Information............ Summary; Unaudited Pro Forma CombinedSelected Historical Consolidated
Financial InformationData
6. Material ContactsContracts with the Company Being
Acquired................................. Summary; The MergerNot Applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel.....Experts................. Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information Withwith Respect to S-3
Registrants.............................. Summary; Unaudited Pro Forma CombinedConsolidated
Financial Information; Business of
MedaphisData
11. Incorporation of Certain Information by
Reference................................ Incorporation of Certain Documents byBy
Reference
12. Information Withwith Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information Withwith Respect to Registrants
Other Thanother than S-2 or S-3 or S-2 Registrants........ Not Applicable
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FORM S-4 ITEM LOCATION IN PROSPECTUS
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C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information Withwith Respect to S-3
Companies................................ Not Applicable
16. Information Withwith Respect to S-2 or S-3
Companies................................ Not Applicable
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ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
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17. Information Withwith Respect to Companies Other
Than S-2 or S-3 Companies................ Summary; Selected Consolidated Financial
Information of HDS; Management's
Discussion and Analysis of Financial
Condition and Results of Operations of
HDS; Business of HDS; Ownership of HDS
Capital Stock; Index to Consolidated
Financial Statements of HDSNot Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Areare to be Solicited....... Summary; The Merger; Ownership of HDS
Capital Stock; The HDS Special Meeting;
Stockholder ProposalsNot Applicable
19. Information if Proxies, Consents or
Authorizations Areare not to be Solicited,
or in an Exchange Offer.................. Not ApplicableManagement; Certain Transactions
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[LETTERHEADSUBJECT TO COMPLETION, DATED MARCH 4, 1998
PROSPECTUS
FEBRUARY , 1998
MEDAPHIS CORPORATION
OFFER TO EXCHANGE ITS
SERIES B 9 1/2% SENIOR NOTES DUE 2005
FOR ANY AND ALL OF HDS]
ITS OUTSTANDING
SERIES A 9 1/2% SENIOR NOTES DUE 2005
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
1996
Dear Stockholder:
YouNEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
------------------------
Medaphis Corporation, a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, the "Prospectus") and
in the accompanying Letter of Transmittal (which together constitute the
"Exchange Offer"), to exchange up to $175,000,000 aggregate principal amount of
its Series B 9 1/2% Senior Notes due 2005 (the "New Notes") for a like principal
amount of its outstanding Series A 9 1/2% Senior Notes due 2005 (the "Old
Notes", and together with the Old Notes, the "Notes"), of which $175,000,000
aggregate principal amount are cordially invitedoutstanding.
The New Notes are being offered in order to attend an important Special Meetingsatisfy certain obligations of
the Stockholders of Health Data Sciences Corporation ("HDS") to be held on
, 1996, at [10:00 a.m.], local time, atCompany under the Mission Inn, 3649
Seventh Street, Riverside, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the MergerRegistration Rights Agreement, dated as of May 23, 1996February 20,
1998 (the "Merger"Registration Rights Agreement"), by and among HDS, Medaphis Corporation ("Medaphis") and RAKSub,
Inc., a wholly-owned subsidiary of Medaphis ("Newco"), which provides for (i)
the acquisition of HDS by Medaphis, and (ii) the merger of Newco with and into
HDS (the "Merger"). If the Merger is consummated, each outstanding share of HDS
Common Stock, HDS Series B Preferred Stock, HDS Series C Preferred Stock and HDS
Series F Preferred Stock will be converted into the right to receive .7911 of a
share of Medaphis Common Stock.
The Merger Agreement has been approved and adopted by the Boards of
Directors of HDS and Medaphis and is subject to approval by (i) the holders of a
majority of the outstanding shares of HDS Common Stock, HDS Series B Preferred
Stock, HDS Series C Preferred Stock and HDS Series F Preferred Stock, voting
together as a single class, and (ii) the holders of at least 85% of the
outstanding shares of HDS Series F Preferred Stock, voting as a separate class.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
Details of the background and reasons for the proposed Merger appear and
are explained in the accompanying Proxy Statement/Prospectus. Additional
information regarding HDS and Medaphis also is set forth in the Proxy
Statement/Prospectus and, with respect to Medaphis, incorporated therein by
reference to other documents.
It is important that your shares be represented at the Special Meeting
either in person or by proxy. HDS has prepared a proxy card for the HDS Common
Stock, the HDS Series B Preferred StockCompany and the HDS Series C Preferred Stock,
and a separate proxy card for the HDS Series F Preferred Stock. A proxy card or
cards for the HDS Common Stock or HDS Preferred Stock you own is enclosed.
Whether or not you plan to attend the Special Meeting, please complete, sign and
date the appropriate enclosed proxy card(s) and return such card(s) in the
enclosed postage paid envelope. Holders of HDS Series F Preferred Stock who are
also holders of any other class of HDS stock are requested to sign and return
both proxy cards enclosed. If you attend the Special Meeting, you may vote in
person if you wish, even if you have previously returned your proxy card. Your
prompt cooperation will be greatly appreciated.
Sincerely,
Ralph A. Korpman, M.D.
Chairman of the Board and Chief
Executive Officer
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HEALTH DATA SCIENCES CORPORATION
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
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Notice is hereby given that a Special Meeting of Stockholders of Health
Data Sciences Corporation ("HDS") will be held on , 1996, at [10:00]
a.m., local time, at the Mission Inn, 3649 Seventh Street, Riverside,
California, for the following purposes:
(1) To consider and vote upon a proposal to approve the Merger
Agreement (the "Merger Agreement") dated as of May 23, 1996, by and among
HDS, Medaphis Corporation ("Medaphis") and RAKSub, Inc., a wholly owned
subsidiary of Medaphis ("Newco"), pursuant to which (i) Newco will be
merged with and into HDS (the "Merger"), and (ii) each outstanding share of
HDS Common Stock, HDS Series B Preferred Stock, HDS Series C Preferred
Stock and HDS Series F Preferred Stock will be converted into the right to
receive .7911 of a share of Medaphis Common Stock.
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of shares of HDS Common Stock, HDS Series B Preferred Stock, HDS
Series C Preferred Stock and HDS Series F Preferred Stock have the right to
dissent from the Merger and receive payment for the statutory "fair value" of
their shares, upon compliance with the provisions of the Delaware General
Corporation Law regarding appraisal rights, a copy of which is attached as Annex
B to the accompanying Proxy Statement/Prospectus and is summarized therein under
the caption "The Merger -- Appraisal Rights."Donaldson,
Lufkin & Jenrette Securities Corporation. The Board of Directors has fixed the close of business on ,
1996, as the record date for the determination of stockholders entitled to
receive notice of and to vote at the Special Meeting and at any adjournment
thereof.
Your attention is directed to the Proxy Statement/Prospectus submitted with
this Notice.
By order of the Board of Directors
Janice E. Ticich
Secretary
San Bernardino, California
, 1996
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD(S) AND RETURN SUCH
CARD(S) PROMPTLY IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD(S).
6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 24, 1996
HEALTH DATA SCIENCES CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
---------------------
MEDAPHIS CORPORATION
PROSPECTUS
SHARES OF COMMON STOCK
This Proxy Statement/Prospectus is being furnished to stockholders of
Health Data Sciences Corporation ("HDS") in connection with the solicitation of
proxies on behalf of the Board of Directors of HDS for use at the Special
Meeting of Stockholders of HDS to be held on , 1996, and at any
adjournment thereof (the "Special Meeting"). At the Special Meeting,
stockholders of HDS will be asked to consider and vote upon a proposal to
approve the Merger Agreement (the "Merger Agreement"), dated as of May 23, 1996,
by and among HDS, Medaphis Corporation ("Medaphis") and RAKSub, Inc., a wholly
owned subsidiary of Medaphis ("Newco"), pursuant to which Newco will be merged
with and into HDS (the "Merger"). If the Merger is consummated, each outstanding
share of common stock, $.10 par value per share, of HDS ("HDS Common Stock"),
Series B Convertible Preferred Stock, $.10 par value per share, of HDS ("HDS
Series B Preferred Stock"), Series C Convertible Preferred Stock, $.10 par value
per share, of HDS ("HDS Series C Preferred Stock") and Series F Convertible
Preferred Stock, $.10 par value per share, of HDS ("HDS Series F Preferred
Stock" and, along with the HDS Series B Preferred Stock and the HDS Series C
Preferred Stock, the "HDS Preferred Stock") (other than treasury shares or
shares held by HDS stockholders who perfect their appraisal rights under
Delaware law) will be converted into the right to receive .7911 of a share of
the Common Stock, par value $.01 per share, of Medaphis ("Medaphis Common
Stock").
This Proxy Statement/Prospectus and the form(s) of proxy for the Special
Meeting will first be sent to stockholders of HDS on or about ,
1996.
This Proxy Statement/Prospectus also constitutes a prospectus of Medaphis
relating to the issuance of shares of Medaphis Common Stock to stockholders of
HDS pursuant to the terms of the Merger Agreement. Medaphis has filed a
Registration Statement on Form S-4 (the "Registration Statement")New Notes are
identical in all material respects to the respective terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and (ii) holders of
the New Notes will generally not be entitled to certain rights, including the
payment of Liquidated Damages (as defined), pursuant to the Registration Rights
Agreement. In the event that the Exchange Offer is consummated, any Old Notes
which remain outstanding after consummation of the Exchange Offer and the New
Notes issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture (as defined herein).
The New Notes will bear interest at the rate of 9 1/2% per annum, payable
semi-annually on February 15 and August 15 of each year, commencing on August
15, 1998. The New Notes will mature on February 15, 2005. The New Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at the redemption prices set forth herein, plus accrued
and unpaid interest to the redemption date. In addition, at any time on or prior
to February 15, 2001, the Company may redeem up to 35% of the original principal
amount of Notes at a redemption price equal to 109.5% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the Securities
and Exchange Commission (the "Commission") coveringnet cash proceeds of one or more Equity Offerings (as
defined); provided that at least $100.0 million aggregate principal amount of
Notes remain outstanding immediately following any such redemption. Upon a
Change of Control (as defined), the shares of Medaphis
Common StockCompany will be required to be issued in connection with the Merger.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer of
Medaphis Common Stock to be issued in connection with the Merger, and, if given
or made, such information or representation must not be relied upon as having
been authorized by Medaphis, HDS or any other person. This Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to
purchase Medaphis Common Stock inall outstanding Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it would be
unlawful. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of such Medaphis Common Stock shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
THE SHARESpurchase date. See "Description of Notes -- Certain
Covenants -- Change of Control."
The New Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured senior
indebtedness of the Company. The New Notes will be guaranteed (the "Subsidiary
Guarantees") by all of the Company's present and future domestic Restricted
Subsidiaries (as defined) (the "Subsidiary Guarantors"). The Subsidiary
Guarantees will be general unsecured obligations of the Subsidiary Guarantors
and will rank pari passu in right of payment with all current and future
unsecured senior indebtedness of the Subsidiary Guarantors. However, the New
Notes and the Subsidiary Guarantees will be effectively subordinated to all
existing and future secured indebtedness of the Company and the Subsidiary
Guarantors, including borrowings under the New Credit Facility (as defined),
which will be secured by a lien on substantially all of the material assets of
the Company and the Subsidiary Guarantors. As of February 27, 1998, the Company
and the Subsidiary Guarantors had approximately $44 million of secured
indebtedness outstanding and had approximately $45 million of additional
borrowing ability under the New Credit Facility. See "Description of New Credit
Facility."
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Notes on , 1998.
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF MEDAPHIS COMMON STOCKCERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO BE ISSUEDTENDER OLD NOTES IN
THE MERGEREXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is , 1996.1998.
7
AVAILABLE INFORMATION
Medaphis5
The Company is making the Exchange Offer of the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter and there can be no
assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance of the
Commission, and subject to the informationaltwo immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any
holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing New Notes, or
any broker-dealer who purchased Old Notes from the Company to resell pursuant to
Rule 144A under the Securities Act ("Rule 144A") or any other available
exemption under the Securities Act, (a) will not be able to rely on the
interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Company may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"),) on behalf of whom such
holder holds the Notes to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
accordance
therewith, files reports, proxy statementsconnection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and other information withby delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the Commission. Such reports, proxy statements and other information filed withmeaning of the
CommissionSecurities Act. Based on the position taken by Medaphis can be inspected and copied at the officestaff of the Division of
Corporation Finance of the Commission at Room 1024, 450 Fifth Street, N.W.in the interpretive letters referred to
above, the Company believes that broker-dealers who acquired Old Notes for their
own accounts, as a result of market-making activities or other trading
activities ("Participating Broker-Dealers"), Washington, D.C. 20549, or at
its Regional Offices located at 7 World Trade Center, Suite 1300,may fulfill their prospectus
delivery requirements with respect to the New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661,
and copiesNotes received upon exchange of
such materials can be obtainedOld Notes (other than Old Notes which represent an unsold allotment from
the Public Reference Sectionoriginal sale of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
Medaphis has filedOld Notes) with a prospectus meeting the Commission the Registration Statement underrequirements
of the Securities Act. This Proxy Statement/Prospectus does not contain allAct, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the informationplan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Statement,Rights Agreement, the Company
i
6
has agreed that this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of such New Notes for a period ending 180 days after the Expiration Date (as
defined herein) (subject to extension under certain partslimited circumstances
described below) or, if earlier, when all such New Notes have been disposed of
which are
omittedby such Participating Broker-Dealer. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in accordanceconnection
with the rules and regulationsresale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the Commission. For
further information relating to Medaphisaddresses
set forth herein under "The Exchange Offer -- Exchange Agent." Any Participating
Broker-Dealer who is an "affiliate" of the Company may not rely on such
interpretive letters and must comply with the sharesregistration and prospectus
delivery requirements of Medaphis Common Stock
offered hereby, reference is hereby madethe Securities Act in connection with any resale
transaction. See "The Exchange Offer -- Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Registration Statement,
including the exhibits and schedules thereto, which mayExchange Offer will be inspected without
charge at the officedeemed to have agreed, by execution of
the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copiesLetter of which may be obtainedTransmittal, that, upon receipt of notice from the Commission at
prescribed rates. Statements contained in this Proxy Statement/Prospectus as toCompany of the
contentsoccurrence of any contractevent or other document referred to are not necessarily
complete and in each instance reference is made to the copydiscovery of such contractany fact which makes any statement
contained or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Medaphis
are incorporated by reference intoin this Proxy Statement/Prospectus:
(i) Medaphis' Annual Report on Form 10-K forProspectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the fiscal year ended
December 31, 1995, filed on April 1, 1996;
(ii) Medaphis' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, filed on May 15, 1996;
(iii) Medaphis' Current Reports on Form 8-K filed on April 3, 1995 (as
amendedstatements contained or incorporated by Form 8-K/A filed on April 5, 1995), October 13, 1995, January
19, 1996, April 3, 1996, May 21, 1996 and May 24, 1996; and
(iv) The descriptionreference
herein, in light of the Medaphis Common Stockcircumstances under which they were made, not misleading
or of the occurrence of certain other events specified in Medaphis'the Registration
Statement on Form 8-A/A filed on May 22, 1996.
In addition, all documents filed by MedaphisRights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to Section 13(a),
13(c), 14this Prospectus until the Company has amended or 15(d)supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the Exchange Act subsequentamended or supplemented Prospectus to such Participating
Broker-Dealer or the dateCompany has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Proxy
Statement/Prospectus in
connection with the resale of New Notes by the number of days during the period
from and prior toincluding the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Old Notes. The New Notes will be a new issue of
securities for which there currently is no market. Although Donaldson, Lufkin &
Jenrette Securities Corporation has informed the Company that it currently
intends to make a market in the New Notes, it is not obligated to do so, and any
such market making may be discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the New Notes. The Company currently does not intend to apply for listing of the
New Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the MergerExchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to all of the existing restrictions upon transfer thereof and the
Company will not have any further obligation to such holders (other than under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors -- Consequences of a Failure to
Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
ii
7
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on , 1998 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended). Tenders of Old Notes may be
withdrawn at any time on or prior to the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. Old Notes may be tendered in whole or in part
in denominations of $1,000 and integral multiples thereof. The Company has
agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer -- Fees and Expenses." Holders of the Old Notes whose Old Notes are
accepted for exchange will not receive interest on such Old Notes and will be
deemed to be incorporated by reference into this Proxy Statement/
Prospectushave waived the right to receive any interest on such Old Notes
accrued from and to be a part hereofafter February 20, 1998. See "The Exchange Offer -- Interest on
New Notes."
The Company will not receive any cash proceeds from the dateissuance of filingthe New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of such documents.
Any statements contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposesProceeds" and "Plan of this Proxy
Statement/Prospectus to the extent that a statement contained herein (or in any
other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part of this Proxy Statement/
Prospectus except as so modified or superseded.Distribution."
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST FROM
MELISSA COLEY, INVESTOR RELATIONS
COORDINATOR,CARYN DICKERSON, VICE PRESIDENT AND TREASURER, MEDAPHIS CORPORATION, 2700
CUMBERLAND PARKWAY, SUITE 300, ATLANTA, GEORGIA 30339;30339, TELEPHONE NUMBER (770)
319-3300.444-5300. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, PRIOR TO THE SPECIAL MEETING, ANY SUCH REQUEST
SHOULD BE MADE BY , 1996.
ii1998.
---------------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS: THIS PROSPECTUS INCLUDES
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (SECTION 27A OF THE SECURITIES ACT AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT")). THE
COMPANY WISHES TO ENSURE THAT ALL SUCH FORWARD-LOOKING STATEMENTS ARE
ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS PURSUANT TO THE SAFE HARBOR
ESTABLISHED IN SUCH ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN
STATEMENTS UNDER "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "THE BUSINESS," MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS SENIOR
MANAGEMENT TEAM. 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, PROSPECTIVE PARTICIPANTS IN THE EXCHANGE
OFFER ARE URGED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS."
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE THIS "SAFE-HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS" TO REFLECT FUTURE DEVELOPMENTS.
iii
8
TABLE OF CONTENTS
PAGE
----
Available Information................................................................. ii
Incorporation of Certain Documents by Reference....................................... ii
Summary............................................................................... 1
The Parties......................................................................... 1
The HDS Special Meeting............................................................. 2
The Merger.......................................................................... 3
Results of Operations............................................................... 8
Markets and Market Prices........................................................... 8
Comparative Per Share Information................................................... 9
Selected Historical and Pro Forma Financial Data.................................... 11
Risk Factors.......................................................................... 15
General Information................................................................... 18
The HDS Special Meeting............................................................... 18
Time, Date, Place and Purpose....................................................... 18
Record Date and Shares Entitled to Vote............................................. 18
Vote Required; Security Ownership of Management..................................... 19
Solicitation and Revocation of Proxies.............................................. 19
The Merger............................................................................ 20
Background of the Merger............................................................ 20
Reasons for the Merger.............................................................. 20
Terms of the Merger Agreement....................................................... 20
Effective Time of the Merger........................................................ 22
Recommendation of the HDS Board of Directors........................................ 22
Opinion of Financial Advisor to HDS................................................. 22
Interests of Certain Persons in the Merger.......................................... 23
Certain Agreements in Connection with the Merger.................................... 23
HDS Options......................................................................... 24
Accounting Treatment................................................................ 24
Certain Federal Income Tax Consequences............................................. 25
Resale of Medaphis Common Stock..................................................... 26
Comparison of Rights of Holders of Medaphis Common Stock and HDS Common Stock and
HDS Preferred Stock.............................................................. 26
Comparison of Rights of Holders of Medaphis Common Stock and HDS Preferred Stock.... 28
HDS Preferred Stock Purchase Agreements............................................. 30
Certain Repurchase Rights and Transfer Restrictions.................................
Appraisal Rights.................................................................... 31
Business of Medaphis.................................................................. 34
Unaudited Pro Forma Combined Financial Information.................................... 37
Selected Consolidated Financial Information of HDS.................................... 41
Management's Discussion and Analysis of Financial Condition and Results of Operations
of HDS.............................................................................. 42
Business of HDS....................................................................... 45
Ownership of HDS Capital Stock........................................................ 50
Experts............................................................................... 53
Legal Matters......................................................................... 54
Stockholder Proposals................................................................. 54
Index to Consolidated Financial Statements............................................ 55
Annex A: Merger Agreement............................................................. A-1
Annex B: Text of Section 262 of the Delaware General Corporation Law.................. B-1
Annex C: Fairness Opinion of Hambrecht & Quist........................................ C-1
iii
9
SUMMARY
The following is a summary of certain information contained or
incorporated by reference, elsewhere in
this Proxy Statement/Prospectus. ThisThe following summary is not intended to be complete andinformation is qualified in its entirety
by reference to, and should be read in conjunction with, the more detailed
information and the financial statements and notes thereto appearing elsewhere
or incorporated by reference, in this Proxy Statement/Prospectus.Prospectus, including information under "Risk Factors." References
herein to the "Company" or "Medaphis" refer to Medaphis Corporation and its
consolidated subsidiaries unless otherwise noted. The Company's fiscal year is
the calendar year. Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. See "Disclosure Regarding
Forward-Looking Statements."
THE PARTIES
MEDAPHISBUSINESS
Medaphis is a leading providerleader in delivering healthcare information products and
business management services, together with enabling technologies in selected
industries. Medaphis serves approximately 20,700 physicians and 2,700 hospitals
predominantly in North America. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively. The
Company's large client base and national presence further support the Company's
competitive position. Medaphis provides its services and products through its
Healthcare Services Group and Per-Se Technologies, its Information Technology
Group. The Company reported a net loss of $19.3 million for the year ended
December 31, 1997, including restructuring and other charges and a litigation
settlement. The Company generated revenue during the year ended December 31,
1997 of $557.9 million and EBITDA (as defined) of $37.8 million, each determined
on a pro forma basis giving effect to the disposition of Medaphis' non-core
insurance subrogation subsidiary, Healthcare Recoveries, Inc. ("HRI"), which was
sold in May 1997.
HEALTHCARE SERVICES GROUP. The Healthcare Services Group provides a range
of business management services to physicians and systems
to the healthcare industry. Medaphis'hospitals, including clinical
data collection, data input, medical coding, billing, cash collections and
accounts receivable management. These services and systems are designed to assist its clientscustomers
with the business management functions associated with the delivery of
healthcare services, thereby permittingallowing physicians and hospitalshospital staff to focus on
providing quality patient care. These services also assist physicians and
hospitals by improving cash flows and by reducing administrative costs and
burdens. The Healthcare Services Group typically enters into contracts with
physician and hospital customers providing for payment to the Company of a
contingent management fee that generally is based upon a percentage of net
collections and is billable monthly upon collection or, where required, on a
fixed fee basis. The Healthcare Services Group consists of the following two
divisions:
PHYSICIAN SERVICES. Physician Services is a leading provider of
business management solutions and claims processing to physicians in the
United States, a market currently estimated to be approximately $10 billion
annually. Of this market, management estimates that approximately 24% is
currently served by outsourcing companies such as Medaphis. With more than
17,250 physician clients throughout 47 states, management estimates the
Company has an approximate 12% share of the domestic outsourcing market,
based on 1996 revenues, more than four times the market share of its
nearest competitor. Physician Services offers clients both revenue and cost
management services. Revenue management services include medical coding,
electronic and manual claims submission, automated patient billing, past
due and delinquent accounts receivable collection, capitation analysis
(i.e., an analysis of the price per member paid to healthcare providers by
managed care health programs for a predetermined set of healthcare services
and procedures) and contract negotiation with payors, including managed
care organizations. Cost management services provide comprehensive practice
management, including front office administration, employee benefit plan
design and administration, cash flow forecasting and budgeting and general
consulting services.
HOSPITAL SERVICES. Hospital Services is a leading provider of
business management services to their patients. Medaphis also
provides subrogation and related recoveryhospitals in the United States,
representing over 1,100 hospitals in a highly fragmented industry. Hospital
1
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Services offers services primarily related to "late stage" (over 90 days)
receivables, including claims submission and automated patient billing.
Hospital Services also offers: (i) eligibility services, in which Hospital
Services personnel assist patients in qualifying for reimbursement under
appropriate federal, state and local government healthcare programs and
(ii) facilities management contracts, in which Hospital Services assumes
responsibility for the customer's entire business office functions,
including patient admissions/registration, medical records and business
office activities.
PER-SE TECHNOLOGIES. Per-Se Technologies ("Per-Se") provides application
software and a broad range of information technology and consulting services to
healthcare payors, scheduling and other service-oriented markets such as energy, communications and
financial services. Per-Se is an early entrant in the emerging market for
Delivery Chain Management ("DCM") solutions, which enable users to assess each
customer's unique needs and cost-effectively deliver products and services
individually tailored to meet them. Per-Se develops solutions using its Deliver
to Order(TM) methodology that enables customers to choose among packaged
application software, software supplied by other companies and modified by
Per-Se, enabling technology services, and outsourcing to balance their needs for
flexibility, time to deployment and cost.
In the third quarter of 1997 Medaphis combined the operations of Healthcare
Information Technologies ("HIT"), its software products division ("Product
Operations"), and the operations of BSG Corporation ("BSG"), its information
technology services division ("Services Operations"), under the Per-Se name.
This combination has helped the Company in its efforts to contain costs and
eliminate redundancies. Per-Se's management expects to benefit from the synergy
of combining HIT's leading information products in the high-growth healthcare
information systems market with BSG's ability to hospitalsprovide enabling technology
infrastructure and emerging
integrated healthcare delivery systemsservices. Per-Se is organized into Product Operations and
Services Operations.
PRODUCT OPERATIONS. Through its Product Operations, Per-Se provides
application software and systems integration services through over 1,800
hospital installations and work flow
engineering systems. Medaphis'to approximately 3,450 physicians. Per-Se offers
the following product lines: (i) an integrated enterprise-wide
patient-centered information system that coordinates quality integrated
care at nearly 200 acute-care and extended-care facilities representing
more than 30,000 beds, and for thousands of ambulatory clinics and
home-care providers; (ii) an advanced radiology information management
system for both single- and multi-site hospitals and imaging center
networks; and (iii) a suite of rules-based staff productivity, patient
scheduling and information systemsresource management software with over 1,900 global
installations. These products address both the business and the clinical
management needs of Per-Se's healthcare provider customers, and can
function in either a stand-alone provider setting or across an entire
healthcare delivery network. Per-Se also provides a variety of interfaces
to ensure that its products are designedcompatible with other software products
used by healthcare providers. Per-Se Product Operations' revenue is derived
from software licenses, resale of hardware, installation and implementation
services, and continuing customer support and software maintenance
activities. Customer support and software maintenance fees generally renew
annually to improve efficiency by automating certain scheduling and related management
functions withinprovide a healthcare facility andrecurring base of revenue.
SERVICES OPERATIONS. Through its Services Operations, Per-Se provides
full-service systems integration, information technology consulting and
work flow
engineering systemstailored software development to more than 100 customers, primarily in
service-oriented markets such as healthcare, energy, communications and
financial services. Per-Se provides its expertise in information technology
and business services are designed to increase flexibility, improve
end-user accessorganizations seeking to information and increase decision-makingcreate competitive
advantages through the strategic use of advanced technologies. These
technologies enable customers to streamline business processes and development of client/server, imagingimprove
access to information within their organizations, as well as to create
strategic advantages by extending business processes and information to
customers, suppliers and other advanced
technologies.organizations through networked systems.
HEALTHCARE INDUSTRY OVERVIEW
The healthcare industry is undergoing major changes, as pressures to cut
costs and increase quality and productivity are inspiring healthcare providers
to seek ways to manage their practices more effectively. In general, the
healthcare industry is in a state similar to that of the financial services
industry in the early 1980s. The same type of computerized technology that
fueled the substantial growth and change in that industry is just beginning to
be deployed in the healthcare industry.
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10
Since 1986, healthcare expenditures have doubled to more than $1.0
trillion, representing approximately 14% of the 1996 U.S. Gross Domestic
Product. At the same time, the healthcare delivery system is experiencing a
shift from a highly fragmented group of independent healthcare providers to
integrated healthcare networks that combine all of the services, products and
equipment necessary to address people's healthcare needs. In the face of
escalating costs and increasingly complex care delivery systems, healthcare
providers are seeking to manage costs, increase productivity and enhance the
quality of patient care through improved access to clinical and financial
information. This creates an opportunity for companies such as Medaphis currently providesthat
provide comprehensive cost-effective management services and information
systems.
Additionally, the federal government's focus on eliminating healthcare
fraud and abuse presents high growth opportunities for companies such as
Medaphis that provide sophisticated technology products and services to help
healthcare service providers comply with complex healthcare laws and
reimbursement procedures.
In light of these trends, healthcare industry analysts expect expenditures
on products and services that support healthcare information systems to continue
to increase over the next several years.
TURNAROUND; NEW 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 Physician Services Corporation ("MPSC") (as further
described below) and (b) the billing procedures and computerized coding system
used in Gottlieb's Financial Services ("GFS") to process claims, which may lead
to claims of errors in billing; (ii) the failure of prior managements'
acquisition strategy to integrate businesses 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 shut down of the operations of one of the companies
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 law.
In response to certain of these setbacks, assembly of a new management team
began in the fourth quarter of 1996, headed by David E. McDowell (former
President and Chief Operating Officer of McKesson Corporation). The new
management team combines healthcare industry talent with information technology
expertise from other industries that have already undergone the transition to
effective use of information technology. The Company believes that the combined
strengths of this team position Medaphis to take advantage of growth
opportunities in the healthcare marketplace.
In addition, in February 1997, new management announced its 1997 operating
plan, refocusing the Company on its core businesses of delivering healthcare
information products and business management services, together with enabling
technologies in selected industries. The major components of the plan included:
(i) exiting non-core businesses; (ii) achieving improved predictability of
business results through enhanced management accountability and systemscontrols; (iii)
reducing costs and increasing efficiencies in the core businesses; (iv)
achieving excellence in customer service; and (v) implementing cross-selling
initiatives. The Company made significant progress in accomplishing the 1997
operating plan, including the divestiture of HRI in May 1997 for net proceeds of
approximately $117.0 million, the combination of the operations of HIT and BSG
under the Per-Se name, the improvement of financial controls and imposition of
cost-containment measures throughout the Company, and the formulation of a new
customer-focused strategy centered on a "markets of one" approach to approximately 19,700 physicianssolutions
meeting the distinct needs of each customer.
RECENT DEVELOPMENT
The Company has previously disclosed an investigation being conducted by
the United States Attorney's Office for the Central District of California
concerning the billing and over 2,200 hospitalscollection practices in all 50
states, subrogationtwo offices of the Company's
wholly owned subsidiary, MPSC, which offices are located in Calabasas and
recovery servicesCypress, California
3
11
(the "Designated Offices") (the "California Investigation"). Medaphis first
became aware of the California Investigation on June 13, 1995, and the Company
subsequently has made periodic disclosures concerning the status of the
California Investigation.
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 healthcare plans covering in excess
of 24 million people throughoutthe defendant. Under the applicable statutes, the United States
and systems integrationthe State of California may elect to intervene fully or partially in qui tam
litigation, and work flow engineering servicesproceed 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 Realtors and
which contains allegations raised by them, the action is to recover civil
penalties on behalf of the United States and abroad.
Medaphis is incorporated under the laws of the State of Delaware. Medaphis
Common Stock is tradedCalifornia arising out
of alleged false claims presented by the defendants on behalf of their clients
for payment under various state and federal insurance programs. As previously
disclosed, no charges or claims by the government have been made. The Nasdaq Stock MarketComplaint
includes causes of action under the symbol "MEDA."
Unlessfederal False Claims Act, 31 U.S.C. sec.
3729 et seq., and the context otherwise requires, referenceCalifornia False Claims Act, Cal. Gov't Code sec. 12650 et
seq. The Complaint also includes causes of action relating to Medaphis's
termination of Realtor 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 includesbelieves that this Complaint relates to and concerns the
California Investigation.
Medaphis is engaged in discussions with the United States, and intends to
pursue settlement discussions with the United States, the State of California,
and the Relators. There can be no assurance that the Complaint will be resolved
promptly or that the Complaint will not have a material adverse effect upon the
Company.
BUSINESS STRATEGY
Medaphis' primary business objective is to expand its market position in
delivering cost-effective, high-quality healthcare information products and
business management services, together with enabling technologies in selected
industries, thereby realizing the growth potential of the Company.
In 1998, Medaphis plans to capitalize on the progress made in 1997 by
continuing to attract talented people, strengthening its infrastructure,
streamlining operations for efficiency and investing in product and service
development, training, sales, marketing and other programs designed to fuel
growth.
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To reach its objectives, Medaphis intends to execute strategies that
include:
- CAPITALIZE ON INDUSTRY TRENDS. The healthcare industry is rapidly
transitioning to consolidated care delivery systems, capitation and
managed care. Many physicians who previously practiced independently or in
small group practices now practice as part of larger groups or integrated
delivery networks that unite physicians with different practice
specialities to cover a broad range or even the entire spectrum of
healthcare needs. The Company's services and products can assist
healthcare providers in pricing services and negotiating agreements in a
marketplace increasingly moving toward capitation and managed care.
Although historically a large portion of Medaphis' Healthcare Services
revenue has come from billing and receivables management services,
Medaphis intends to respond to the changing nature of the healthcare
industry by developing higher value-added services and products that
enable customers to operate more effectively in increasingly complex
environments. The Company plans to grow revenue derived from offerings
such as: information management and consulting services for mergers and
group formations; activity-based costing systems; capitation management
and analysis; outcomes reporting; medical guidelines management; patient
eligibility services; and facilities management.
- LEAD INDUSTRY IN DELIVERING INTEGRATED SOLUTIONS. Medaphis intends to
capitalize on its experience as a software provider and systems integrator
to deliver workable integrated solutions that combine new technologies
with customers' existing information systems. There are substantial
opportunities for the expansion of information technology systems within
the healthcare market, which management believes has adopted such
technology at a slower rate than have some other industries. Management
anticipates that current healthcare industry trends will continue, and
that expenditures for information technology and services will increase as
a percentage of total healthcare expenditures. Medaphis has the healthcare
information products, personnel, services and systems in place to deliver
integrated solutions that capitalize on this growth opportunity.
- DIFFERENTIATE FROM COMPETITORS BY BECOMING KNOWN FOR CREATING
"INDIVIDUALLY DELIVERED" SOLUTIONS. Medaphis plans to deliver personalized
value, attract new customers and strengthen customer loyalty by focusing
on a "markets of one" approach to business that enables its customers to
combine Medaphis' array of packaged applications, tailored third-party
solutions, component frameworks and information technology services to
craft solutions suited to their unique needs.
- LEAD THE COMPLIANCE INITIATIVE IN THE HEALTHCARE MARKET. The healthcare
industry is subject to extensive and complex federal and state government
regulations. These regulations, along with the federal government's close
monitoring of healthcare costs and stricter regulatory controls over the
industry, are driving the demand for better systems to monitor and ensure
compliance with healthcare laws and regulations. Management believes the
Company's size, customer base and access to payor data enable it to
assemble and analyze data and trends more effectively and to invest in
compliance initiatives. Through continued investments in technology and
training, Medaphis intends to strengthen further its position in
developing and improving compliance systems that enable customers to
operate in accordance with continually changing healthcare regulations.
For example, in December of 1997 Physician Services teamed with the Graham
Company, a Philadelphia-based insurance broker, to develop an exclusive
insurance product in conjunction with an underwriter for Physician
Services' customers that will pay for losses (civil fines and penalties
and multiple damages) incurred by a physician for any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement,
omission or act in billing his or her professional services.
- EXECUTE PROGRAMS THAT EXPAND EXISTING CUSTOMER RELATIONSHIPS. Medaphis
plans to sell products and services from each of its operations to
existing customers across all operations. In addition, Medaphis will
leverage advanced technology knowledge and capabilities derived from
solutions Per-Se creates for services industries such as communications,
energy and financial services that have adopted technology solutions more
quickly than healthcare. Medaphis believes cross-development initiatives
will enable it to deliver leading-edge, yet proven, technology solutions
to the healthcare market.
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- MAKE STRATEGIC ACQUISITIONS, PARTNERSHIPS AND ALLIANCES. Medaphis
intends to enhance internal growth by making, when and if appropriate, a
limited number of strategic acquisitions, as well as by formulating
alliances and partnerships, that extend the skills, processes,
capabilities, products, systems or geographic coverage already in place
within the Company.
REFINANCING
In conjunction with the offering of the Old Notes, the Company entered into
the New Credit Facility (as defined). The Company used the net proceeds of such
offering, together with available cash and the initial borrowing under the New
Credit Facility, to refinance the Company's $210 million principal amount of
Senior Secured Increasing Rate Notes due April 1, 1999 (the "Bridge Notes"),
$185 million of which were purchased by an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation on December 23, 1997 and the remainder of which
were purchased by such affiliate on January 22, 1998. Approximately $157.5
million of the proceeds from the sale of the Bridge Notes was used by the
Company on December 23, 1997 to repay and refinance in full the Company's then
existing credit facility which was scheduled to mature on June 30, 1998 and
which would have required the issuance by the Company to the lenders thereunder
of warrants for 1% of the voting common stock of the Company if such credit
facility had not been repaid in full prior to December 31, 1997. Management
believes the refinancing has provided the Company with the financial flexibility
to support its turnaround plan and facilitate its future growth strategies.
GENERAL INFORMATION
Medaphis Corporation is a Delaware corporation formed in 1985 and itsoperates
through a number of wholly-owned subsidiaries. Medaphis'The Company's principal executive
offices are located at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia
30339, and its telephone number is (770) 319-3300.
HDS
HDS is444-5300.
THE EXCHANGE OFFER
The Exchange Offer............ Up to $175,000,000 aggregate principal amount
of New Notes are being offered in exchange for
a developer and supplierlike aggregate principal amount of healthcare information systems to
institutions, payers, healthcare networks, and providers. HDS offers a product
line generally known as ULTICARE(R), an integrated information system which
addresses a healthcare enterprise's information needs through the integrated
monitoring, scheduling, documentation, and control of patient care activities.
To accomplish this, patient care workstations are situated throughout the
enterprise: at patient bedsides, at nursing stations, in ancillaries
(laboratory, radiology, pharmacy, etc.), in physician offices and with mobile
health workers such as home care staff. HDS forms relationships throughout the
organization, especially with senior management of integrated delivery systems
(whether payer, provider, or practitioner based).
HDS has extensive experience in most phases of patient care automation:
nursing, physicians, laboratories, radiology, pharmacy, case management, and
quality assurance, among others. HDS customers include hospitals, integrated
healthcare enterprises, health maintenance organizations, municipal healthcare
systems and elder care organizations.
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ULTICARE offers functional modules to meet the specific information needs
of each customer. TheyOld Notes.
Old Notes may be purchased together astendered for exchange in whole
or in part in denominations of $1,000 or any
integral multiple thereof. The Company is
making the Exchange Offer in order to satisfy
its obligations under the Registration Rights
Agreement relating to the Old Notes. For a
package or separately, by
module. ULTICARE Modular, a four-module package, is an affordable and flexible
way to obtain patient information throughout an enterprise without having to
purchase the entire system at once. It combines HDS's patient-centered
Registration/ADT, order communications, nursing, and results reporting modules
to provide a highly functional core clinical information system. A wide
selection of additional modules are also available for integration. The
following are somedescription of the currently available ULTICARE modules:
- Patient Registration/ADT
- Point-of-Care Nursing Support
- Physician Support
- Health Maintenance Record
- Case Management/Critical Pathways
- Order Communication/Charge Capture
- Result Reporting
- Quality Assurance/Utilization Review
- Laboratory Departmental Processing
- Medical Records Departmental Processing
- Pharmacy Departmental Processing
- Radiology Departmental Processing
- Other Ancillary Departmental Processing
- Patient Schedulingprocedures for tendering Old
Notes, see "The Exchange Offer -- Procedures
for Tendering Old Notes."
Expiration Date............... 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by
the Company (in which case the Expiration Date
will be the latest date and Control
- Call Center Management
- Physician/Professional Staff Registry
- Cost Finding and Analysis
- Outpatient Appointment and Encounter Processing
- Report Writer/Query Processor
- Criteria Evaluation Processor
- Electronic Mail
HDStime to which the
Exchange Offer is incorporated under the lawsextended). See "The Exchange
Offer -- Terms of the StateExchange Offer."
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
conditions, which may be waived by the Company
in its sole discretion. The Exchange Offer is
not conditioned upon any minimum principal
amount of Delaware. There is no
public marketOld Notes being tendered. See "The
Exchange Offer -- Conditions to the Exchange
Offer."
Offer......................... The Company reserves the right in its sole and
absolute discretion, subject to applicable law,
at any time and from time to time, (i) to delay
the acceptance of the Old Notes for exchange,
(ii) to terminate the HDS Common Stock orExchange Offer if certain
specified conditions have
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14
not been satisfied, (iii) to extend the
HDS Preferred Stock. HDS's
principal executive offices are located at 268 West Hospitality Lane #300, San
Bernardino, California 92408,Expiration Date of the Exchange Offer and
its telephone number is (909) 888-3282.
THE HDS SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Special Meeting will be held on , 1996, at [10:00] a.m.
local time, atretain all Old Notes tendered pursuant to the
Mission Inn, 3649 Seventh Street, Riverside, California. AtExchange Offer, subject, however, to the Special Meeting,right
of holders of HDS Common Stock and HDS Preferred Stock, voting
together as a single class, as well as holders of HDS Series F Preferred Stock,
voting as a separate class, will be askedOld Notes to consider and vote upon a proposalwithdraw their
tendered Old Notes, or (iv) to approvewaive any
condition or otherwise amend the Merger Agreement. A copyterms of the
Merger Agreement is attached
hereto as Annex A and is incorporated hereinExchange Offer in any respect. See "The
Exchange Offer -- Terms of the Exchange Offer."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time on or prior to the Expiration Date by
this reference.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of shares of HDS Common Stock and HDS Preferred
Stock at the close of business on , 1996 (the "Record Date"), are
entitled todelivering a written notice of such withdrawal
to the Exchange Agent in conformity with
certain procedures set forth below under "The
Exchange Offer -- Withdrawal Rights."
Procedures for Tendering Old
Notes......................... Brokers, dealers, commercial banks, trust
companies and to vote at the Special Meeting. Asother nominees who hold Old Notes
through DTC (as defined herein) may effect
tenders by book-entry transfer in accordance
with DTC's Automated Tender Offer Program
("ATOP"). Holders of such date, there
were issued and outstanding: 4,081,990 shares of HDS Common Stock held by 157
holders of record, 742,000 shares of HDS Series B Preferred Stock held by 147
holders of record, 1,312,500 shares of HDS Series C Preferred Stock held by 49
holders of record and 1,605,353 shares of HDS Series F Preferred Stock held by
12 holders of record. Holders of record of HDS Common Stock and HDS Preferred
Stock onOld Notes registered
in the Record Date for the Special Meeting are entitled to one vote per
share on any matter that may properly come before the Special Meeting.
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VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
The presence in person or by proxy of the holdersname of a majority of the
shares of HDS Common Stock and HDS Preferred Stock (collectively, the "HDS
Capital Stock") outstanding as of the Record Date is necessarybroker, dealer, commercial
bank, trust company or other nominee are urged
to constitute a
quorum at the Special Meeting. The affirmative vote of (i) the holders of a
majority of the outstanding shares of HDS Common Stock and HDS Preferred Stock,
voting together as a single class, and (ii) the holders of at least 85% of the
outstanding shares of HDS Series F Preferred Stock, voting as a separate class,
in each case, outstanding as of the Record Date, voting incontact such person or by proxy,
is necessarypromptly if they wish to
approve the Merger Agreement. As of the Record Date, the
executive officers and directors of HDS beneficially owned an aggregate of (i)
1,954,023 shares of HDS Common Stock and HDS Preferred Stock (not including any
shares which might be deemedtender Old Notes. In order for Old Notes to be
beneficially owned on accounttendered by a means other than by book-entry
transfer, a Letter of outstanding
options), or approximately 25.24% of the shares of HDS Common StockTransmittal must be
completed and HDS
Preferred Stock then outstanding and (ii) 2,040 shares of HDS Series F Preferred
Stock, or less than 1% of the HDS Series F Preferred Stock then outstanding.
Approval of the Merger Agreement by the stockholders of Medaphis is not
required.
PROXIES
HDS has prepared a form of proxy card for the HDS Common Stock, the HDS
Series B Preferred Stock and the HDS Series C Preferred Stock, and a separate
form of proxy card for the HDS Series F Preferred Stock. HDS has enclosed the
applicable proxy card or cards with this Proxy Statement/Prospectus. Holders of
HDS Common Stock, HDS Series B Preferred Stock or HDS Series C Preferred Stock
are requested to sign and return the proxy marked "HDS Common and Series B and C
Preferred Stock." Holders of the HDS Series F Preferred Stock are requested to
sign and return the proxy marked "HDS Series F Preferred Stock." Holders of HDS
Series F Preferred Stock who are also holders of any other class of HDS Capital
Stock are requested to sign and return both proxy cards enclosed. All shares of
HDS Common Stock and HDS Preferred Stock represented by properly executed
proxies, unless such proxies have been previously revoked, will be votedsigned in accordance with the
instructions indicatedcontained herein. The Letter of
Transmittal and any other documents required by
the Letter of Transmittal must be delivered to
the Exchange Agent by mail, facsimile, hand
delivery or overnight carrier and either such
Old Notes must be delivered to the Exchange
Agent or specified procedures for guaranteed
delivery must be complied with. See "The
Exchange Offer -- Procedures for Tendering Old
Notes."
Letters of Transmittal and certificates
representing Old Notes should not be sent to
the Company. Such documents should only be sent
to the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
Resales of New Notes.......... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the
Commission as set forth in certain interpretive
letters addressed to third parties in other
transactions. The Company has not sought its
own interpretive letter and there can be no
assurance that the staff of the Division of
Corporation Finance of the Commission would
make a similar determination with respect to
the Exchange Offer as it has in such
proxies. Ifinterpretive letters to third parties. Based on
these interpretations by the staff of the
Division of Corporation Finance of the
Commission, and subject to the two immediately
following sentences, the Company believes that
New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by
a holder thereof (other than a holder who is a
broker-dealer) without further compliance with
the registration and prospectus delivery
requirements of the Securities Act, provided
that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder is not participating, and has
no instructions
are indicated,arrangement or understanding with any person
to participate, in a distribution
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15
(within the meaning of the Securities Act) of
such sharesNew Notes. However, any holder of Old
Notes who is an "affiliate" of the Company or
who intends to participate in the Exchange
Offer for the purpose of distributing the New
Notes, or any broker-dealer who purchased the
Old Notes from the Company to resell pursuant
to Rule 144A or any other available exemption
under the Securities Act, (a) will not be able
to rely on the interpretations of the staff of
the Division of Corporation Finance of the
Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted
or entitled to tender such Old Notes in the
Exchange Offer and (c) must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any sale or other transfer of
such Old Notes unless such sale is made
pursuant to an exemption from such
requirements. In addition, as described below,
if any broker-dealer holds Old Notes acquired
for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New Notes, then
such broker-dealer must deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange
Old Notes for New Notes in the Exchange Offer
will be voted for approvalrequired to represent that (i) it is
not an "affiliate" of the Merger Agreement
and, in the discretion of the proxy holder, as toCompany, (ii) any other matter which may
properly come before the Special Meeting. See "The HDS Special Meeting --
Solicitation and Revocation of Proxies."
THE MERGER
BACKGROUND OF THE MERGER
Beginning in early May, 1996, Medaphis and HDS engaged in substantive
discussions regarding a possible acquisition transaction. A definitive Merger
Agreement was executed on May 23, 1996. Prior to the execution of the Merger
Agreement, there was no material relationship between Medaphis and HDS.
REASONS FOR THE MERGER
HDS. The Board of Directors of HDS formed a special committee consisting
of the three non-employee members of the Board (the "Special Committee") to
consider the proposed terms of the Merger. In approving and adopting the Merger
Agreement and formulating its recommendation that the stockholders of HDS
approve and adopt the Merger Agreement and consummate the Merger, the HDS Board
of Directors considered a number of factors, including, without limitation, the
following: (i) the recommendation of the Special Committee that the Board of
Directors approve and adopt the Merger Agreement; (ii) the current
privately-held status of HDS; (iii) the quality of, and risks associated with,
Medaphis Common StockNew
Notes to be received by HDS stockholdersit are being acquired
in the Merger; (iv)ordinary course of its business, (iii)
it has no arrangement or understanding with any
person to participate in a distribution (within
the termsmeaning of the Merger Agreement; (v)Securities Act) of such New
Notes, and (iv) if such holder is not a
broker-dealer, such holder is not engaged in,
and does not intend to engage in, a
distribution (within the expectationmeaning of the
Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its
own account pursuant to the MergerExchange Offer must
acknowledge that it acquired the Old Notes for
its own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such New Notes.
The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. Based on the position taken
by the staff of the Division of Corporation
Finance of the Commission in the interpretive
letters referred to above, the Company believes
that Participating Broker-Dealers who acquired
Old Notes for their own accounts as a result of
market-making activities or other trading
activities may fulfill their prospectus
delivery requirements with respect to the New
Notes received upon exchange of such Old Notes
(other than Old Notes which represent an unsold
allotment from the original sale of the Old
Notes) with a prospectus meeting the
requirements of the Securities Act, which may
be the prospectus prepared for an exchange
offer so long as it contains a description of
the plan of distribution with respect to the
resale of such New Notes. Accordingly, this
Prospectus, as it may be amended or
supplemented from time to time, may be used by
a
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16
Participating Broker-Dealer in connection with
resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by
such Participating Broker-Dealer for its own
account as a result of market-making or other
trading activities. Subject to certain
provisions set forth in the Registration Rights
Agreement and to the limitations described
below under "The Exchange Offer -- Resales of
New Notes," the Company has agreed that this
Prospectus, as it may be amended or
supplemented from time to time, may be used by
a Participating Broker-Dealer in connection
with resales of such New Notes for a period
ending 180 days after the Expiration Date
(subject to extension under certain limited
circumstances) or, if earlier, when all such
New Notes have been disposed of by such
Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer
who is an "affiliate" of the Company may not
rely on such interpretive letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. See
"The Exchange Offer -- Resales of New Notes."
Exchange Agent................ The exchange agent with respect to the Exchange
Offer is State Street Bank and Trust Company
(the "Exchange Agent"). The addresses, and
telephone and facsimile numbers, of the
Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent" and in the Letter of
Transmittal.
Use of Proceeds............... The Company will not receive any cash proceeds
from the issuance of the New Notes offered
hereby. See "Use of Proceeds."
Certain Federal Income Tax
Considerations................ Holders of Old Notes should review the
information set forth under "Certain Federal
Income Tax Consequences" prior to tendering Old
Notes in the Exchange Offer.
THE OFFERING
Securities Offered............ $175 million aggregate principal amount of
Series B 9 1/2% Senior Notes due 2005.
Maturity Date................. February 15, 2005.
Interest Rate; Payment
Dates......................... The New Notes will bear interest at the rate of
9 1/2% per annum from the date of issuance,
payable semi-annually on February 15 and August
15 of each year, commencing August 15, 1998.
Subsidiary Guarantees......... Payment of principal of, premium, if any, and
interest on the New Notes will be
treatedunconditionally guaranteed, on a senior
unsecured basis, jointly and severally (the
"Subsidiary Guarantees") by all of the
Company's present and future domestic
Restricted Subsidiaries (the "Subsidiary
Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented
as a tax-free reorganizationall subsidiaries, except for federal income tax purposes so that
generally no gaincertain
inconsequential foreign subsidiaries, have
provided guarantees and the Parent does not
have any significant operations or lossassets,
separate from its investment in it
subsidiaries.
Ranking....................... The New Notes will be recognized by HDS stockholdersgeneral unsecured
obligations of the Company and will rank pari
passu in right of payment with all
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current and future unsecured senior
indebtedness of the Company. The Subsidiary
Guarantees will be general unsecured
obligations of the Subsidiary Guarantors and
will rank pari passu in right of payment with
all current and future unsecured senior
indebtedness of the Subsidiary Guarantors.
However, the New Notes and the Subsidiary
Guarantees will be effectively subordinated to
all current and future secured indebtedness of
the Company and the Subsidiary Guarantors,
including borrowings under the new credit
agreement entered into in connection with the
exchangeoffering of HDS Common Stock or HDS Preferred Stock for Medaphis Common
Stock in the Merger; (vi)Old Notes (the "New Credit
Facility"), which is secured by a lien on
substantially all the opinion renderedmaterial assets of the
Company and the Subsidiary Guarantors. As of
February 27, 1998, the Company and the
Subsidiary Guarantors had approximately $44
million of secured indebtedness outstanding and
approximately $45 million of additional
borrowing ability under the New Credit
Facility, all of which would be effectively
senior to the HDS BoardNew Notes and the Subsidiary
Guarantees. See "Description of Directors by
Hambrecht & Quist LLC ("Hambrecht & Quist") thatNew Credit
Facility" and "Description of
Notes -- General."
Optional Redemption........... The New Notes will be redeemable at the consideration to be
received byoption
of the holders of HDS Common Stock and HDS Preferred StockCompany, in whole or in part, at any
time on or after February 15, 2002, at the
Merger is fair, from a financial point
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12
of view, to such stockholders, the full text of which isredemption prices set forth as Annex Cherein, plus
accrued and unpaid interest, if any, to the
Proxy Statement/Prospectus (see "The Mergerredemption date. In addition, at any time on or
prior to February 15, 2001, the Company may
redeem up to 35% of the aggregate principal
amount of the Notes originally outstanding at a
redemption price equal to 109.5% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the redemption date, with the net proceeds
of one or more Equity Offerings (as defined),
provided that at least $100.0 million of the
aggregate principal amount of the Notes
originally outstanding remain outstanding
immediately following any such redemption. See
"Description of Notes -- OpinionOptional Redemption."
Change of Financial AdvisorControl............. Upon a Change of Control, the Company will be
required to HDS");offer to purchase all outstanding
Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and
(vii) certain strategic and business reasons forunpaid interest, if any, to the Merger, as
set forth below as Medaphis' reasons for pursuingpurchase date.
See "Description of Notes -- Certain
Covenants -- Change of Control."
Certain Covenants............. The indenture governing the Merger.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
Medaphis. In approving the Merger, the Merger Agreement and the
transactions contemplated thereby, the Board of Directors of Medaphis
considered,Notes (the
"Indenture") contains covenants that, among
other things, limit the following strategic and business reasons for
the Merger.
First, the Merger provides Medaphis with an advanced clinical information
management system which organizes data and processes around a patient-centered
model and facilitates the delivery of protocol-based care on a real-time basis.
ULTICARE, HDS's lead system, represents an integrated information management
system which addresses a healthcare enterprise's information needs through the
integrated monitoring, scheduling, documentation and control of all patient care
activities. As the evolving healthcare environment continues to promote
consolidation among healthcare providers and the growth of managed care,
Medaphis believes that the demand for clinical information management systems
designed to reduce costs within a healthcare enterprise and improve the quality
of care across the enterprise should increase. The Merger provides Medaphis with
established and deliverable products and expertise to take immediate advantage
of this market opportunity. Moreover, management of Medaphis believes that
ULTICARE will complement Medaphis' existing product and service offerings.
Second, Medaphis believes that the Merger will present opportunities for
Medaphis to cross sell systems and services among the consolidated Medaphis/HDS
customer base. Through its recent acquisitions of BSG Corporation ("BSG") and
Rapid Systems Solutions, Inc. ("Rapid Systems"), Medaphis has become oneability of the leading client/server systems integrationCompany
and work flow engineering companiesits Restricted Subsidiaries: (i) to pay
dividends and make other Restricted Payments
(as defined); (ii) to incur additional
indebtedness; (iii) to incur liens; (iv) to
enter into transactions with affiliates; (v) to
engage in sale-leaseback transactions; (vi) to
enter into agreements restricting the United States. Managementability
of Medaphis believes that Medaphis' systems
integrationRestricted Subsidiaries to pay dividends and
work flow engineering resourcesmake distributions; (vii) to merge or
consolidate with any other entity; and expertise should prove
helpful in connection with(viii)
to transfer or sell assets. In addition, under
certain circumstances, the sale and installation of HDS's clinical
information systems, particularly in Integrated Healthcare Delivery Systems
("IHDS") and other large healthcare enterprises which have an ever increasing
need for integration of clinical, financial, operational, administrative and
analytical systems and data across the enterprise. Similarly, management of
Medaphis believes that opportunities exist for Medaphis to provide business
management outsourcing services and information management systems to the HDS
client base, andCompany will be
required to offer HDS's clinical information systems to Medaphis'
existing base of healthcare providers and payor clients. Medaphis currently
provides business management services and systemspurchase outstanding Notes
at a price equal to approximately 19,700
physicians and over 2,200 hospitals in all 50 states and subrogation and
recovery services to 45 payors covering in excess of 24 million lives.
Third, Medaphis believes that the Merger will enhance Medaphis' ability to
pursue its mission of seeking to achieve an unequaled level of measurable
quality and productivity in the delivery of information technology systems and
business services which respond to the wants, needs and values of its customers.
Management believes that HDS's clinical information systems and expertise
together with Medaphis' existing product development expertise should assist
Medaphis in developing a proprietary data model for its clients which captures
and organizes data relating to the delivery of healthcare services and utilizes
such data in real-time to reduce costs, increase efficiency and improve the
quality of care provided. It has been estimated that the healthcare industry
spends in excess of $40 billion per year and employs in excess of 1 million
people to capture data on healthcare services provided and then to price, bill
and collect for such services. Management of Medaphis believes that the Merger
will provide Medaphis with a necessary component to address the cost and
management problems currently confronting the healthcare industry.
TERMS OF THE MERGER AGREEMENT
General. The Merger Agreement provides that, following approval100% of the Merger Agreement by the stockholdersprincipal
amount of HDSsuch Notes, plus accrued and the satisfaction or waiver of
the other conditions to the Merger, at the Effective
4
13
Time (as hereinafter defined), Newco will be merged withunpaid
interest and into HDS in
accordance with the provisions of the Delaware General Corporation Law ("DGCL").
HDS will be the surviving corporation in the Merger. As a result of the Merger,
the separate corporate existence of Newco will cease, and HDS will become a
wholly owned subsidiary of Medaphis.
Conversion Ratio. Each share of HDS Capital Stock issued and outstanding
at the time of the Merger (other than treasury shares and shares held by HDS
stockholders who perfect their appraisal rights under the DGCL) will be
converted into the right to receive .7911 of a share of Medaphis Common Stock
(the "Conversion Ratio"). The Conversion Ratio was determined in arms' length
negotiations between representatives of Medaphis and HDS. See "The
Merger -- Background of the Merger."
Cash will be paid in lieu of issuing fractional shares of Medaphis Common
Stock in an amount equal to the average closing price of Medaphis Common Stock,
as reported on The Nasdaq Stock Market, for the ten consecutive trading days
ending on the trading day immediately priorLiquidated Damages, if any, to the
date of purchase with the Special Meeting
(the "Average Closing Price"), multiplied bynet proceeds of
certain Asset Sales (as defined). These
covenants are subject to a number of important
exceptions. See "Description of
Notes -- Certain Covenants."
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18
Use of Proceeds............ The Company will not receive any cash proceeds in
the fraction of a share whichExchange Offer. The Company used the holder of HDS Capital Stock would otherwise be entitled to receive. See "The
Merger -- Termsnet
proceeds of the Merger Agreement -- Conversion Ratio."
Issuanceoffering of Additional Options. In connectionthe Old Notes, together
with the Merger, Medaphis
has agreed to issue additional options covering 100,000 shares of Medaphis
Common Stock to certain employees of HDS. The exercise price for such options
will be the fair market value of Medaphis Common Stock at the time of grantavailable cash and the options shall vest over five years.
Conditionsinitial borrowing under
the New Credit Facility, to refinance the Merger. In additionBridge
Notes. See "Use of Proceeds."
For more complete information regarding the New Notes, including
definitions of certain capitalized terms used above, see "Description of Notes."
RISK FACTORS
Holders should consider carefully the information set forth under the
caption "Risk Factors," and all other information set forth in this Prospectus
in deciding whether to approvaltender in the Exchange Offer.
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19
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth (i) summary consolidated financial
information for Medaphis for and as of each of the Merger Agreement
by the stockholders of HDS and certain customary conditions, consummation of the
Merger is subject to the satisfaction or waiver of, among others, the following
conditions: (i) that HDS and Medaphis shall have received the written opinion of
King & Spalding concerning certain federal income tax consequences of the
Merger; (ii) that HDS and Medaphis shall have been advised in writing by
Deloitte & Touche LLP that, in accordance with generally accepted accounting
principles, the Merger qualifies to be treated as a pooling of interests for
accounting purposes; (iii) that holders of not more than 10% of the outstanding
shares of HDS Capital Stock shall have elected to exercise appraisal rights
pursuant to the DGCL; (iv) that the Registration Statement of which this Proxy
Statement/Prospectus forms a part shall be effective; and (v) that the
applicable waiting periods shall have terminated under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See "The
Merger -- Terms of the Merger Agreement -- Conditions to the Merger."
Amendment. The Merger Agreement may be amended by mutual agreement of the
parties thereto. Any amendment to the Merger Agreement must be in writing and
signed by the parties to the Merger Agreement.
Termination. The Merger Agreement may be terminated (i) by mutual
agreement of the Boards of Directors of HDS and Medaphis; (ii) by HDS or
Medaphis if any of the conditions to such party's obligations to consummate the
Merger have not been complied with or performed, and such noncompliance or
nonperformance has not been cured or eliminated on or before August 15, 1996;
(iii) by HDS or by Medaphis if the Merger Agreement has not been approved by the
holders of a majority of the outstanding shares of HDS Common Stock and HDS
Preferred Stock, voting together as a single class, and the holders of at least
85% of the outstanding shares of HDS Series F Preferred Stock, voting as a
separate class; and (iv) by HDS if the Average Closing Price is less than $37.
Fees and Expenses. Medaphis will pay its own fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby. HDS will pay its own fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
but such fees, costs and expenses shall not exceed certain specified amounts and
the reasonable fees and expenses of accountants and counsel for HDS. In
addition, HDS has agreed that, if (i) the Merger Agreement is terminated solely
as a result of the failure of HDS's stockholders to approve the Merger
Agreement, (ii) on or prior to the date scheduled for the Special Meeting, HDS
receives a proposal or offer from another entity concerning a merger, sale of
substantial assets or stock or similar transaction involving HDS (an
"Acquisition Transaction"), (iii) HDS engages in negotiations or enters into a
letter of intent, agreement in principle or definitive agreement with another
entity concerning an Acquisition Transaction within 182 days after the date
5
14
of such termination of the Merger Agreement and (iv) such Acquisition
Transaction is consummated during or after such 182-day period, then HDS shall
pay Medaphis $7,500,000 to reimburse and compensate Medaphis for its expense,
time and effort in connection with the matters contemplated by the Merger
Agreement.
EFFECTIVE TIME OF THE MERGER AND EXCHANGE OF SHARES
Effective Time of the Merger. The Merger will become effective upon the
filing of a certificate of merger relating thereto with the Secretary of State
of the State of Delaware (the "Effective Time"). The Merger Agreement provides
that the parties thereto will cause such certificate of merger to be filed as
soon as practicable after all of the conditions to the consummation of the
Merger have been satisfied or waived. See "The Merger -- Effective Time of
Merger."
Exchange of HDS Stock Certificates. Prior to the Effective Time,
instructions and a letter of transmittal will be furnished to all stockholders
of HDS for use in exchanging their stock certificates for certificates
evidencing the shares of Medaphis Common Stock they will be entitled to receive
as a result of the Merger. STOCKHOLDERS OF HDS SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL INSTRUCTIONS AND THE LETTER OF TRANSMITTAL ARE
RECEIVED. See "The Merger -- Terms of the Merger Agreement -- Exchange of HDS
Stock Certificates."
RECOMMENDATION OF THE HDS BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT, AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, holders of HDS Capital Stock should be aware
that certain executive officers and directors of HDS have certain interests that
may present them with potential conflicts of interest with respect to the
Merger. See "The Merger -- Interests of Certain Persons in the Merger."
Ownership of HDS Capital Stock. As of the date of this Proxy
Statement/Prospectus, executive officers and directors of HDS beneficially owned
an aggregate of 1,954,023 shares of HDS Capital Stock (not including any shares
which might be deemed to be beneficially owned on account of outstanding
options). If the Special Meeting had been held on May 23, 1996, the trading day
before the date of this Proxy Statement/Prospectus (the "Last Trading Date"),
executive officers and directors of HDS would have been entitled to receive in
the Merger an aggregate of 1,545,828 shares of Medaphis Common Stock having an
aggregate market value of approximately $60.9 million based on the closing price
per share of Medaphis Common Stock reported on The Nasdaq Stock Market on the
Last Trading Date. See "Ownership of HDS Capital Stock."
Employment Agreements. In connection with the Merger, Ralph A. Korpman,
M.D., Jere Chrispens, Peter Gladkin, Janice E. Ticich and Karen C. Miller
(collectively, the "Key Employees" and individually a "Key Employee") will enter
into employment agreements (the "Employment Agreements") pursuant to which
Medaphis will agree to employ each of them for a term of two years. Certain
other employees of HDS will enter into Employment Agreements providing for a
one-year term. Each person entering into an Employment Agreement will be paid an
agreed upon annual salary and will be entitled to receive certain incentive
compensation payments. The Employment Agreements will contain certain
non-competition and non-solicitation covenants and will be in form and substance
mutually satisfactory to each party. Each Key Employee and certain other
stockholders of HDS will also enter into a Non-competition, Non-solicitation and
Confidentiality Agreement with Medaphis (the "Non-Compete Agreement") that will
be in form and substance mutually satisfactory to each party. See "The
Merger -- Certain Agreements in Connection with the Merger -- Employment
Agreements" and "-- Certain Agreements in Connection with the Merger --
Non-competition, Non-solicitation and Confidentiality Agreements."
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HDS OPTIONS
Pursuant to the Merger, Medaphis shall assume all of HDS's rights and
obligations with respect to the outstanding and unexercised options to acquire
shares of HDS Common Stock (the "HDS Options"). Prior to the Effective Time,
Medaphis will request that each holder of an HDS Option enter into an Option
Notice and Assumption Agreement (an "Option Assumption Agreement") with
Medaphis. Upon receipt of an Option Assumption Agreement from a holder of an HDS
Option following the Effective Time, Medaphis will issue to such holder a
non-qualified option (a "Non-Qualified Option") to be granted under Medaphis'
Non-Qualified Stock Option Plan for Employees of Acquired Companies (the
"Medaphis Stock Option Plan"). Each Non-Qualified Option issued to a holder of
an HDS Option will be subject to vesting as follows: the Option shall vest as to
25% of the shares of Medaphis Common Stock for which it may be exercised for
each year that the Optionholder has been employed by HDS.
Pursuant to the Merger Agreement, Medaphis is not entitled or required to
substitute a Non-Qualified Option for an HDS Option until it has received from
the holder of an HDS Option a properly completed and executed Option Assumption
Agreement with respect to the HDS Option. Each Non-Qualified Option issued in
substitution for an HDS Option will evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product of the number of shares of
HDS Common Stock covered by the HDS Option immediately prior to the Effective
Time multiplied by the Conversion Ratio. The exercise price for each such
Non-Qualified Option will be equal to the quotient obtained by dividing the
exercise price of the HDS Option immediately prior to the Effective Time by the
Conversion Ratio.
In addition, Medaphis has agreed to issue new options to certain employees
of HDS. See "The Merger -- Terms of the Merger Agreement -- Issuance of
Additional Options."
ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
purposes. The obligations of Medaphis and HDS to consummate the Merger are
conditioned upon the receipt of an opinion from Deloitte & Touche LLP, to the
effect that, in accordance with generally accepted accounting principles, the
Merger qualifies to be treated as a pooling of interests for accounting
purposes. Medaphis and HDS have agreed that neither they nor any of their
respective subsidiaries or affiliates will take or fail to take any action that
would jeopardize the treatment of the Merger as a pooling of interests for
accounting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Medaphis and HDS expect the Merger to be a tax-free reorganization for
federal income tax purposes so that no gain or loss will be recognized by
stockholders of HDS, except in respect of cash received in lieu of fractional
shares. The obligations of Medaphis and HDS to consummate the Merger are
conditioned upon the receipt of an opinion of King & Spalding, counsel to
Medaphis, to the effect that, subject to the assumptions, qualifications and
limitations set forth therein, the Merger will qualify as a tax-free
reorganization for federal income tax purposes under the Internal Revenue Code
of 1986, as amended ("Code"). In addition, Non-Qualified Options substituted for
outstanding HDS Options will, as a result of such substitution, no longer
qualify as incentive stock options for federal income tax purposes. See "The
Merger--Certain Federal Income Tax Consequences."
APPRAISAL RIGHTS
Holders of HDS Common Stock and HDS Preferred Stock are entitled to
appraisal rights and, if the Merger is consummated, to receive payment in cash
for the statutory "fair value" of their shares (excluding any element of value
arising from the accomplishment or expectation of the Merger), upon compliance
with the provisions of Section 262 of the DGCL. In order to perfect these
rights, a stockholder must not vote in favor of the Merger and must deliver to
HDS a written demand for appraisal of such stockholder's shares prior to the
vote on the Merger at the HDS Special Meeting. The delivery of a proxy or vote
against the Merger will not constitute such a demand. Failure to follow any of
these or other applicable procedures may result in the loss of statutory
appraisal rights. Holders of Medaphis Common Stock are not entitled to appraisal
rights in
7
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connection with the Merger. See "The Merger -- Appraisal Rights" and Annex B,
which sets forth the full text of Section 262 of the DGCL relating to appraisal
rights.
RESULTS OF OPERATIONS
Medaphis expects to record charges of approximately $900,000 and $6.5
million in the quarter ended June 30, 1996 associated with the acquisitions of
Rapid Systems and BSG, respectively, which are being accounted for as
poolings-of-interests. The charges relate to transaction fees, costs and
expenses incurred in connection with the mergers. Medaphis also expects to incur
an additional charge of $3.8 million for similar fees, costs and expenses in
connection with the Merger. The charge is expected to be recordedthree fiscal years in the
period in which the Merger is consummated.
MARKETS AND MARKET PRICES
Medaphis Common Stock is listed on The Nasdaq Stock Market under the symbol
"MEDA." No cash dividends have ever been declared or paid on Medaphis Common
Stock.
The following table sets forth for the calendar quarter indicated the high
and low closing prices per share of Medaphis Common Stock as reported on The
Nasdaq Stock Market.
MEDAPHIS COMMON
STOCK(1)
---------------------
HIGH LOW
------ ------
1994:
First Quarter..................................................... $18.88 $15.69
Second Quarter.................................................... 18.50 13.25
Third Quarter..................................................... 18.13 12.50
Fourth Quarter.................................................... 23.44 17.88
1995:
First Quarter..................................................... $31.50 $22.19
Second Quarter.................................................... 34.00 21.25
Third Quarter..................................................... 29.38 20.88
Fourth Quarter.................................................... 37.00 26.50
1996:
First Quarter..................................................... $52.50 $34.50
Second Quarter (through May 23, 1996)............................. 53.82 $39.38
- ---------------
(1) On May 3, 1995, Medaphis' Board of Directors declared a two-for-one stock
split of the outstanding shares of Medaphis Common Stock. The stock split
was effected in the form of a stock dividend payable on May 31, 1995, to
Medaphis stockholders of record as of May 24, 1995. The high and low
closing prices per share of Medaphis Common Stock have been retroactively
adjusted to reflect the stock split. As of the date hereof, Medaphis had
approximately 450 stockholders of record.
On (i) May 23, 1996, the last trading date prior to public announcement of
the Merger, and (ii) , 1996, the closing sale price of Medaphis
Common Stock, as reported on The Nasdaq Stock Market, was $39.375 and
$ per share, respectively.
HDS is privately held and there is no established public market for any of
the HDS Common Stock or HDS Preferred Stock. As of the date of this Proxy
Statement/Prospectus, there were 157 holders of record of HDS Common Stock,
representing 100% of the ownership of HDS Common Stock, and 181 holders of
record of HDS Preferred Stock, representing 100% of the ownership of HDS
Preferred Stock.
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COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain per common share information for
Medaphis and HDS on both historical and pro forma combined bases (giving effect
to the Merger using the pooling-of-interests method of accounting) and certain
information on an equivalent pro forma combined basis for each share of HDS
Common Stock. No cash dividends have ever been declared or paid on Medaphis
Common Stock or HDS Common Stock.
PER SHARE OF COMMON STOCK
---------------------------------
INCOME CASH BOOK
(LOSS) DIVIDENDS(9) VALUE
--------- ------------ ------
Medaphis -- Historical(1)(2)(3)(4)
Year ended December 31, 1993.................................. $ 0.16 $ -- $ --
Year ended December 31, 1994.................................. 0.45 -- --
Year ended December 31, 1995.................................. (0.00) -- 6.99
Quarter ended March 31, 1996.................................. 0.18 -- 7.68
Medaphis -- Pro Forma Combined(1)(2)(3)(4)(5)(6)
Year ended December 31, 1993.................................. $ 0.36 $ -- $ --
Year ended December 31, 1994.................................. 0.56 -- --
Year ended December 31, 1995.................................. 0.08 -- 7.02
Quarter ended March 31, 1996.................................. 0.17 -- 7.59
HDS -- Historical(7)
Year ended March 31, 1994..................................... $ 1.13 $ -- $ --
Year ended March 31, 1995..................................... 1.15 -- --
Year ended March 31, 1996..................................... (0.98) -- 0.98
HDS -- Equivalent Pro Forma Combined(8)
Year ended December 31, 1993.................................. $ 0.28 $ -- $ --
Year ended December 31, 1994.................................. 0.44 -- --
Year ended December 31, 1995.................................. 0.06 -- 5.55
Quarter ended March 31, 1996.................................. 0.13 -- 6.00
- ---------------
(1) Income (loss) represents income (loss) from continuing operations.
(2) Historical book value per share information for Medaphis as of the end of
each period presented is computed by dividing historical stockholders'
equity by the number of shares of Medaphis Common Stock outstanding at the
end of each period presented, excluding common stock equivalents. Pro forma
combined book value per share information as of the end of each period
presented is computed by dividing pro forma stockholders' equity by the
number of shares of Medaphis Common Stock outstanding on such dates and the
shares of Medaphis Common Stock to be issued in the Merger.
(3) On April 3, Medaphis acquired Rapid Systems in a merger transaction
accounted for as a pooling-of-interests. In addition, on May 6, 1996,
Medaphis acquired BSG in a merger transaction accounted for as a
pooling-of-interests. Accordingly, the historical financial statements of
Medaphis have been restated to reflect the mergers.
(4) In 1995 and 1996, Medaphis acquired Automation Atwork and affiliates
("Atwork"), Medical Management Sciences, Inc. ("MMS"), Rapid Systems and
BSG in merger transactions that were accounted for as poolings of
interests. Prior to the mergers, Atwork, MMS, Rapid Systems and a company
acquired by BSG prior to the BSG Merger had elected "S" corporation status
for income tax purposes. As a result of the Mergers, (or, in the case of
the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Per share of Common Stock
information for Medaphis is presented on a pro forma basis as if the
entities had been "C" corporations during the years ended December 31, 1993, 1994 and 19951997 and the three months ended MarchDecember 31, 1996.
(5) The Medaphis Pro Forma Combined Income per share amounts1997; and
(ii) summary unaudited pro forma statement of operations for the yearsyear ended
December 31, 1993, 19941997, giving effect to the divestiture of HRI. The unaudited pro
forma statement of operations does not give any effect to the offering of the
Old Notes, the initial borrowing under the New Credit Facility or the
application of the net proceeds therefrom due to the immaterial difference in
the weighted average interest rate. The summary consolidated financial
information of Medaphis for each of the three fiscal years in the period ended
December 31, 1997 has been derived from the audited consolidated financial
statements of Medaphis, which are incorporated herein by reference. The pro
forma information is provided for informational purposes only and 1995is not
necessarily indicative of actual results that would have been achieved had the
offering of the Old Notes, the initial borrowing under the New Credit Facility
and the three monthsapplication of the net proceeds therefrom, and the divestiture of HRI
been consummated as of January 1, 1997 or of future results. The summary
unaudited pro forma statement of operations is derived from the Unaudited Pro
Forma Consolidated Financial Statement appearing elsewhere herein.
The information set forth below should be read in conjunction with (i) the
Consolidated Financial Statements of the Company and the related notes thereto,
which are incorporated herein by reference; (ii) the Unaudited Pro Forma
Consolidated Financial Statement and notes thereto, which is included elsewhere
herein; and (iii) Management's Discussion and Analysis of Financial Condition
and Results of Operations, which is included elsewhere herein.
PRO
FORMA(1) THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1997
-------- --------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $538,012 $ 596,714 $572,625 $ 557,905 $149,463
Salaries and wages......................... 314,790 398,573 377,363 370,625 95,855
Other operating expenses................... 134,055 163,677 153,372 149,476 37,531
Depreciation............................... 14,187 28,276 29,355 28,954 7,815
Amortization............................... 18,048 25,713 24,137 24,137 6,136
Interest expense, net...................... 9,761 11,585 23,260 18,822 3,843
Litigation settlement...................... -- -- 52,500 52,500 --
Restructuring and other charges............ 48,750 180,316 22,640 22,640 5,979
Loss before extraordinary item
and cumulative effect of accounting
change................................... (2,650) (137,337) (93,229) (92,591) (7,696)
OTHER FINANCIAL DATA:
EBITDA(2).................................. $ 89,167 $ 34,464 $ 41,890 $ 37,804(3) $ 16,077
Capital expenditures....................... 51,120 51,135 19,971 19,863 4,773
Ratio of pro forma total debt to EBITDA.... -- -- -- 5.2x 3.1x(4)
Ratio of EBITDA to pro forma interest
expense.................................. -- -- -- 2.0x 3.4x(4)
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AS OF DECEMBER 31, 1997
AS OF DECEMBER 31, ------------------------
-------------------- AS
1995 1996 ACTUAL ADJUSTED(5)
-------- --------- -------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................ $ 90,043 $ 56,492 $ 93,497 $ 78,703
Intangible assets.......................... 611,544 539,151 515,939 515,939
Total assets............................... 935,790 936,854 874,027 862,383
Total debt................................. 161,246 271,727 200,941 197,397
Convertible subordinated debentures........ 63,375 -- -- --
Stockholders' equity....................... 554,074 508,525 501,781 496,905
- ---------------
(1) The Unaudited Pro Forma Consolidated Statement of Operations Data for the
year ended MarchDecember 31, 1996 give1997, gives effect to (i) the Mergerdivestiture of HRI as if
it had occurred on January 1, 19931997.
(2) EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, litigation settlement, restructuring and (ii) certainother
charges, extraordinary item and cumulative effect of accounting change. See
Note 4 to the notes to the Consolidated Financial Statements of Medaphis
Corporation and subsidiaries where restructuring and other charges are
discussed in more detail. EBITDA is not a measure of performance under GAAP.
While EBITDA should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity, management understands that EBITDA is customarily used as a
measurement in evaluating companies. Moreover, substantially all of the
Company's financing agreements contain covenants in which EBITDA, as defined
therein, is used as a measure of financial performance. The method of
calculating EBITDA set forth above may be different from calculations of
EBITDA employed by other companies and, accordingly, may not be directly
comparable to such other calculations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion
of other measures of performance determined in accordance with GAAP.
(3) EBITDA includes approximately $18.0 million of other unusual charges which
reduced revenue in the quarter ended September 30, 1997 consisting of the
following:
(000'S)
-------
Adjustment to the methodology of calculating accounts
receivable, unbilled...................................... $12,132
Adjustment to unbilled receivables related to one of the
Company's software products............................... 3,000
Miscellaneous unusual bad debt reserves..................... 2,823
-------
$17,955
=======
If such charges had not been incurred in the quarter ended September 30 of
fiscal year 1997, pro forma adjustments related to the mergers with
9
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Atwork, MMS Rapid Systems and BSG. The amountsEBITDA would have equaled $55.8 million for the
year ended December 31, 1995 also give effect1997. Such unusual charges will be added back to
the 1995 Acquisitions, as hereinafter defined,
as if each had occurred on January 1, 1995.
(6) ForCompany's consolidated net income for 1997 for purposes of preparing Pro Forma Combined per sharecalculating
the fixed charge coverage incurrence test contained in the Indenture. See
"Description of Notes."
(4) Represents ratio of (i) pro forma total debt to (ii) four times EBITDA in
the three months ended December 31, 1997 and ratio of (i) four times EBITDA
in the three months ended December 31, 1997 to (ii) pro forma interest
expense.
(5) The As Adjusted balance sheet data as of December 31, 1997 is adjusted for
(i) the offering of the Old Notes, the initial borrowing under the New
Credit Facility and the application of the net proceeds therefrom and (ii)
the addition of new debt issuance costs and the write-off of the debt
issuance costs associated with the Bridge Notes. See "Capitalization" for
additional discussion.
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RISK FACTORS
In addition to the other information HDS'sset forth herein, prospective
investors should carefully consider the following risk factors before deciding
to participate in the Exchange Offer. The information contained in this
Prospectus contains statements that are forward-looking in nature and,
accordingly, are subject to a number of risks and uncertainties. A number of
factors, including, but not limited to, those discussed below and those
contained in "Disclosure Regarding Forward-Looking Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Business," could cause actual results to differ materially from those
anticipated by such forward-looking statements. In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and data that may be incorrect or imprecise. Accordingly, any forward-looking
statements included or incorporated by reference herein do not purport to be
predictions of future events or circumstances and may not be realized.
Forward-looking statements can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "plans," "may,"
"will," "should," "seeks," "pro forma" or "anticipates," or the negative
thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of February 27, 1998, the Company had approximately $44
million of secured indebtedness outstanding and had approximately $45 million of
additional borrowing availability under the New Credit Facility. See
"Capitalization." In addition, the Indenture, the New Credit Facility and the
Company's other debt instruments will allow the Company to incur additional
indebtedness under certain circumstances. The Company's ability to make payments
on the Notes and to satisfy its other 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.
The Company believes, based on circumstances as of the date of this
Prospectus, that its cash flow, together with available borrowings under the New
Credit Facility, will be sufficient to permit the Company to meet its operating
expenses and to service its debt requirements as they become due for the
foreseeable future, however, there can be no assurance that such results will be
achieved. The Company's belief is based upon certain assumptions, including,
among other things, that the Company will succeed in implementing its business
strategy and that there will be no material adverse developments in the
business, liquidity or capital requirements of the Company. 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 to holders of the Notes, 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 New
Credit Facility contains 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 the Notes and those requiring maintenance of
minimum net worth, minimum EBITDA, minimum interest coverage and maximum
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 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.
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LITIGATION AND GOVERNMENT INVESTIGATIONS
Medaphis is the subject of ongoing investigations by various state and
federal agencies involving, among other things, billing and collection practices
and potential allegations of fraud with respect to California Investigation and
the GFS Investigation (as defined) and potential insider trading and certain
accounting matters. Such actions could expose the Company and its subsidiaries
to significant liabilities and penalties. Medaphis is also involved in
substantial litigation which exposes the Company to material loss contingencies,
including numerous federal securities class action lawsuits brought by
shareholders and claims brought by former shareholders of entities acquired by
the Company. The Company is also subject to certain qui tam litigation which the
Company believes resulted in certain of the investigations by the above
mentioned agencies. Medaphis has also received certain written demands that have
not yet resulted in legal action. See "The Business -- Legal Proceedings" and
the Legal Matters note to the Company's Consolidated Financial Statements.
There can be no assurance that the Company will be able to defend these
lawsuits successfully or that additional lawsuits or governmental investigations
will not be commenced against the Company, nor can there be any assurance that
the ongoing governmental investigations will not result in significant fines,
damages or other penalties. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations and
the resolution thereof will not have a disruptive effect upon the operations of
the business, consume the time and attention of the senior management of the
Company or have a material adverse effect upon the Company. In the event of an
adverse outcome to pending litigation, there can be no assurance that insurance
coverage, if any, would be available for or would fully cover any monetary
damages assessed against the Company. Adverse developments or an adverse outcome
in one or more of the lawsuits, written demands or investigations could have a
material adverse effect on the Company or its ability to repay the Notes.
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 MPSC (the "California Investigation"), and (b) the billing procedures
and computerized coding system used in 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 shutdown 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 and 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 Imonics Shutdown (as defined); (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.
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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 such failure could have a material adverse effect on the
Company's ability to repay the Notes.
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 yearsyear
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
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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 were combined
with Medaphis' operating resultsand 1996 fiscal years and the first two
fiscal quarters of its 1997 fiscal year. The effect of such restatements on the
Company's net income (loss) for the years ended December 31, 19931994, 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 restatement, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, respectively. For1995 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. As indicated in a Current Report on
Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"), 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 (the "MMS Restatement"). Such
acquisition had previously been accounted for as a pooling-of-interests.
Financial statements for the Company's 1995 and 1996 fiscal years and the
nine-month period ended September 30, 1997 reflecting the HDS and MMS-related
restatements were filed by the Company as an exhibit to the January 8-K. 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 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. See "-- Litigation and
Government Investigations" and "The Business -- Legal Proceedings."
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
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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.
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 ended December 31,2000
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
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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 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 titles 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 Balanced Budget Act of 1997
instituted substantial reductions in Medicare program expenditures. Medaphis
anticipates that future legislation may 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' 1995business
through, among other things, its potential to reduce the amount of reimbursement
received by Medaphis' clients for healthcare services.
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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. See "The
Business -- Legal Proceedings."
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 recently became aware that it was a defendant in a qui tam
litigation. There can be no assurance that Medaphis will not be the subject of
additional 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. See "The Business --
Legal Proceedings."
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.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the Notes contains certain covenants directly or
indirectly limiting, subject to certain important exceptions, the incurrence of
additional indebtedness (in part through fixed charge coverage test measured on
a pro forma basis at the time of any proposed incurrence of indebtedness), the
payment of dividends, the redemption of capital stock, the making of certain
investments, the issuance of capital stock of subsidiaries, the creation of
liens, the declaration and payment of dividends and other distributions to
equityholders, dividend and other payment restrictions affecting the Company's
subsidiaries, the issuance of guarantees, transactions with affiliates, asset
sales and certain mergers and consolidations. A breach of any of these covenants
could result in a default under the Indenture. In addition, the New Credit
Facility and the instruments governing the Company's other indebtedness contain
other, more restrictive covenants, including restrictions on the Company's
ability to prepay the Notes and will require the Company to satisfy certain
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financial tests. See "New Credit Facility." The Company's ability to comply with
such covenants and to satisfy such financial tests may be affected by events
beyond its control. A breach of any of these covenants could result in a default
under the applicable indebtedness. In the event of a default under the New
Credit Facility, the lenders thereunder could elect to declare all amounts
borrowed, together with accrued interest, to be immediately due and payable, and
could terminate all commitments thereunder. In addition, a default under the New
Credit Facility or the instruments governing the Company's other indebtedness
could constitute a cross-default under the Indenture and any instruments
governing the Company's other indebtedness, and a default under the Indenture
could constitute a cross-default under the New Credit Facility and any
instrument governing the Company's other indebtedness. The occurrence of a
default under any indebtedness of the Company could therefore have a material
adverse effect on the Company. See "Description of Notes -- Certain Covenants"
and "Description of New Credit Facility."
HOLDING COMPANY STRUCTURE; EFFECTS OF LIENS ON ASSETS
Substantially all of the Company's consolidated operating results were combined with HDS's 1995 operating results which
were restatedincome will be
generated by its subsidiaries. As a result, Medaphis will depend on the earnings
and cash flow of, and dividends and distributions or advances from, its
Restricted Subsidiaries (as defined) to provide the funds necessary to meet its
debt service obligations, including the payment of principal of and interest on
the Notes. There can be no assurance that the Company's subsidiaries will
generate sufficient cash flow to dividend, distribute or advance funds to the
Company. Should the Company fail to satisfy any payment obligation under the
Notes, the holders thereof would have a direct claim therefor against the
Subsidiary Guarantors pursuant to the Subsidiary Guarantees. However,
substantially all of the material assets of the Company and the Subsidiary
Guarantors are pledged to secure the obligations of the Company and such
subsidiaries under the New Credit Facility and other assets of the Company and
the Subsidiary Guarantors may secure other secured obligations as well. The
Indenture will limit, but not prohibit, the ability of the Company and its
Restricted Subsidiaries to incur additional secured indebtedness. In the event
of a default under the New Credit Facility (or any other secured indebtedness),
the lenders thereunder would be entitled to a calendar year basis. See "Unaudited Pro Forma Combined
Financial Information."
(7) Historical book value per share information for HDS asclaim on the assets securing such
indebtedness which is prior to any claim of the end of each
period presented is computed by dividing historical stockholder's equity
attributable to holders of HDS Commonthe Notes.
Accordingly, there may be insufficient assets remaining after payment of secured
claims against the Company and the Subsidiary Guarantors (including claims of
lenders under the New Credit Facility) to pay amounts due on the Notes. See
"-- Substantial Leverage; Ability to Service Debt."
POTENTIAL FAILURE TO MAKE PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company must offer to
purchase the Notes at a purchase price of 101% of the principal amount of the
Notes, together with accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase. In such circumstances, the Company may be required to
obtain any requisite consent from its lenders, including under the New Credit
Facility, to permit the repurchase of the Notes. If the Company is unable to
repay all of such indebtedness or is unable to obtain the necessary consents,
the Company may be unable to offer to repurchase the Notes, which would
constitute an Event of Default under the Indenture. There can be no assurance
that the Company will have sufficient funds available at the time of any Change
of Control to make any debt payment (including repurchase of the Notes) as
described above or that the Company would be able to refinance its outstanding
indebtedness in order to permit it to repurchase the Notes or, if such
refinancing were to occur, that such refinancing would be on terms favorable to
the Company. See "Description of Notes -- Certain Covenants -- Change of
Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the New Credit Facility or other secured or unsecured
senior indebtedness of the Company. Such events may permit the holders under
such debt instruments to refuse to advance additional funds, reduce the
borrowing base thereunder or accelerate the maturity of the debt, and, if the
debt is not paid, to enforce security interests in, or commence litigation that
could ultimately result in a sale of, substantially all the assets of the
Company, thereby limiting the Company's ability to raise cash to repurchase the
Notes and afford the benefit of the Change of Control provisions to the holder
of the Notes. See "-- Holding Company Structure; Effects of Liens on Assets."
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FRAUDULENT CONVEYANCE
The obligations of the Company under the Notes, and the application of the
net proceeds therefrom, may be subject to review under various laws for the
protection of creditors, including federal and state fraudulent conveyance and
fraudulent transfer laws, if a bankruptcy case or other lawsuit (including in
circumstances where bankruptcy is not involved) is commenced by or on behalf of
any creditor of the Company or a representative of any of the Company's
creditors. If a court in such case or lawsuit were to find that, at the time the
Company issued the Notes or at the time of the closing of the New Credit
Facility and related transactions, the Company (i) intended to hinder, delay or
defraud any existing or future creditor or (ii) did not receive fair
consideration or reasonably equivalent value for issuing the Notes or in
connection with related transactions, and the Company either (A) was insolvent
or rendered insolvent by reason thereof, (B) was engaged or was about to engage
in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (C) intended to or believed that it
would incur debts beyond its ability to pay such debts as they matured or became
due, such court could void the Company's obligations under the Notes,
subordinate the Notes to other indebtedness of the Company, direct that holders
of the Notes return any amounts paid thereunder to the Company or to a fund for
the benefit of its creditors or take other action detrimental to the holders of
the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
will be considered insolvent at a particular time if the sum of its debts,
including contingent liabilities, at that time is greater than the then-fair
value of its assets or if the fair saleable value of the assets at that time is
less than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. There can be no assurance,
however, as to what standard a court would apply to evaluate the parties' intent
or to determine whether the Company was insolvent at the time of, or rendered
insolvent upon consummation of, the issuance of the Notes and the closing under
the New Credit Facility or that, regardless of the standard, a court would not
determine that the Company was insolvent at the time of, or rendered insolvent
upon consummation of, the issuance of the Notes and the closing under the New
Credit Facility.
The Company's obligations under the Notes are guaranteed by the Subsidiary
Guarantors, and the Subsidiary Guarantees also may be subject to review under
various laws for the protection of creditors, including federal and state
fraudulent conveyance and fraudulent transfer laws, if a bankruptcy case or a
lawsuit (including in circumstances where bankruptcy is not involved) is
commenced by or on behalf of any creditor of a Subsidiary Guarantor or a
representative of any such creditors. In such a case, the analysis set forth
above would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the Subsidiary
Guarantors), the obligations of the Subsidiary Guarantors thereunder were
incurred for less than reasonably equivalent value or fair consideration. A
court could void a Subsidiary Guarantor's obligation under its Subsidiary
Guarantee, subordinate the Subsidiary Guarantee to the other indebtedness of a
Subsidiary Guarantor, direct that holders of the Notes return any amounts paid
under a Subsidiary Guarantee to the relevant Subsidiary Guarantor or to a fund
for the benefit of its creditors, or take other action detrimental to the
holders of the Notes.
ABSENCE OF PUBLIC MARKET FOR NOTES
The Old Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the New Notes may be resold or otherwise by the holders (who are
not affiliates of the Company) without compliance with the registration
requirements under the Securities Act, they will be new securities for which
there is currently no established trading market. The Company does not intend to
apply for listing of the New Notes on a national securities exchange or for
quotation of the New Notes on an automated dealer quotation system. Although
Donaldson, Lufkin & Jenrette Securities Corporation, the initial purchaser in
the offering of the Old Notes, has informed the Company that it currently
intends to make a
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market in the New Notes, it is not obligated to do so, and any such
market-making, if initiated, may be discontinued at any time without notice. The
liquidity of any market for the New Notes will depend upon the number of holders
of the Notes, the interest of securities dealers in making a market in the New
Notes and other factors. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Notes. If an active trading
market for the New Notes does not develop, the market price and liquidity of the
New Notes may be adversely affected. If the New Notes are traded, they may trade
at a discount from their face value, depending upon prevailing interest rates,
the market for similar securities, the performance of the Company and certain
other factors. The liquidity of, and trading markets for, the New Notes may also
be adversely affected by general declines in the market for non-investment grade
debt. Such declines may adversely affect the liquidity of, and trading markets
for, the New Notes independent of the financial performance of, or prospects
for, the Company.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with provisions of Rule 144 under the Securities Act.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the New Notes. There can be no assurance that the market, if any, for
the New Notes will not be subject to similar disruptions. Any such disruptions
may have an adverse effect on the holders of the New Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company does not intend
to register under the Securities Act any Old Notes which remain outstanding
after consummation of the Exchange Offer (subject to such limited exceptions, if
applicable). To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
Indenture.
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer -- Conditions
to the Exchange Offer," delivery of New Notes in exchange for Old Notes tendered
and accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for Old Notes or a
book-entry confirmation of a book-entry transfer of Old Notes into the Exchange
Agent's account at DTC, including an Agent's Message (as defined under "The
Exchange Offer -- Acceptance for Exchange and Issuance of New Notes") if the
tendering holder does not deliver a Letter of Transmittal, (ii) a completed and
signed Letter of Transmittal (or facsimile thereof), with any required signature
guarantees or, in the case of a book-entry transfer, an Agent's Message in lieu
of the Letter of Transmittal, and (iii) any other documents required by the
Letter of Transmittal. Therefore, holders of Old Notes desiring to tender such
Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. The Company is not under a duty to give notification of defects
or irregularities with respect to the tenders of Old Notes for exchange.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with Donaldson, Lufkin & Jenrette Securities
Corporation, pursuant to which the Company agreed to file and to use its
commercially reasonable efforts to cause to become effective with the Commission
a registration statement with respect to the exchange of the Old Notes for notes
with terms identical in all material respects to the terms of the Old Notes. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company under the Registration Rights Agreement. The form and terms of the
New Notes are the same as the form and terms of the Old Notes except that the
New Notes have been registered under the Securities Act and will not provide for
any increase in the interest rate thereon. In that regard, the Old Notes
provide, among other things, that, if a registration statement relating to the
Exchange Offer has not been filed by April 21, 1998 and declared effective by
June 22, 1998, Liquidated Damages will be payable on the Old Notes. Upon
consummation of the Exchange Offer, holders of Old Notes will not be entitled to
any Liquidated Damages thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors -- Consequences of a Failure to Exchange Old Notes" and "Description of
Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose Old Notes
are held of record by The Depository Trust Company ("DTC") who desires to
deliver such Old Notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $175,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $175,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in denominations of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $175,000,000
aggregate principal amount of the Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors -- Consequences
of a Failure to Exchange Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
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Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER BASED ON
SUCH HOLDERS OWN FINANCIAL POSITIONS AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its sole and absolute discretion, that
any of the events or conditions referred to under "-- Conditions to the Exchange
Offer" have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered pursuant
to the Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their tendered Old Notes as described under "-- Withdrawal Rights," and
(iv) to waive any condition or otherwise amend the terms of the Exchange Offer
in any respect. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, or if the Company waives a material
condition of the Exchange Offer, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
holders of the Old Notes, and the Company will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "-- Withdrawal Rights") promptly after the Expiration Date.
Subject to the conditions set forth under "-- Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder does not
deliver a Letter of Transmittal, (ii) a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, or,
in the case of a book-entry transfer, an Agent's Message in lieu of the Letter
of Transmittal, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders
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at the same time, and will depend upon when certificates for Old Notes,
book-entry confirmations with respect to Old Notes and other required documents
are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"-- Procedures for Tendering Old Notes -- Book-Entry Transfer." The term
"Agent's Message" means a message transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Company may enforce such Letter
of Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering holders. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever,
acceptance for exchange or the exchange of any Old Notes tendered pursuant to
the Exchange Offer is delayed (whether before or after the Company's acceptance
for exchange of Old Notes) or the Company extends the Exchange Offer or is
unable to accept for exchange or exchange Old Notes tendered pursuant to the
Exchange Offer, then, without prejudice to the Company's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Company and
subject to Rule 14e-1(c) under the Exchange Act, retain tendered Old Notes and
such Old Notes may not be withdrawn except to the extent tendering holders are
entitled to withdrawal rights as described under "-- Withdrawal Rights."
Pursuant to the Letter of Transmittal, or the Agent's Message, as the case
may be, a holder of Old Notes will warrant and agree in the Letter of
Transmittal or pursuant to the Agent's Message that it has full power and
authority to tender, exchange, sell, assign and transfer Old Notes, that the
Company will acquire good, marketable and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
the Old Notes tendered for exchange are not subject to any adverse claims or
proxies. The holder also will warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Company or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
Valid Tender
Except as set forth below, in order for Old Notes to be validly tendered by
book-entry transfer, an Agent's Message or a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
in either case any other documents required by the Letter of Transmittal, must
be delivered to the Exchange Agent by mail, facsimile, hand delivery or
overnight carrier at one of the Exchange Agent's addresses set forth under "--
Exchange Agent" on or prior to the Expiration Date and either (i) such Old Notes
must be tendered pursuant to the procedures for book-entry transfer set forth
below or (ii) the guaranteed delivery procedures set forth below must be
complied with.
Except as set forth below, in order for Old Notes to be validly tendered by
a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile, hand delivery or overnight carrier at one
of the Exchange Agent's addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date and either (i) such Old Notes must be delivered to
the Exchange Agent on or prior to the Expiration Date or (ii) guaranteed
delivery procedures set forth below must be complied with.
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If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent and DTC have confirmed that any Direct Participant (as
defined in "Description of Notes -- Book-Entry, Delivery and Form") in DTC's
book-entry transfer facility system may utilize DTC's ATOP procedures to tender
Old Notes. The Exchange Agent will establish an account with respect to the Old
Notes at DTC for purposes of the Exchange Offer within two business days after
the date of this Prospectus. Any Direct Participant may make a book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's Message
or a completed and signed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other documents required by the Letter of
Transmittal must in any case be delivered to and received by the Exchange Agent
at one of its addresses set forth under "-- Exchange Agent" on or prior to the
Expiration Date, or the guaranteed delivery procedure set forth below must be
complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees
Certificates for the Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate
for the Old Notes is registered in a name other than that of the person
surrendering the certificate or (b) such holder completes the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" in the Letter
of Transmittal. In the case of (a) or (b) above, such certificates for Old Notes
must be duly endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein): (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association (an "Eligible Institution"), unless surrendered
on behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
Guaranteed Delivery
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
the certificates for such Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent on or prior to the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, such Old Notes may nevertheless be tendered, provided that all
of the following guaranteed delivery procedures are complied with:
(a) such tenders are made by or through an Eligible Institution;
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(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is received by
the Exchange Agent, as provided below, on or prior to the Expiration Date; and
(c) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other documents required by the Letter
of Transmittal, are received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of New Notes might not be made to all tendering holders at the same time, and
will depend upon when Old Notes, book-entry confirmations with respect to Old
Notes and other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
Determination of Validity
All questions as to the form of documents, validity, eligibility (including
time of receipt) and acceptance for exchange of any tendered Old Notes will be
determined by the Company, in its sole discretion, whose determination shall be
final and binding on all parties. The Company reserves the absolute right, in
its sole and absolute discretion, to reject any and all tenders determined by it
not to be in proper form or the acceptance of which, or exchange for, may, in
the opinion of counsel to the Company, be unlawful. The Company also reserves
the absolute right, subject to applicable law, to waive any of the conditions of
the Exchange Offer as set forth under "-- Conditions to the Exchange Offer" or
any condition or irregularity in any tender of Old Notes of any particular
holder whether or not similar conditions or irregularities are waived in the
case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in tenders or incur any liability for
failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
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RESALES OF NEW NOTES
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the staff of the Division
of Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the Division of
Corporation Finance of the Commission, and subject to the two immediately
following sentences, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act, (a) will not be able to rely on the interpretations of the
staff of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Company may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act) on
behalf of whom such holder holds the Notes to be exchanged in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Company believes that
Participating Broker-Dealers who acquired Old Notes for their own accounts as a
result of market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting the
requirements of the Securities Act, which may be the prospectus prepared for an
exchange offer so long as it contains a description of the plan of distribution
with respect to the resale of such New Notes. Accordingly, this Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company has
agreed that this Prospectus, as it may be amended or
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supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes for a period ending 180 days after the
Expiration Date (subject to extension under certain limited circumstances
described below) or, if earlier, when all such New Notes have been disposed of
by such Participating Broker-Dealer. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "-- Exchange Agent." Any Participating Broker-Dealer who
is an "affiliate" of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of sharesdays during the period
from and including the date of HDS
Common Stock outstandingthe giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "-- Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "-- Procedures
for Tendering Old Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Old Notes, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of
tenders of Old Notes may not be rescinded. Old Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "-- Procedures for
Tendering Old Notes."
30
38
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliate or assign of the Company, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Old Notes which have been tendered but which are
withdrawn will be returned to the holder thereof promptly after withdrawal.
INTEREST ON NEW NOTES
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after February 20,
1998. Accordingly, such holders of Old Notes as of the record date for the
payment of interest on August 15, 1998 will be entitled to receive interest on
the New Notes issued in exchange therefor accrued from and after February 20,
1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exists
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such New Notes; or
(b) any law, statute, rule or regulation shall have been adopted or enacted
which, in the judgment of the Company, would reasonably be expected to impair
its ability to proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose or any governmental approval has not been obtained,
which approval the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Old Notes have theretofore been accepted for exchange) or
may waive any such condition or otherwise amend the terms of the Exchange Offer
in any respect. If such waiver or amendment constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver or amendment by
means of a prospectus supplement that will be distributed to the registered
holders of the Old Notes and will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
31
39
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
By Registered or Certified Mail: By Hand or Overnight Delivery:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department, 4th Floor
P.O. Box 778 Two International Place
Boston, MA 02102-0078 Boston, MA 02110
Confirm By Telephone:
Sandra Szczsponik
(617) 664-5587
Facsimile Transmissions:
(Eligible Institutions Only)
(617) 664-5395
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other nominees
soliciting acceptances of the Exchange Offer.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes certain United States Federal income
tax considerations associated with the exchange of Old Notes for New Notes and
the ownership and disposition of New Notes. This summary applies only to
beneficial owners of Old Notes who acquired such Old Notes at the endinitial
offering from Donaldson, Lufkin & Jenrette Securities Corporation for the
original offering price therefor and who acquire New Notes pursuant to the
Exchange Offer. This summary is based upon existing United States Federal income
tax law, which is subject to change, possibly with retroactive effect. This
summary does not discuss all aspects of United States Federal income taxation
that may be relevant to particular holders in the context of their specific
investment circumstances or certain types of holders subject to special
treatment
32
40
under such laws (including, for example, financial institutions, insurance
companies, broker-dealers, persons having a functional currency other than the
United States dollar, United States expatriates, tax-exempt organizations and
holders (whether actual or constructive) of 10% or more of the period.
(8) Equivalent pro formatotal combined
per share informationvoting power of all classes of stock of the Company). In addition, this summary
does not discuss any foreign, state or local tax considerations and assumes that
holders of the New Notes will hold the New Notes as "capital assets" (generally,
property held for HDSinvestment). Prospective holders of New Notes should consult
their tax advisors regarding the United States Federal, state, local, and
foreign income and other tax considerations of the exchange of Old Notes for New
Notes and the ownership and disposition of the New Notes.
For purposes of this summary, a "United States holder" is determined
by multiplyingan individual who
is a citizen or resident of the Medaphis pro forma combined amounts byUnited States, a corporation or partnership
created or organized under the Conversion
Ratiolaws of the United States or any state or
political subdivision thereof, or a person or other entity who is otherwise
subject to represent equivalent per share amountsUnited States Federal income taxation on a net income basis in
respect of income derived from the New Notes.
Exchange Offer
The exchange of Old Notes for New Notes pursuant to stockholdersthe Exchange Offer will
not be treated as an exchange or other taxable event for United States Federal
income tax purposes because, under United States Treasury regulations, the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. As a result, the holders of HDS.
(9) Medaphis has entered into pooling-of-interests transactionsOld Notes will not recognize taxable gain or
loss upon the exchange of such Old Notes for the New Notes, and any such holder
will have the same tax basis and holding period in the New Notes as it had in
the Old Notes immediately before the exchange.
United States Holders
Interest payable on the New Notes will be includible in the income of a
United States holder at the time accrued or received in accordance with entities
that were formerly "S" corporationssuch
holder's regular method of accounting for federalUnited States Federal income tax
purposes.
DistributionsA United States holder will recognize a capital gain or loss upon the sale
or other disposition of a New Note in an amount equal to the difference between
the amount realized from such disposition (exclusive of any amount paid for
accrued interest not previously included in income, which amount will be taxable
as ordinary income) and the holder's adjusted tax basis in the New Note. Such
capital gain or loss will be long-term capital gain or loss if the holder has
held the New Note for more than one year at the time of disposition. In certain
circumstances, holders of New Notes that are individuals may be entitled to
preferential treatment for net long-term capital gains, including, as a result
of recently enacted legislation, in the case of a capital asset held for more
than 18 months at the time of the disposition.
Non-United States Holders
An investment in the New Notes by a non-United States holder generally will
not give rise to any United States Federal income tax consequences, unless the
interest received or any gain recognized on the sale or other disposition of the
New Notes by such holder is treated as effectively connected with the conduct by
such holder of trade or business in the United States, or, in the case of gains
derived by an individual, such individual is present in the United States for
183 days or more and certain other requirements are met.
In order to avoid back-up withholding of 31% on payments of interest and
principal made by United States payors, a non-United States holder of the "S" corporationsNew
Notes must generally complete, and provide the payor with, an Internal Revenue
Service Form W-8 ("Certificate of Foreign Status"), or other documentary
evidence, certifying that such holder is an exempt foreign person.
33
41
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes in exchange for
the Old Notes as described in the Prospectus, the Company will receive Old Notes
in like principal amount. The Old Notes surrendered in exchange for the New
Notes will be retired and cancelled.
The gross proceeds from the offering of the Old Notes ($175.0 million),
together with available cash ($16.4 million) and the initial borrowing under the
New Credit Facility ($30.0 million), were used to pay the fees and expenses
associated therewith ($7.9 million) and to refinance the Company's $210 million
outstanding principal amount of Bridge Notes plus $3.5 million of accrued
interest. Approximately $157.5 million of the proceeds from the sale of the
Bridge Notes was used by the Company on December 23, 1997 to repay and refinance
in full the Company's then existing credit facility which was scheduled to
mature on June 30, 1998 and which would have required the issuance by the
Company to the lenders thereunder of warrants for 1% of the voting common stock
of the Company if such credit agreement had not been repaid in full prior to
December 31, 1997. In addition, on January 22, 1998, the remaining $25 million
of Bridge Notes was purchased and approximately $10 million of the proceeds
therefrom was used to purchase certain real property then under lease to the
Company.
34
42
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997 and as adjusted to give effect to the offering
of the Old Notes, the initial borrowing under the New Credit Facility and the
application of the net proceeds therefrom and available cash as if they had
occurred on such date. This table should be read in conjunction with "Unaudited
Pro Forma Consolidated Financial Statements," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus and the
Consolidated Financial Statements of the Company and the related merger
transactionsnotes thereto,
which are not includedincorporated herein by reference.
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents................................... $ 17,794 $ 3,000
LONG-TERM DEBT (INCLUDING CURRENT PORTION):
Bridge Notes(1)........................................... $185,000 $ --
Other Debt................................................ 15,941 15,941
New Credit Facility(2).................................... -- 6,456
The Notes offered hereby.................................. -- 175,000
-------- --------
Total long-term debt, including current portion... $200,941 $197,397
======== ========
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20,000,000 shares
authorized; none outstanding........................... -- --
Common stock, voting, $0.01 par value, 200,000,000
authorized; 73,204,000 issued and outstanding.......... $ 732 $ 732
Common stock, non-voting, $0.01 par value, 600,000 shares
authorized; none outstanding........................... -- --
Additional paid-in capital................................ 678,998 678,998
Accumulated deficit....................................... (177,949) (182,825)(3)
-------- --------
Total stockholders' equity........................ $501,781 $496,905
-------- --------
TOTAL CAPITALIZATION................................. $702,722 $694,302
======== ========
- ---------------
(1) Represents outstanding principal of the Bridge Notes as of December 31,
1997. At the time of repayment, there was $210 million in Cash Dividends Per Share.
10principal
outstanding under the Bridge Notes.
(2) The actual amount of the initial borrowing under the New Credit Facility was
$30,000,000.
(3) The change in accumulated deficit and total stockholders' equity results
from the write-off of $4.9 million, net of tax of $3.2 million, of
previously deferred financing fees relating to the Company's Bridge Notes.
35
1943
SELECTED HISTORICAL AND PRO FORMACONSOLIDATED FINANCIAL DATA
The following tables settable sets forth (i) selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1995,1997. The financial statements of the Company for each of the three
monthsfiscal years in the period ended MarchDecember 31, 1995 and
1996 and as of March 31, 1996; (ii)1997 are incorporated herein by
reference. The selected consolidated financial information for HDSof Medaphis for and
as of each of the three fiscal years in the period ended March
31, 1996, for and as of the six month period ended March 31, 1993 and for and as
of the two fiscal years ended September 30, 1992; (iii) selected pro forma
combined financial information for the years ended December 31, 1993 and 1994,
giving effect to the Merger using the pooling-of-interests method of accounting
and certain pro forma adjustments related to the Atwork, MMS, Rapid Systems and
BSG Mergers; and (iv) selected pro forma combined financial information for the
year ended December 31, 1995, and for and as of the three months ended March 31,
1996, giving effect to the Merger using the pooling-of-interests method of
accounting and certain pro forma adjustments related to the Atwork, MMS, Rapid
Systems and BSG Mergers and the acquisitions consummated in 1995 that were
recorded using the purchase method of accounting. For purposes of preparing the
pro forma combined statements of operations for the years ended December 31,
1993 and 1994, HDS's operating results for the years ended March 31, 1994 and
1995 were combined with Medaphis' operating results for the years ended December
31, 1993 and 1994, respectively. The pro forma combined statement of income for
the year ended December 31, 1995 was prepared by combining Medaphis' 1995
operating results with HDS's 1995 operating results which were restated to a
calendar year basis. Accordingly, HDS's historical operating results for the
three months ended March 31, 1995 were included in each of the years ended
December 31, 1994 and 1995. HDS's revenues and net income for that three month
period were $14,018,000 and $6,314,000, respectively. The selected consolidated
financial information of Medaphis for each of the three fiscal years in the
period ended December 31, 1995, and as of December 31, 1994 and 1995,1997 has
been derived from the audited supplemental consolidated financial statements of Medaphis,
which give retroactive effect to the Rapid Systemsmergers with the Automation Atwork
Companies ("Atwork"), HRI, BSG Government, BSG and BSG Mergers,
bothHDS, all of which have been
accounted for as poolings-of-interests.using the pooling-of-interests method of accounting. The selected
consolidated financial data of Medaphis for and as of the two fiscal years in
the period ended December 31, 1992, as of December 31, 1991, 1992 and 1993, for the
three-month periods ended March 31, 1995 and 1996 and as of March 31, 1996, has1994 have been derived from the unaudited supplemental
consolidated financial statements of Medaphis, which give retroactive effect to
the Rapid Systemsmergers with Atwork, HRI, BSG Government, BSG and BSG Mergers.HDS. Management of Medaphis believes
that the unaudited supplemental consolidated financial statements referred to above include
all adjustments (consisting only of normal recurring adjustments) that are
necessary for a fair presentation of the financial position and results of
operations for such periods.
The selected
consolidated financialfollowing information of HDS for all of the periods presented has
been derived from the audited financial statements of HDS. The pro forma
information is provided for informational purposes only and is not necessarily
indicative of actual results that would have been achieved had the Merger been
consummated at the beginning of the periods presented or of future results. The
selected pro forma combined financial information is derived from the Unaudited
Pro Forma Combined Financial Information appearing elsewhere herein.
The information set forth below should be read in conjunction with (i) the
supplemental consolidated financial statements of Medaphis and the historical
consolidated financial statements of HDS and in each case the notes thereto
which are, in the case of Medaphis, incorporated herein by reference and, in the
case of HDS, included elsewhere herein; (ii) the Unaudited Pro Forma Combined
Financial Information and notes thereto appearing elsewhere herein; and (iii)
Management's"Management's
Discussion and Analysis of Financial Condition and Results of OperationsOperations"
included elsewhere in this Prospectus and the Consolidated Financial Statements
of Medaphisthe Company and HDS, which is, in the case of Medaphis,related notes thereto incorporated herein by reference and, in the case of HDS, included elsewhere herein.
11
20
MEDAPHIS -- HISTORICALreference.
THREE MONTHS ENDED
YEAR ENDED
DECEMBER 31,
MARCH 31,
----------------------------------------------------- -------------------
1991 1992-------------------------------------------------------
1993 1994 1995 1995 1996 1997
-------- -------- -------- -------- -------- -------- ----------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTSTATEMENTS OF OPERATIONS DATA:
Revenue...............Revenue.......................................... $250,094 $369,483 $ 94,579 $160,252 $259,575 $376,870 $552,132 $130,367 $159,869538,012 $ 596,714 $ 572,625
Salaries and wages.... 60,022 100,607 158,703 221,575 318,014 74,811 88,963wages............................... 151,913 216,950 314,790 398,573 377,363
Other operating expenses........... 29,043 47,246 66,412 90,836 130,714 29,027 38,618
Depreciation.......... 3,140 4,405 6,960 9,269 14,346 3,376 4,917
Amortization.......... 532 2,170 5,317 7,748 14,112 3,522 4,023expenses......................... 65,258 88,655 134,055 163,677 153,372
Depreciation..................................... 6,967 9,065 14,187 28,276 29,355
Amortization..................................... 6,926 10,310 18,048 25,713 24,137
Interest expense, net................ 1,763 966 6,517 5,896 10,417 3,931 2,242net............................ 6,202 5,591 9,761 11,585 23,260
Litigation settlement............................ -- -- -- -- 52,500
Restructuring and other charges......charges.................. -- -- -- 1,905 54,950 31,750 15048,750 180,316 22,640
Income (loss) before extraordinary itemsitem and
cumulative effect of accounting change.. (181) 2,288 8,617 26,486 2,676 (7,118) 12,343change......... 5,984 25,682 (2,650) (137,337) (93,229)
Net income (loss)..... (181) 5,764 8,617 26,486 2,676 (7,118) 12,343................................ 5,984 25,682 (2,650) (137,337) (19,303)(2)
Pro forma net income (loss)(2)...(1)................... $ --6,001 $ 6,383(1)24,251 $ 7,437(4,780) $(136,358) $ 24,669 $ (207) $(10,992) $ 12,697(19,303)
Weighted average shares outstanding........ 27,014 41,338 45,505 54,623 53,362 47,704 69,164
PRO FORMAoutstanding.............. 39,179 46,128 52,591 71,225 72,679
PER SHARE DATA(2):DATA:(1)
Pro forma basic income (loss) before
extraordinary itemsitem and cumulative effect of
accounting change.. -- $ 0.07 $ 0.16 $ 0.45 $ (0.00) $ (0.23) $ 0.18
Pro forma net
income............. --change.............................. $ 0.15 $ 0.160.53 $ 0.45(0.09) $ (0.00)(1.91) $ (0.23)(1.28)
Pro forma basic net income (loss)................ $ 0.180.15 $ 0.53 $ (0.09) $ (1.91) $ (0.26)
CASH FLOW DATA:
Net cash provided by (used for) operating
activities..................................... $ -- $ -- $ 19,852 $ (7,863) $ (10,207)
Net cash (used for) provided by investing
activities..................................... -- -- (162,158) (107,281) 97,432
Net cash provided by (used for) financing
activities..................................... -- -- 144,335 103,796 (77,062)
OTHER FINANCIAL DATA:
EBITDA(3)........................................ $ -- $ -- $ 89,167 $ 34,464 $ 41,890
Capital expenditures............................. -- -- 51,120 51,135 19,971
Ratio of earnings to fixed charges............... 2.37 4.97 --(4) --(4) --(4)
36
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AS OF DECEMBER 31,
AS OF
--------------------------------------------------- MARCH 31,
1991 1992----------------------------------------------------
1993 1994 1995 1996 -------1997
-------- -------- -------- -------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................... $41,126Capital..................................... $ 27,94048,757 $ 57,17665,549 $ 66,50290,043 $ 79,00956,492 $ 114,01793,497
Intangible assets................. 22,158 109,478 175,368 368,813 448,613 463,278assets................................... 181,000 376,827 611,544 539,151 515,939
Total assets...................... 99,988 205,102 331,833 580,622 746,826 810,035
Long-term debt.................... 22,965 16,059 9,803 148,261 150,566 191,823assets........................................ 334,361 597,487 935,790 936,854 874,027
Total debt.......................................... 76,308 218,374 161,246 271,727 200,941
Convertible subordinated debentures..................... -- 60,000debentures................. 63,375 63,375 63,375 -- --
Stockholders' equity.............. 42,196 70,292 173,296 234,808 381,649 468,230equity................................ $166,706 $236,003 $554,074 $508,525 $501,781
- ---------------
(1) Reflects the extraordinary loss of $2.1 million relating to the prepayment
of certain indebtedness net of income tax benefit and the cumulative
benefit for the change in accounting for income taxes arising from the
adoption of Statement of Financial Accounting Standards No. 109 of $5.6
million.
(2) In 1995 and 1996, MedaphisCompany acquired Atwork, MMS, Rapid SystemsConsort, IVC, BSG Government and
BSG in merger transactions which were recordedaccounted for as poolings-of-interests. Prior to
the mergers, Atwork, MMS, Rapid SystemsConsort, IVC, BSG Government and a company acquired by
BSG prior to the Company's merger with BSG Merger had elected "S" corporation
status under the Code for income tax purposes. As a result of the mergers (or, in the case
of the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Pro forma net income (loss) and
pro forma net income (loss) per common share are presented in the
consolidated statements of operations as if theeach of these entities had been
a "C" corporationscorporation during the years ended December 31, 1992, 1993, 1994periods presented.
(2) Reflects extraordinary income of $76.4 million relating to the sale of HRI
and 1995a $2.5 million charge for the change in accounting for business process
reengineering costs in accordance with EITF 97-13 (as defined).
(3) EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, litigation settlement, restructuring and other
charges, extraordinary item and cumulative effect of an accounting change.
See Note 4 to the three months ended March 31, 1995notes to the Consolidated Financial Statements of Medaphis
Corporation and 1996. Pro formasubsidiaries. EBITDA is not a measure of performance under
GAAP. While EBITDA should not be considered as a substitute for net income,
per common sharecash flows from operating activities and other income or cash flow statement
data prepared in accordance with GAAP, or as a measure of profitability or
liquidity, management understands that EBITDA is customarily used as a
measurement in evaluating companies. Moreover, substantially all of the
company's financing agreements contain covenants in which EBITDA, as defined
therein, is used as a measure of financial performance. The method of
calculating EBITDA set forth above may be different from calculations of
EBITDA employed by other companies and, accordingly, may not presentedbe directly
comparable to such other calculations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion
of other measures of performance determined in accordance with GAAP.
(4) Earnings did not cover fixed charges by $3.9 million, $215.5 million and
$110.0 million in 1995, 1996 and 1997, respectively.
37
45
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENT
The Unaudited Pro Forma Consolidated Financial Statement is based on the
historical presentation of the consolidated financial statements of Medaphis.
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1991.
121997 gives effect to the divestiture of HRI as if it had occurred
on January 1, 1997. The unaudited pro forma financial information does not give
any effect to the offering of the Old Notes, the initial borrowing under the New
Credit Facility or the application of the net proceeds therefrom due to the
immaterial difference in the weighted average interest rate. The Unaudited Pro
Forma Consolidated Balance Sheet as of December 31, 1997 is not presented since
Medaphis' December 31, 1997 balance sheet does not include HRI.
The Unaudited Pro Forma Consolidated Statement of Operations includes the
historical operating results of Medaphis and HRI from the beginning of the
period covered by such statement until the earlier of the date of disposition or
the end of the period covered by such statement.
The Unaudited Pro Forma Consolidated Financial Statement does not purport
to be indicative of the results that actually would have been obtained if the
combined operations had been conducted during the period presented and they are
not necessarily indicative of operating results to be expected in future
periods. The Unaudited Pro Forma Consolidated Financial Statement and notes
thereto should be read in conjunction with the Consolidated Financial Statements
and the related notes thereto of Medaphis, which are incorporated herein by
reference.
38
21
HDS -- HISTORICAL(1)46
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDEDDECEMBER 31, 1997
----------------------------------
MEDAPHIS HRI(1) PRO FORMA
--------- -------- ---------
(DOLLARS IN THOUSANDS)
Revenue................................................... $ 572,625 $(14,720) $ 557,905
--------- -------- ---------
Salaries and wages........................................ 377,363 (6,738) 370,625
Other operating expenses.................................. 153,372 (3,896) 149,476
Depreciation.............................................. 29,355 (401) 28,954
Amortization.............................................. 24,137 -- 24,137
Interest expense, net..................................... 23,260 (4,438)(2) 18,822
Litigation settlement..................................... 52,500 -- 52,500
Restructuring and other charges........................... 22,640 -- 22,640
--------- -------- ---------
Total expenses.................................. 682,627 (15,473) 667,154
Income (loss) before income taxes......................... (110,002) 753 (109,249)
Income tax (benefit) expense.............................. (16,773) 115(3) (16,658)
--------- -------- ---------
Income (loss) before extraordinary item and cumulative
effect of accounting change............................. $ (93,229) $ 638 $ (92,591)
Basic loss before extraordinary item and cumulative effect
of accounting change per common share................... $ (1.28) $ (1.27)
========= =========
Weighted average shares outstanding....................... 72,679 72,679
========= =========
- ---------------
(1) The results of HRI are for the period from January 1, 1997 through May 28,
1997 (date of divesture).
(2) Represents the following adjustment to interest expenses assuming the
Company had completed the sale of HRI as of January 1, 1997:
Proceeds from sale of HRI, net.............................. $117,000
Interest rate............................................... 9.5%
--------
Annual interest expense savings............................. $ 11,115
Adjustment for period outstanding........................... .417
--------
$ 4,631
Less HRI interest income, as reported....................... 193
--------
$ 4,438
========
(3) Reflects tax expense for the above adjustments using the Company's effective
tax rate.
39
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company suffered several setbacks in recent years, including: (i)
government investigations into: (a) the billing and collection practices in two
offices of Medaphis Physician Services Corporation ("MPSC"), and (b) the billing
procedures and computerized coding system used at Gottlieb's Financial Services
("GFS") to process claims, which may lead to claims of errors in billing; (ii)
the failure of prior management's acquisition strategy to integrate businesses
acquired; (iii) several restatements of various financial statements of the
Company, including restatements of the Company's fiscal 1995, 1996 and interim
1997 financial statements; (iv) the shut down of the operations of one of the
companies 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.
In response to certain of these setbacks, assembly of a new management team
began in the fourth quarter of 1996, headed by David E. McDowell (former
President and Chief Operating Officer of McKesson Corporation). The new
management team combines healthcare industry talent with information technology
expertise from other industries that have already undergone the transition to
effective use of information technology. The Company believes that the combined
strengths of this team position Medaphis to take advantage of growth
opportunities in the healthcare marketplace.
In addition, in February 1997, new management announced its 1997 operating
plan, refocusing the Company on its core businesses of delivering healthcare
information products and business management services, together with enabling
technologies in selected industries. The major components of the plan included:
(i) exiting non-core businesses; (ii) achieving improved predictability of
business results through enhanced management accountability and controls; (iii)
reducing costs and increasing efficiencies in its core businesses; (iv)
achieving excellence in customer service; and (v) implementing cross-selling
initiatives.
The Company made significant progress in accomplishing the 1997 operating
plan, including the divestiture of HRI, in May 1997 for net proceeds of
approximately $117.0 million, the combination of the operations of HIT and BSG
under the Per-Se name, the improvement of financial controls, the imposition of
cost-containment measures throughout the Company, and the formulation of a new
customer-focused strategy centered on a "markets of one" approach to solutions
meeting the distinct needs of each customer.
The Company also reached a proposed settlement in 1997 with the plaintiffs
in one of the major class-action securities lawsuits pending against it and,
during the third quarter of 1997, the Company recorded a non-cash charge of
$52.5 million related to this settlement. In addition, through the successful
completion of a $210.0 million loan facility (the "Bridge Facility"), management
stabilized and provided for the near-term financing needs of the Company.
40
48
RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
YEAR ENDED MARCHDECEMBER 31,
----------------- MARCH 31, ---------------------------
1991 1992 1993 1994--------------------------------------------------------
1995 1996 ------- ------- ---------- ------- ------- -------
(IN1997
---------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA(1)
Net sales.............................. $20,593 $24,451 $4,646 $26,040 $30,454 $22,727
Cost of sales.......................... 10,953 12,419 739 11,875 13,767 15,185
Gross margin........................... 9,640 12,032 3,907 14,165 16,687 7,542
Expenses:
ResearchRevenue......................... $538,012 100.0% $ 596,714 100.0% $ 572,625 100.0%
Salaries and development............. 1,145 1,308 903 1,775 1,754 1,793
Sales and marketing.................. 3,044 2,577 1,406 3,028 3,672 4,870
General and administrative........... 2,029 2,873 1,676 3,219 2,194 6,107
Interest............................. 735 8 45 129 232 265
Income from operations............... 2,687 5,266 (123) 6,014 8,835 (5,493)wages.............. 314,790 58.5 398,573 66.8 377,363 65.9
Other operating expenses........ 134,055 24.9 163,677 27.4 153,372 26.8
Depreciation.................... 14,187 2.6 28,276 4.7 29,355 5.1
Amortization.................... 18,048 3.4 25,713 4.3 24,137 4.2
Interest income...................... 86 58 36 73 202 620
Income (loss) before provision for
income taxes...................... 2,773 5,324 (87) 6,087 9,037 (4,873)
Provision for income taxes...........expense, net........... 9,761 1.8 11,585 2.0 23,260 4.1
Litigation settlement........... -- -- -- -- 3,000 (1,700)
Net52,500 9.2
Restructuring and other
charges....................... 48,750 9.1 180,316 30.2 22,640 3.9
-------- ----- --------- ----- --------- -----
Loss before income (loss).................... 2,773 5,324 (87) 6,087 6,037 (3,173)
AS OF SEPTEMBER
30, AS OF MARCH 31,
----------------- ----------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA(1)
Working capital........................ $ 4,931 $ 9,046 $8,630 $14,102 $22,760 $23,689
Intangible assets...................... 4,360 6,226 6,905 7,822 8,014 7,768
Total assets........................... 20,297 26,973 23,203 35,448 46,529 55,043
Convertible subordinated debentures.... 7,000taxes........ (1,579) (0.3) (211,426) (35.4) (110,002) (19.2)
Income tax expense (benefit).... 1,071 0.2 (74,089) (12.4) (16,773) (2.9)
-------- ----- --------- ----- --------- -----
Loss before extraordinary item
and cumulative effect of
accounting change............. (2,650) (0.5) (137,337) (23.0) (93,229) (16.3)
Extraordinary item: Gain on sale
of HRI, net of tax............ -- -- -- -- --
Redeemable preferred stock.............76,391 13.3
Cumulative effect of accounting
change, net of tax............ -- -- -- 6,910 6,565 -- Stockholders' equity................... 12,284 17,672 17,584 16,554 22,289 44,781(2,465) (0.4)
-------- ----- --------- ----- --------- -----
Net loss...................... (2,650) (0.5) (137,337) (23.0) (19,303) (3.4)
Pro forma tax adjustments....... (2,130) (0.4) 979 0.2 -- --
-------- ----- --------- ----- --------- -----
Pro forma net loss.............. $ (4,780) (0.9)% $(136,358) (22.8)% $ (19,303) (3.4)%
======== ===== ========= ===== ========= =====
- ---------------
(1) HDS changed its fiscal year-end in 1993 from September 30Fiscal 1997 compared to March 31.
13
22
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATIONFiscal 1996
REVENUE. Revenue classified by the Company's reportable segments is as follows:
YEAR ENDED
DECEMBER 31,
THREE MONTHS
------------------------------ ENDED MARCH
1993 1994 1995 31,-------------------
1996 1997
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $294,406 $279,593
Hospital Services........................................... 89,715 98,067
HRI......................................................... 31,419 14,720
Per-Se Product Operations................................... 70,047 90,977
Per-Se Services Operations.................................. 113,988 90,594
Corporate and eliminations.................................. (2,861) (1,326)
-------- --------------------
$596,714 $572,625
======== ========
Physician Services' revenue for the year ended December 31, 1997 declined
5.0% from the prior year principally due to an adjustment to revenue of $12.1
million in the third quarter of 1997 that resulted from a detailed review,
performed by the Company, to update the assumptions and methodology underlying
the calculation of accounts receivable, unbilled, for Physician Services. In
1997, management's emphasis has been on enhancing client service to its existing
clients and not on expanding the client base.
Hospital Services' revenue for the year ended December 31, 1997 increased
9.3% as compared to the comparable period in 1996. This increase reflects
internally generated volume growth.
41
49
Medaphis acquired HRI on August 28, 1995 in a transaction accounted for as
a pooling-of-interests. On May 28, 1997 Medaphis completed the sale of HRI and,
as a result, there are only five months of revenue from HRI in 1997 compared
with a full year for 1996.
Product Operations' revenue increased 29.9% for the year ended December 31,
1997, as compared with the year ended December 31, 1996. This increase is
primarily the result of an increase in license fees associated with the
ULTICARE(R) and scheduling product lines, offset in part by charges of $4.7
million for unusual revenue adjustments.
Services Operations' revenue in 1996 includes the results of the Company's
wholly-owned subsidiary, Imonics Corporation ("Imonics"), which was shut down at
the end of 1996 (the "Imonics Shutdown"). Imonics generated $12.3 million of
revenue during the year ended December 31, 1996. Excluding the revenue generated
by Imonics, Services Operations' revenue decreased 10.9% for the year ended
December 31, 1997, as compared with the year ended December 31, 1996.
Disruptions associated with the restructuring of this division have negatively
affected revenue. Also negatively impacting the Services Operations' revenue for
1997 was approximately $1.1 million of unusual revenue adjustments.
SALARIES AND WAGES. Salaries and wages for 1997 decreased to $377.4
million (65.9% of revenue) from $398.6 million (66.8% of revenue) in 1996. This
decrease is attributable to management's efforts to reduce costs by streamlining
processes and reducing the overall head count of the Company. Management further
reduced the Company's head count during the fourth quarter of 1997 within
Physician Services and Per-Se.
OTHER OPERATING EXPENSES. Other operating expenses decreased to $153.4
million (26.8% of revenue) in 1997 from $163.7 million (27.4% of revenue) in
1996. The decrease in other operating expenses as a percentage of revenue
reflects the cost management initiatives that were stated in the Company's 1997
business plan. Included in other operating expenses for 1997 are higher than
normal professional fees the Company incurred to assist with a variety of
financial, operational and organizational projects undertaken by the management
of the Company. Management believes that expenditures for professional fees will
decrease in 1998. Other operating expenses are primarily comprised of postage,
facility and equipment rental, telecommunication, travel, outside consulting
services and office supplies.
DEPRECIATION. Depreciation expense was $29.4 million in the year ended
December 31, 1997 as compared with $28.3 million for the same period of 1996.
This increase reflects the Company's normal investment in property and equipment
to support growth in its business.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and software products, was $24.1
million for the year ended December 31, 1997 as compared with $25.7 million for
the same period of 1996. This decrease is primarily due to the write-offs of
goodwill and capitalized software associated with the Imonics Shutdown.
INTEREST. Net interest expense was $23.3 million in the year ended
December 31, 1997 as compared with $11.6 million in the same period of 1996. The
increase in interest expense was due to increased borrowing rates. Management
anticipates that interest rate fluctuations and changes in the amount of
borrowings under the Existing Facility will impact future interest expense.
RESTRUCTURING AND OTHER CHARGES. See Note 4 of Notes to Consolidated
Financial Statements for a discussion of restructuring and other charges.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with the litigation settlement in 1997 and merger transactions consummated by
the Company in 1996 and previous years. Pro forma adjustments for income taxes
have been provided for companies that elected to be treated as "S" Corporations
under the Internal Revenue Code of 1986, as amended, prior to merging with the
Company.
EXTRAORDINARY ITEM. On May 28, 1997, Medaphis sold HRI through an initial
public offering of 100% of its stock, which generated net proceeds to the
Company of approximately $117.0 million. Medaphis had acquired HRI on August 28,
1995 through a business combination accounted for using the pooling-of-interests
method of accounting.
42
50
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology" ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter which includes November 1997. The Company recorded a
charge of $2.5 million, net of tax of $1.6 million, in the fourth quarter of
1997 as a result of EITF 97-13.
Fiscal 1996 compared to Fiscal 1995
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Physician Services.......................................... $289,968 $294,406
Hospital Services........................................... 69,689 89,715
HRI......................................................... 22,667 31,419
Per-Se Product Operations................................... 58,799 70,047
Per-Se Services Operations.................................. 98,615 113,988
Corporate and eliminations.................................. (1,726) (2,861)
-------- --------
$538,012 $596,714
======== ========
Physician Services' revenue grew only 1.5% in 1996 as compared to 1995.
Excluding the growth by acquisitions, Physician Services experienced a decline
in revenue, which is attributable to the loss of clients at a higher rate than
had historically been experienced by the Company. These client losses were
mostly due to the reengineering and consolidation effort undertaken by Physician
Services, which diverted management's attention away from client service.
Hospital Services' revenue grew by 28.7% in 1996 as compared to 1995. The
majority of this growth is attributable to acquisitions made in December 1995
and the first quarter of 1996.
HRI's revenue increased by 38.6% in 1996 as compared with 1995. This growth
was caused by increased subrogation recoveries.
Product Operations' revenue increased 19.1% in 1996 as compared with the
same period in 1995. This increase is primarily the result of higher licensing
revenue from the ULTICARE product line.
Services Operations' 1996 revenues increased 15.6% from 1995. The increases
in revenue reflected the demand for Per-Se's services as migration to client
server architectures continued to accelerate. This demand for Per-Se's services
was negatively affected in 1996 by a decrease in the revenues generated by
Imonics.
SALARIES AND WAGES. Salaries and wages increased to $398.6 million (66.8%
of revenue) in 1996 from $314.8 million (58.5% of revenue) in 1995. This
increase was due to a slowdown in the growth of the Company's revenue and an
increase in the employment levels across the Company.
OTHER OPERATING EXPENSES. Other operating expenses increased to $163.7
million (27.4% of revenue) in 1996 from $134.1 million (24.9% in 1995). The
increase in other operating expenses as a percentage of revenue for 1996, as
compared with 1995, is due to a slowdown in the growth of the Company's revenue
without a corresponding slowdown in the growth of the Company's operating
expenses. Other operating expenses are primarily comprised of postage, facility
and equipment rental, telecommunications, travel, office supplies and legal,
accounting and other outside professional services.
DEPRECIATION. Depreciation expense was $28.3 million in 1996 compared to
$14.2 million in 1995. This increase reflects the Company's investment in
property and equipment, including approximately $42.0 million of new computer
and other data processing equipment purchased in connection with the Company's
reengineering program and, to support growth in its business, including
acquisitions.
43
51
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and software products, was $25.7
million in 1996 versus $18.0 million in 1995. The increases are primarily due to
increased amortization of goodwill and client lists resulting from acquisitions.
INTEREST. Net interest expense was $11.6 million in 1996, compared to $9.8
million in 1995. The increase in 1996 is primarily due to increased borrowings
under the Company's then-current credit facility to finance acquisitions and the
Company's investment in its reengineering project.
RESTRUCTURING AND OTHER CHARGES. See Note 4 of Notes to Consolidated
Financial Statements for a discussion of restructuring and other charges.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions consummated by the Company in 1996 and previous years.
Pro forma adjustments for income taxes have been provided for companies that
elected to be treated as "S" Corporations under the Internal Revenue Code of
1986, as amended, prior to merging with the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $93.5 million at December 31, 1997 and
had unrestricted cash and cash equivalents of $17.8 million. The Company used
cash of $10.2 million for operating activities in the year ended December 31,
1997, principally to fund liabilities related to restructuring and other
charges.
Also during 1997, the Company generated approximately $126.4 million of
cash proceeds from the sale of HRI. The net cash proceeds of approximately
$117.0 million were used to reduce the Company's borrowings under its then
credit facility.
On December 23, 1997, Medaphis entered the Bridge Facility with an
affiliate of the Donaldson Lufkin & Jenrette Securities Corporation. The
proceeds of the Bridge Facility were used in part to repay the Company's
previous credit facility. Borrowings under the Bridge Facility accrued interest
at Prime plus 250 basis points. The interest rate at December 31, 1997 was
11.0%. The Bridge Facility contained certain quarterly financial covenants
related to the Company's performance, was secured by substantially all of the
assets of the Company and its subsidiaries, and was guaranteed by substantially
all of the Company's subsidiaries. The Bridge Facility contained customary
covenants for facilities of this type. The Bridge Facility was prepayable, in
whole or in part, at the option of Medaphis, at any time. The Bridge Facility
was prepaid in full with the proceeds of the offering of the Old Notes, cash on
hand and the initial borrowing under the New Credit Facility.
On December 31, 1997, the Company had $185.0 million of outstanding
indebtedness under the Bridge Facility. On January 22, 1998, the Company drew
down the remaining $25.0 million of the Bridge Facility, with the funds used in
part to purchase certain real property then under lease to the Company, with the
balance invested in cash equivalents.
In connection with the offering of the Old Notes, the Company entered into
the New Credit Facility. Borrowings under the New Credit Facility, as well as
the incurrence of other Indebtedness of the Company, will be subject to
compliance with certain conditions, including the maintenance of certain
financial ratios. See "Description of New Credit Facility." The Company believes
that its liquidity will be sufficient to meet its current and planned needs,
although no assurance can be given in this regard. See "Risk Factors."
OTHER MATTERS
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
44
52
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.
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at HDS, which was
acquired in a merger transaction in June 1996 and accounted for as a
pooling-of-interests. These practices related principally to revenue recognized
in fiscal years 1994, 1995 and 1996. As a result of this evaluation, management
determined that the revenue was improperly recognized and, accordingly, restated
the Company's financial statements for the years ended December 31, 1994, 1995
and 1996 interim periods of 1997 and (the "HDS Restatement").
As a result of the HDS-related restatement, 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. As indicated in a Current Report on
Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"), 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 (the "MMS Restatement"). Such
acquisition had previously been accounted for as a pooling-of-interests.
The withdrawn audit opinion included an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern due
to certain step-down payments required during 1997 under the Company's Senior
Credit Facility. As discussed in Note 8 of the Notes to Consolidated Financial
Statements, on December 23, 1997, the Company entered into the Bridge Facility,
the proceeds of which were used to refinance the Senior Credit Facility, and
that increased the Company's borrowing capacity and extended the term into 1999,
thereby removing the substantial doubt expressed in the predecessor accountants'
audit opinion. Fiscal years 1995 and 1996 have been re-audited by the Company's
current independent accountants.
The impact of the HDS Restatement and MMS Restatement for the years ended
December 31, 1995 and 1996 and as of the years ended December 31, 1994, 1995 and
1996 is presented below:
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
STATEMENTAS OF OPERATIONS DATA(1):
Revenue............................................ $279,338 $398,985 $597,060 $163,612
Salaries and wages................................. 155,684 220,261 331,213 90,527
Other operating expenses........................... 71,569 95,425 147,391 39,378
Depreciation....................................... 7,192 9,383 15,059 4,950
Amortization....................................... 7,878 10,691 17,902 4,909
Interest expense, net.............................. 6,573 5,926 11,987 2,105
Restructuring and other charges.................... -- 1,905 54,200 150
Income before income taxes......................... 30,442 55,394 19,308 21,593
IncomeDECEMBER 31, 1994
Retained Earnings (accumulated deficit)............. $ 4,838 $ (16,059)
Total stockholders' equity.......................... $ 257,097 $ 236,004
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue............................................. $ 559,877 $ 538,012
Pro forma net loss.................................. (8,504) (4,780)
Pro forma basic net loss per share...................................share.................. $ 0.36(0.15) $ 0.56(0.09)
AS OF DECEMBER 31, 1995
Accumulated deficit................................. $ 0.08(6,052) $ 0.17
======== ======== ======== ==========
Weighted average shares outstanding................ 52,045 61,163 68,060 75,704
======== ======== ======== ==========(21,284)
Total stockholders' equity.......................... $ 421,306 $ 554,074
45
53
AS OF
MARCHPREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1996
---------
BALANCE SHEET DATA(2):
Working capital...................................................................Revenue............................................. $ 133,956608,313 $ 596,714
Pro forma net loss.................................. (123,642) (136,358)
Pro forma basic net loss per share.................. $ (1.74) $ (1.91)
AS OF DECEMBER 31, 1996
Current assets...................................... $ 269,385 $ 255,239
Intangible assets................................................................. 471,046assets................................... 389,033 539,151
Total assets...................................................................... 865,078
Long-term debt.................................................................... 191,823
Stockholders' equity.............................................................. 509,261assets........................................ 815,624 936,854
Current liabilities................................. 193,752 198,747
Total liabilities................................... 423,334 428,329
Total stockholders' equity.......................... $ 392,290 $ 508,525
- ---------------
(1)46
54
THE BUSINESS
Medaphis is a leader in delivering healthcare information products and
business management services, together with enabling technologies in selected
industries. Medaphis serves approximately 20,700 physicians and 2,700 hospitals
predominantly in North America. Medaphis believes it is well-positioned to
capitalize on the healthcare industry trends toward consolidation, managed care
and cost containment through a broad range of services and products that enable
customers to provide quality patient care efficiently and cost effectively. The
Unaudited Pro Forma Combined StatementCompany's large client base and national presence further support the Company's
competitive position. Medaphis provides its services and products through its
Healthcare Services Group and Per-Se Technologies, its Information Technologies
Group. The Company reported a net loss of Operations Data for the years
ended December 31, 1993, 1994 and 1995, for the three months ended March
31, 1996 gives effect to (i) the Merger as if it had occurred as of January
1, 1993 and (ii) certain pro forma adjustments related to the Atwork, MMS
Rapid Systems and BSG Mergers. The Unaudited Pro Forma Combined Statement
of Operations Data$19.3 million for the year ended
December 31, 1995 also gives effect
to the 1995 Acquisition (as hereinafter defined) as if each had occurred as
of January 1, 1995.
(2) The Unaudited Pro Forma Combined Balance Sheet Data as of March 31, 1996
gives effect to the Merger as if it had occurred as of March 31, 1996.
14
23
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
the following factors should be considered carefully in evaluating the proposed
Merger. This Proxy Statement/Prospectus contains and incorporates by reference
certain forward-looking statements,1997, including but not limited to, statements
regarding product development initiatives, the status of Medaphis' physician
billing operations, the status and future prospects of Medaphis' re-engineering
and consolidation program and the status and scope of the investigation
described below. The actual results may differ materially from such
forward-looking statements due to risks and uncertainties set forth under this
caption and in other reports and registration statements filed by Medaphis under
the Securities Act and the Exchange Act.
Acquisitions; Future Operating Results; Re-Engineering Project; Margin
Pressure. Medaphis' expansion strategy involves both acquisitions and internal
growth. Although Medaphis has successfully acquired businesses and effectively
integrated their operations in the past, there can be no assurance that Medaphis
will be able to continue to make successful acquisitions in the future or that
any such acquisitions will be successfully integrated into Medaphis' operations.
Furthermore, there can be no assurance that an acquisition will not have an
adverse effect upon Medaphis' operating results, particularly in the fiscal
quarters immediately following the consummation of such acquisition. There can
be no assurance that Medaphis will be able to continue to operate an acquired
business in a profitable manner. Although Medaphis has reported net income for
each of the past four fiscal years (and would have reported net income in fiscal
1991 but for the restatement of its financial statements as a result of the BSG
Merger) and has expanded its operations through acquisitions and internal
growth, there can be no assurance that Medaphis will be able to sustain
profitability or revenue growth on an annual or quarterly basis in the future,
that fluctuations in quarter-to-quarter or year-to-year operating results will
not occur or that any such quarter-to-quarter or year-to-year fluctuations will
not be material. In addition, Medaphis recorded restructuring and other charges and a litigation
settlement. The Company generated revenue during 1997 of $557.9 million and
EBITDA of $37.8 million, each determined on a pro forma basis giving effect to
the disposition of HRI.
Medaphis' services and product offerings assist healthcare providers in
minimizing the risks of providing patient care, and in competing for physician
and patient loyalty, by enhancing the quality of care delivered. The Healthcare
Services Group fosters quality care delivery by enabling physicians and other
health practitioners to focus on the patient rather than on business and systems
operations management. Per-Se Technologies delivers solutions that use
sophisticated business process, data and enterprise workflow models to ensure
the right service is delivered in the firstright setting by the right person, using
the right processes at the right time. Both groups differentiate their offerings
from those of competitors by enabling customers to individually tailor solutions
to their unique needs.
Medaphis markets its products and services primarily to integrated
healthcare delivery networks, hospitals, physician practices, long-term care
facilities, home health providers and managed care providers. The Company sells
its software solutions and systems integration services internationally, both
directly and through distribution agreements, in the United States, Canada,
England and Germany. Medaphis Corporation was incorporated in Delaware in 1985,
and operates through a number of wholly-owned subsidiaries.
Healthcare Services Group
The Healthcare Services Group provides a range of business management
services to physicians and hospitals, including clinical data collection, data
input, medical coding, billing, cash collections and accounts receivable
management. These services are designed to assist customers with the business
management functions associated with the delivery of healthcare services,
allowing physicians and hospital staff to focus on providing quality patient
care. These services also assist physicians and hospitals in improving cash
flows and reducing administrative costs and burdens. The Healthcare Services
Group typically enters into contracts with physician and hospital customers
providing for payment to the Company of a contingent management fee that
generally is based upon a percentage of net collections and is billable monthly
upon collection or, where required, on a fixed fee basis. The Healthcare
Services Group consists of two divisions, Physician Services and Hospital
Services.
Per-Se Technologies
Per-Se provides application software and a broad range of information
technology and consulting services to healthcare and other service-oriented
markets such as energy, communications and financial services. Per-Se is an
early entrant in the emerging market for Delivery Chain Management solutions,
which enable users to assess each customer's unique needs and cost-effectively
deliver products and services individually tailored to meet them. Per-Se
develops solutions using a methodology called Deliver to Order(TM) that enables
customers to choose among packaged application software, software supplied by
other companies and modified by Per-Se, enabling technology services, and
outsourcing to balance their needs for flexibility, time to deployment and cost.
In the third quarter of 1995 relating1997, Medaphis combined the operations of HIT, its
software products operation, with the operations of BSG, its information
technology services operation, under the Per-Se Technologies name. This business
combination has assisted the Company in its efforts to contain costs and
eliminate
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redundancies. Per-Se's management expects to benefit from the synergy of
combining HIT's leading information products in the high-growth healthcare
information systems market with BSG's ability to provide enabling technology
infrastructure and services. Per-Se is organized into Product Operations and
Services Operations.
THE INDUSTRY
The healthcare industry is undergoing major changes, as pressures to cut
costs and increase quality and productivity are inspiring healthcare providers
to seek ways to manage their practices more effectively. In general, the
healthcare industry is in a state similar to that of the financial services
industry in the early 1980's. The same type of computerized technology that
fueled substantial growth and change in that industry is just beginning to be
deployed in the healthcare industry. See "Risk Factors -- Evolving Industry
Standards; Rapid Technological Changes" and "Risk Factors -- Competition;
Industry and Market Changes."
Since 1986, healthcare expenditures have doubled to more than $1.0
trillion, representing approximately 14% of the 1996 U.S. Gross Domestic
Product. At the same time, the healthcare delivery system is experiencing a
shift from a highly fragmented group of independent healthcare providers to
integrated healthcare networks that combine all of the services, products and
equipment necessary to address people's healthcare needs. In the face of
escalating costs and increasingly complex care delivery systems, healthcare
providers are seeking to manage costs, increase productivity and enhance the
quality of patient care through improved access to clinical and financial
information. This creates an opportunity for companies such as Medaphis that
provide comprehensive, cost-effective business management services and
information technology.
With more than $1 trillion in annual expenditures, the United States spends
more on healthcare than on information technology and defense combined,
according to industry research firm The Gartner Group. Healthcare in the United
States traditionally was a cottage industry, with more than 5,000 hospitals and
600,000 practicing physicians. Since the early 1990s, the formation of complex
healthcare delivery systems has been the hallmark of the industry as managed
care providers move to control costs and provide higher-quality patient care.
According to Modern Healthcare, an estimated 768 hospitals were involved in
merger and acquisitions activities in 1996. In the past three years, 40% of U.S.
non-federal hospitals have either completed, or agreed to be part of, a merger,
acquisition or joint venture. More than one-third of U.S. physicians are now in
group practices, and large groups composed of more than 100 physicians represent
almost one-third of all physicians in such group practices.
This trend toward consolidation has a profound impact on information and
business management systems. The need for healthcare providers to manage on a
cost-effective basis the complexity of combining information from different
business systems, while at the same time competing for patient loyalty, is
creating high-growth opportunities for companies such as Medaphis that can
deliver integrated technology solutions and can invest in an information
technology infrastructure to support sophisticated outsourcing services.
Additionally, the federal government's focus on compliance and the demand
for technology products and services are creating growth opportunities for the
Company. The government's drive to curb healthcare fraud and abuse is compelling
healthcare providers to utilize, and providing Medaphis with the opportunity to
offer, increasingly sophisticated compliance services; this gives an advantage
to companies that can invest in technology infrastructure and databases, and
those able to acquire the regulatory expertise necessary to help healthcare
providers comply with complex healthcare laws and reimbursement procedures.
Further, as healthcare delivery systems move to integrate disparate technology
infrastructures, patient databases and information access methods, the demand
for new technology products and services is growing. See "Risk
Factors -- Evolving Industry Standards; Rapid Technological Changes."
According to healthcare industry analyst Sheldon Dorenfest & Associates,
Ltd., expenditures on products and services to support automated information
systems for healthcare providers reached $11.6 billion in 1996, a 16% increase
over the previous year. Industry analysts expect double-digit industry growth to
continue in the healthcare information systems expenditures over the next
several years, with expenditures reaching $18 billion by the turn of the
century.
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Healthcare information systems expenditure increases are virtually
industry-wide. In a survey conducted at HIMSS, the leading healthcare industry
tradeshow, 68% of respondents indicated planned budget increases. According to
Andersen Consulting, information technology expenditures outstrip all other
spending priorities for healthcare executives, logging a 77% response rate
compared to the next closest priorities, buildings/ facilities and human
resource development, at 8% (see Figure 1). See "Risk Factors -- Competition;
Industry and Market Changes."
FIGURE 1
TOP SPENDING PRIORITIES
FOR HEALTHCARE EXECUTIVES
[CHART]
- ---------------
Source: Andersen Consulting, 1996
Estimated compound annual growth rates between 1996 and 2000 for products
and services Medaphis provides also indicate promising market opportunity (see
Figure 2).
FIGURE 2
COMPOUND ANNUAL GROWTH RATE 1996-2000
OF HEALTHCARE INDUSTRY SPENDING
SPENDING AREA RATE
- ------------- ----
Systems integration and networking.......................... 15%
Interface engines and translation software.................. 38
Data repositories........................................... 50
Internet/Intranet development............................... 58
Decision support systems.................................... 28
Enterprise scheduling software.............................. 50
Managed care and medical management......................... 32
Clinical workstations....................................... 38
Document management and workflow............................ 43
Home care information systems............................... 32
- ---------------
Source: Volpe, Welty, 1996
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BUSINESS STRATEGY
Medaphis' primary business objective is to expand its leadership position
in delivering cost-effective, high-quality healthcare information products and
business management services, together with enabling technologies in selected
industries, thereby realizing the growth potential of the Company.
In 1997, Medaphis hired new management talent, instituted new business
processes, invested in new technology, developed new product and service
offerings, and formulated a new customer-focused strategy centered on a "markets
of one" approach to creating individually delivered solutions to meet the
distinct needs of each customer.
In 1998, Medaphis plans to capitalize on this progress by continuing to
attract talented people, strengthening its infrastructure, streamlining
operations for efficiency and investing in product and service development,
training, sales, marketing and other programs designed to fuel growth.
To reach its objectives, Medaphis intends to execute strategies that
include:
- CAPITALIZE ON INDUSTRY TRENDS. The healthcare industry is rapidly
transitioning to consolidated care delivery systems, capitation and
managed care. Many physicians who previously practiced in independently
or in small group practices now practice as part of larger groups or
Integrated Delivery Networks that unite physicians with different
practice specialties to cover a broad range or even the entire spectrum
of healthcare needs. The Company's services and products can assist
healthcare providers in pricing services and negotiating agreements in a
marketplace increasingly moving toward capitation and managed care.
Although historically a large portion of Medaphis' Healthcare Services
revenue has come from billing and receivables management services,
Medaphis intends to respond to the changing nature of the healthcare
industry by developing higher value-added services and products that
enable customers to operate more effectively in increasingly complex
environments. The Company plans to grow revenue derived from offerings
such as information management and consulting services for mergers and
group formations; activity-based costing systems; capitation management
and analysis; outcomes reporting; medical guidelines management; patient
eligibility services; and facilities management.
- LEAD INDUSTRY IN DELIVERING INTEGRATED SOLUTIONS. Medaphis intends to
capitalize on its experience as a software provider and systems
integrator to deliver workable integrated solutions that combine new
technologies with customers' existing information systems. There are
substantial opportunities for the expansion of information technology
systems within the healthcare market, which has adopted such technology
at a slower rate than have other industries. Management anticipates that
current healthcare industry trends will continue and that expenditures
for information technology and services will increase as a percentage of
total healthcare expenditures. Medaphis has the healthcare information
products, personnel, services and systems in place to deliver integrated
solutions that capitalize on this growth opportunity.
- DIFFERENTIATE FROM COMPETITORS BY BECOMING KNOWN FOR CREATING
"INDIVIDUALLY DELIVERED" SOLUTIONS. Medaphis plans to deliver
personalized value, attract new customers and strengthen customer loyalty
by focusing on a "markets of one" approach to business that enables its
customers to combine Medaphis' array of packaged applications, tailored
third-party solutions, component frameworks and information technology
services to craft solutions suited to their unique needs.
- LEAD THE COMPLIANCE INITIATIVE IN THE HEALTHCARE MARKET. The healthcare
industry is subject to extensive and complex federal and state government
regulations. These regulations, along with the federal government's close
monitoring of healthcare costs and stricter regulatory controls over the
industry, are driving the demand for better systems to monitor and ensure
compliance with healthcare laws and regulations. Management believes the
Company's size, customer base and access to payor data enable it to
assemble and analyze data and trends more effectively and to invest in
compliance initiatives. Through continued investments in technology and
training, Medaphis intends to strengthen further its market-leading
position in developing and improving compliance systems that enable
customers to safely operate in accordance with continually changing
healthcare regulations. For
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example, in December of 1997 Physician Services teamed with the Graham
Company, a Philadelphia-based insurance broker, to develop an exclusive
insurance product in conjunction with an underwriter for Physician
Services' customers that will pay for losses (civil fines and penalties
and multiple damages) incurred by a physician for any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement,
omission or act in billing his or her professional services.
- EXECUTE PROGRAMS THAT EXPAND EXISTING CUSTOMER RELATIONSHIPS. Medaphis
plans to sell products and services from each of its operations to
existing customers across all operations. In addition, Medaphis will
leverage advanced technology knowledge and capabilities derived from
solutions its Per-Se Technologies operation creates for services
industries such as communications, energy and financial services that
have adopted technology more quickly than healthcare. Medaphis believes
cross-development initiatives will enable it to deliver leading-edge, yet
proven, technology solutions to the healthcare market.
- MAKE STRATEGIC ACQUISITIONS, PARTNERSHIPS AND ALLIANCES. Medaphis
intends to drive organic growth by making a limited number of strategic
acquisitions, as well as by formulating alliances and partnerships, that
extend the skills, processes, capabilities, products, systems or
geographic coverage already in place within the Company.
HEALTHCARE SERVICES GROUP
The Healthcare Services Group consists of Physician Services and Hospital
Services.
Physician Services
Physician Services is a leading provider of business management solutions
and claims processing to physicians in the United States, a market currently
estimated to be approximately $10 billion annually. Of this market, management
estimates that approximately 24% is currently served by outsourcing companies
such as Medaphis. With more than 17,250 physician clients throughout 47 states,
management estimates the Company has an approximate 12% share of the domestic
outsourcing market, based on 1996 revenue, or more than four times the market
share of its nearest competitor. Physician Services offers clients both revenue
and cost management services. Revenue management services include medical
coding, electronic and manual claims submission, automated patient billing, past
due and delinquent accounts receivable collection, capitation analysis (i.e., an
analysis of the price per member paid to healthcare providers by managed care
health programs for a predetermined set of healthcare services and procedures)
and contract negotiation with payors, including managed care organizations. Cost
management provides comprehensive practice management services including front
office administration, employee benefit plan design and administration, cash
flow forecasting and budgeting and general consulting services.
A key goal of Physician Services is to grow its revenue from the
higher-margin consulting services it provides to its announced re-engineeringcustomers. These services
include: financial and consolidation project. There canstatistical reporting; alliance, merger and acquisition
advice; budgeting and tax planning services; marketing consultation; managed
care advisory services; and employee compensation and benefit advice.
Physician Services' current systems support approximately 30 different
medical and surgical specialties. Although Physician Services is preparing for
growth in the academic and office-based markets, the majority of Physician
Services' customers are in the hospital-based market. Figure 3 depicts Physician
Services' customer base.
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FIGURE 3
BREAKDOWN OF PHYSICIAN SERVICES' CUSTOMER
BASE BY MEDICAL SPECIALTY
[CHART]
Services Offered by Physician Services
Physicians have been outsourcing their business management services to
Physician Services for nearly 30 years. The solid relationships developed over
that time serve as excellent referral sources and strengthen Physician Services'
position in the growing outsourcing market. Its proactive approach and ability
to guide physicians in the rapidly changing healthcare environment has enabled
Physician Services to be no assurancerecognized as a leader in its industry.
To meet the business management service needs of hospital-based, faculty
practice, and office-based physicians, Physician Services has developed broad
service selection. Its core services include accounts receivable management,
fee-for-service billing, expense accounting, practice consulting, analysis of
practice statistics, and electronic data interchange ("EDI") consulting
regarding claims and remittance status. Physician Services also has developed a
variety of emerging services in response to the changing business needs of
physicians, including: activity-based costing systems; consulting services
regarding alliances and mergers and acquisitions; capitation management and
analysis; compliance services; consulting regarding EDI for eligibility,
referrals and authorizations; outcomes reporting; and medical guidelines
management.
In order to identify and respond to the needs of its physician customers,
Physician Services has a comprehensive understanding of the various complexities
and requirements in a managed healthcare environment. To better serve its
physician customers, Physician Services has continually expanded its range of
services to include information management and consulting services for mergers
and group formations, and has created a distinct operating unit whose exclusive
mission is to manage specialty networks. Recognizing that this re-engineering and
consolidation project will be successful, will achieve any cost or labor
efficiencies or will not have an adverse effect upon Medaphis' operations,
particularly during the initialdifferent stages of
the project. Finally, Medaphishealthcare market evolve at different paces, Physician Services is
experiencing margin pressurestrategically positioned to assist physician clients at all stages of the
market's evolution. This enables Physician Services to differentiate its
services from its competitors' services by tailoring solutions to meet the
individualized needs of its physician clients.
Physician Services has approximately 5,700 employees in approximately 170
operating locations throughout the United States. Many employees also have
market-specific expertise in the areas of reimbursement, contracting, marketing,
facility management, systems integration and financial and strategic management.
Additionally, Physician Services' emphasis on compliance training will enable
the Company to capitalize on the growing demand for companies with a
sophisticated understanding of healthcare regulations. Physician Services'
ability to leverage such skills of its employee base enables it to provide a
broad spectrum of high quality services.
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Hospital Services
Hospital Services is a leading provider of business management services to
hospitals in the United States, representing over 1,100 hospitals in a highly
fragmented industry. Hospital Services offers services primarily related to
"late stage" (over 90 days) receivables, including claims submission and
automated patient billing. A key goal of Hospital Services is to increase
revenue from strategic value-added services such as: (i) eligibility services,
in which Hospital Services personnel assist patients in qualifying for
reimbursement under appropriate federal, state and local government healthcare
programs and (ii) facilities management contracts, in which Hospital Services
assumes responsibility for the client's entire business office functions,
including patient admissions/registration, medical records and business office
activities.
Hospital Services' resources and expertise address the functional and
professional needs of healthcare providers. Its services are designed to
increase client productivity, profitability and cash flow; maximize return on
revenue through knowledgeable management skills; reduce administrative costs in
a declining reimbursement environment; improve resource utilization and patient
satisfaction; and provide extensive information and management reporting through
comprehensive databases and decision support systems.
Among potential other systems advantages, Hospital Services enjoys the
ability to automate much of the workflow associated with account resolution,
which enhances communication between the Company and its customers. Customers
gain a clearer understanding of the status of their accounts receivable, and can
respond instantaneously to improvement opportunities and problem areas. Hospital
Services' systems advantages also help its employees improve efficiency.
Hospital Services can respond overnight and provide resources to help manage a
customer's entire accounts receivable base. This provides a safety-net for
customer facilities experiencing accounts receivable problems, as well as for
those undergoing changes such as major conversions to different patient
accounting systems.
Products and Services Offered by Hospital Services. Hospital Services'
target market is primarily community hospitals. There are approximately 5,200 of
these facilities in the United States yielding a potential market size of $6-$7
billion annually. Hospital Services offers its customers a broad range of
services, which can be purchased individually or as a complete package,
depending on the customer's needs. This enables Hospital Services to deliver
solutions individually designed to meet a specific customer's requirements. The
products and services offered by Hospital Services includes:
Patient Financial Services Outsourcing. Under its most intensive
program, Hospital Services customizes management systems and services to
assume responsibility for the customer's entire business office functions,
including patient admissions/registration, medical records and business
office activities. Customer benefits include improved provider focus on
strategic business goals; increased efficiency in overall performance while
reducing operating costs; flexibility and control over difficult-to-manage
functions; and accelerated benefits of consolidation efforts.
Customized Collection Services. Formed in 1914, the collection
agency, owned and operated by Medaphis, services some of the largest
collections contracts awarded in the healthcare industry. Its regional
offices offer (i) a national presence represented through regional
headquarters to adequately support performance commitments, (ii) an
experienced management team dedicated to delivering customized solutions
with customer satisfaction as the ultimate goal and (iii) a healthcare
focus.
Extended Business Office Services. Through this program, Hospital
Services assumes responsibility for managing collection of assigned
accounts receivable. This enables clients to move accounts electronically
to Hospital Services' regional facilities, where centralized resources are
responsible for all billing and accounts receivablefollow-up activities on assigned accounts.
Managed Care and Charge Accuracy Services. Hospital Services'
"Managed Care Services" are designed to increase profitability by
identifying underpaid claims, helping in contract negotiation and
administration, and assisting in payment recovery to assure accurate
reimbursement. Managed Care Services include: reimbursement analysis of
complex contracts; elimination of costly errors in authorization oversights
and identification of carve-outs, pass-throughs and stop-losses; modeling
of proposed contract terms to assist on blind contract negotiating;
reducing cost of contract administration; reducing
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contract risks by supporting proactive contract management; performing
account accuracy reviews (pre-billing and post-billing); performing
insurance company defense audits, coding and reimbursement validation
audits and medicare compliance reviews; and performing coding reviews and
optimization, and chargemaster updates.
Claims Resolution Services. These services assist customers in
favorably resolving disputes with third party payors. By utilizing
proprietary techniques developed over several years and employing
specialists with legal, provider and payor healthcare claims administration
experience, Hospital Services challenges payor denials with substantial
success.
Entitlement Program Services. Under this program, Hospital Services
assists patients in qualifying for reimbursement under appropriate federal,
state, and local government healthcare programs. Hospital Services'
entitlement program includes medical assistance certification programs,
out-of-state Medicaid billing programs, health maintenance organization
member retention programs and Medicaid denials billing programs.
Consulting Services. Hospital Services provides specialized
consulting services, including interim management and supervisory services,
business office reviews, evaluations and assessments, management
recruitment, and seminars for in-house personnel.
Shared Systems. Hospital Services' shared systems enable customers to
license and operate Hospital Services' software, on a 'turnkey' basis.
These sophisticated automated collection and managed care systems are fully
interfaced with the provider's internal systems, and all hardware and
system functionality are guaranteed under time-share agreements.
PER-SE TECHNOLOGIES
Per-Se provides application software and a broad range of information
technology and consulting services to healthcare and other service-oriented
markets such as energy, communications and financial services. Per-Se is an
early entrant in the emerging market for Delivery Chain Management solutions,
which enable users to assess each customer's unique needs and cost-effectively
deliver products and services individually tailored to meet them. Per-Se
develops solutions using a methodology called Deliver to Order(TM) that enables
customers to choose among packaged application software, software supplied by
other companies and modified by Per-Se, enabling technology services, and
outsourcing to balance their needs for flexibility, time to deployment and cost.
In the third quarter of 1997 Medaphis combined the operations of MedaphisHIT, its
software products operation ("Product Operations"), with the operations of BSG,
its information technology services operation ("Services Operations"), under the
Per-Se name. This business combination has enabled the Company to contain costs
and eliminate redundancies. Per-Se management expects to benefit from the
synergy of combining HIT's leading information products in the high-growth
healthcare information systems market with BSG's ability to provide enabling
technology infrastructure and services. Per-Se is organized into Product
Operations and Services Operations.
Product Operations
Per-Se provides application software and systems integration services to
over 1,800 hospitals and 3,450 physicians. Per-Se offers the following product
lines: (i) an integrated enterprise-wide patient-centered information system
that coordinates quality integrated care at nearly 200 acute-care and
extended-care facilities representing more than 30,000 beds, and for thousands
of ambulatory clinics and home-care providers; (ii) an advanced radiology
information management system for both single and multi-site hospitals and
imaging center networks; and (iii) a suite of rules-based staff productivity,
patient scheduling and resource management software installed at over 1,900
global locations. These products address both the business and the clinical
management needs of Per-Se's healthcare provider customers and can function in
either a stand-alone provider setting or across an entire healthcare delivery
network. Per-Se also provides a variety of interfaces to ensure that its
products are compatible with other software products used by healthcare
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providers. Per-Se Product Operations' revenue is derived from software licenses,
resale of hardware, installation and implementation services, and continuing
customer support and software maintenance activities. Customer support and
software maintenance fees generally renew annually to provide a recurring base
of revenue.
Per-Se Product Operations is comprised of Automation Atwork ("Atwork"), the
provider of the rules-based staff productivity, patient scheduling and resource
management software referred to above; Consort Technologies, Inc. ("Consort"),
the provider of advanced radiology information management systems for single and
multi-site hospitals and imaging center networks, and HDS which distributes
patient-centered clinically-based information systems.
Services Operations
Through its Services Operation, Per-Se provides full-service systems
integration, information technology consulting and tailored software development
to more than 100 customers, primarily in service-oriented markets such as
healthcare, energy, communications and financial services. Per-Se provides its
expertise in information technology and business services to organizations
seeking to create competitive advantages through the strategic use of advanced
technologies. These technologies enable customers to streamline business
processes and improve access to information within their organizations, as well
as to create strategic advantages by extending business processes and
information to customers, suppliers and other organizations through networked
systems.
Products Offered by Per-Se
The Company's array of products and services offered through Per-Se
includes the following:
ATWORK. This company is a worldwide leader in rules-based staff
productivity, patient scheduling and resource management software,
currently with over 1,900 installations worldwide. Atwork's systems enable
healthcare facilities to manage all resources and the flow of all patients
throughout the healthcare delivery process. In 1996, Atwork served 77% of
the nurse scheduling and 42.5% of the patient scheduling markets. The
integration of Atwork's staff and patient management systems achieves an
enterprise-wide balance between healthcare supply (staff and other
resources) and demand (patient flow).
One-Staff(R). One-Staff provides enterprise-wide staff scheduling
and productivity management. One-Staff's expert, rules-based system
manages positions and schedules for all facility staff, regardless of
department, discipline or location. Comprehensive personnel information
can be accessed and stored on a central database. Staff productivity and
competency-based staff sharing are managed on an enterprise-wide basis.
One-Call(R). One-Call provides enterprise-wide patient scheduling
and resource management. One-Call's expert, rules-based, scheduling
system coordinates enterprise-wide patient flow in conjunction with all
human and physical resources, and all clinical, business and other
necessities. With One-Call, all patients entering the delivery system
are scheduled for every needed procedure, test or office visit,
regardless of the location or discipline, with one telephone call.
ANSOS(TM). ANSOS delivers complete nurse scheduling, productivity
and management for single facilities and multi-facilities. With 77%
market share, ANSOS is a leading nurse scheduling product.
ORSOS(TM). ORSOS provides for single-facility and multi-facility
surgical patient scheduling and resource management. ORSOS is an
integrated surgical solution for all healthcare facilities, from
stand-alone surgical centers to components of integrated delivery
systems. It automatically schedules and manages all surgical procedures,
staff, equipment, inventory and other resources across all surgical
locations.
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Credentialing Manager(TM). Credentialing Manager delivers
enterprise-wide automated credentialing of physicians and allied health
personnel. When combined with ORSOS or One-Staff, it creates an
integrated credentialing and operating room resource management system.
HDS. HDS develops and distributes ULTICARE(R), an integrated,
enterprise-wide, patient-centered information system. ULTICARE enables
hospitals, integrated delivery networks, managed-care organizations,
multi-specialty medical groups and a myriad of other healthcare
organizations to optimize provider productivity and patient care, creating
and maintaining a computer-based patient record that enables users to
coordinate outcome-oriented, protocol-based, wellness-focused, acute,
ambulatory, long-term and home healthcare for patients, members and
clients. ULTICARE is currently being used to orchestrate quality integrated
care at nearly 200 acute and extended-care facilities, and for thousands of
ambulatory clinics and home-care providers, representing more than 30,000
beds.
CONSORT. This company is a leading provider of advanced radiology
information management systems for both single and multi-site hospitals and
imaging center networks. By integrating and tracking all radiology
information associated with patient visits from pre-registration to
follow-up letters, Consort's proven software and services help improve
communication between departments and facilities, increase departmental
efficiency and productivity, reduce errors and operating costs and enhance
physician and patient satisfaction. Consort has 20 hospital-based and 15
clinic-based clients.
ProgRIS(TM). This system is a next-generation Radiology
Information System that can be configured to meet the specific
operational requirements of both hospital and imaging center networks.
Consort's solution incorporates industry standards and open architecture
tools, such as the UNIX operating system, relational database management
and graphical Windows user interface. This solution delivers flexibility
in data access and management with a range of expansion options for both
system hardware and software. An Integrated Mammography Information
Reporting and Tracking Module is fully integrated with the base ProgRIS
system.
RESEARCH AND DEVELOPMENT
The Company intends to maintain a leadership position by continuing to
invest in developing industry-leading products and services. Most research and
development investments will occur at Per-Se, which is the technology product
and service development business unit of Medaphis.
From a healthcare application perspective, the Company plans to introduce
more than 30 new products or product enhancements in 1998. Additional product or
service investments will be made in: (i) integrating Per-Se's product offerings
into a unified suite; (ii) creating interfaces among Per-Se applications and
those supplied by other vendors; and (iii) data warehousing, data mart,
Internet/Intranet, customer asset management and call center applications that
capitalize on the Services Operations' subject matter expertise in industries
other than healthcare. The expertise gained through these initiatives will be
leveraged to bring leading-edge, yet proven, solutions to the healthcare market,
which has been slower to adopt new information technology solutions than have
less risk-adverse services industries. Per-Se plans to spend approximately 15%
of projected revenues in 1998 on research and development.
EMPLOYEES
The Company currently employs approximately 9,800 full-time and part-time
employees. The Company's workforce is not unionized and management believes
relations with its employees are satisfactory.
PROPERTIES
The Company's principal executive offices are leased and are located in
Atlanta, Georgia. The lease expires in February 2000.
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Healthcare Services Group
Physician Services' principal office is leased and is located in Atlanta,
Georgia. The lease expires in February 2000. In addition to its principal
office, Physician Services, Corporation ("MPSC"). MPSC
did not significantly contribute to Medaphis' overall results of operations
duringthrough its various operating subsidiaries, operates
approximately 174 business offices throughout the second half of 1995. During the first quarter of 1996, Medaphis'
Services Division contributed positively to the operating results of Medaphis.
However, MPSC adversely affected the results of operationsUnited States. Two of the
Services
Division for the quarter ended March 31, 1996. Management does not expect this
trend to improve materially until further progress is made with, among other
things, Medaphis' re-engineeringfacilities are owned and consolidation project and overall
operationsunencumbered. All of the business. To date, Medaphis has been ableremaining facilities are
leased with expiration dates ranging from April 1998 to offset margin
pressureApril 2005.
Hospital Services' principal office is leased and is located in MPSC's operationsNorcross,
Georgia. The lease expires in May 2002. In addition to its principal office,
Hospital Services, through growthits various operating subsidiaries, operates
approximately 41 business offices throughout the United States. These facilities
are leased with expiration dates ranging from April 1998 to September 2002.
Per-Se Technologies
Per-Se's principal office is leased and is located in Atlanta, Georgia. The
lease expires in September 1999. In addition to its technology operations, but
there can be no assurance that Medaphis will be able to continue such trendprincipal office, Per-Se,
through its various operating subsidiaries, operates approximately 36 offices in
the future.
Pending Federal Investigation; Putative Class Action Lawsuits. The United States, Attorney's Office for the Central District of California is conducting an
investigation (the "Federal Investigation") of Medaphis' billingAustralia, Canada and collection
practices in its offices located in Calabasas and Cypress, California (the
"Designated Offices"). Medaphis first became aware of the Federal Investigation
when it received search warrants and grand jury subpoenas on June 13, 1995.
Although the precise scope of the Federal Investigation is not known at this
time, Medaphis believes that the U.S. Attorney's Office is investigating
allegations of billing fraud and that the inquiry is focused upon Medaphis'
billing and collection practices in the Designated Offices.Europe. These facilities are leased
with expiration dates ranging from April 1998 to April 2004.
LEGAL PROCEEDINGS
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. AlthoughSee "Risk Factors -- Litigation and Government
Investigations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Other Matters."
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, 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 represent lessand 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 on 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 2%for
the purposes of Medaphis' annual
revenue,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
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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 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 this Complaint
relates to and concerns the California Investigation. Medaphis is engaged in
discussions with the United States, and intends to pursue settlement discussions
with the United States, the State of California, and the Relators.
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 FederalCalifornia 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 FederalCalifornia Investigation or
the qui tam suit will not have a material adverse effect upon Medaphis. Medaphis reported a chargeon 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 thelegal and administrative fees, costs and expenses it
anticipates incurring in connection with the FederalCalifornia Investigation and the
putative class 15
24
action lawsuits described below.below which were filed in 1995
following the Company's announcement of the California Investigation. The
charge ischarges are intended to cover only the anticipated administrative expenses of the FederalCalifornia
Investigation and the related lawsuits and doesdo not include any provision for
fines, penalties, damages, assessments, judgments or sanctions that may arise
out of such matters.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors 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.
Following the announcement of the Federal Investigation,investigation by the United States
Attorney's Office for the Central District of California, Medaphis, and 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 stockholdershareholder class action lawsuits filed in federal district courtthe
United States District Court for the Northern District of Georgia. In general,
these lawsuits allegealleged 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
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voluntarily dismissed with prejudice all of their claims. As a result of these
dismissals, the Consolidated Complaint no longer containscontained any claims based on
the Securities Act and Medaphis'the Company's underwriters and outside directors arewere 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 filed in the Superior Court
of Cobb County, Georgia, described more fully below. On October 28, 1997 the
court certified a class for settlement purposes, approved the settlement and
entered final judgment dismissing the action with prejudice. One of Medaphis'
directors' and officers' liability insurance carriers has paid $3.7 million of
the 1995 Class Action Settlement. The Company accrued approximately $1.2 million
in the quarter ended December 31, 1996 for the anticipated balance of the 1995
Class Action Settlement and to pay certain fees incident thereto. On November 6,
1997, the Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
The Company learned in March 1997 that the government is investigating
allegations concerning the Company's wholly owned subsidiary, Gottlieb's
Financial Services, Inc. ("GFS") (the "GFS Investigation"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the year ended December 31, 1996, GFS represented approximately 7% of Medaphis'
revenue. During that year, GFS processed approximately 5.6 million claims,
approximately 2 million of which were made to government programs. The
government has requested that GFS voluntarily produce records, and GFS is
complying 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. There can
be no assurance that the GFS Investigation will be resolved promptly 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
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merger between Medaphis and 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
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. See "Risk Factors -- Restatement of Financial Statements;
Accounting Issues" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Other Matters."
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
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 plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants, additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. On February 5, 1997 the Court overruled defendants' demurrer. On
March 18, 1997, the court denied the plaintiff's motion for a preliminary
injunction. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former and
current officers of Medaphis. All of the newly added defendants have responded
to the amended complaint. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the Securities Act, but the Company
believes that it has substantial defenses to the alleged damages relating to
such Securities 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 Securities Act and common law and new parties,
including former officers of Medaphis, Medaphis' former outside auditors and
BSG. On or about October 29, 1997 all defendants filed motions to dismiss the
amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through 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 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 D. 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 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 asserts 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 rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, 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
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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 thisthe
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.
THE REIMBURSEMENT PROCESS
Healthcare providers receive payment for medical services from their
patients, third-party payors, or a combination of both. Third-party payors
include insurance companies, governments or their intermediaries, health
maintenance organizations, preferred provider organizations, third-party
administrators for self-insured companies and other "managed care" companies.
Although patients generally retain primary responsibility for payment for all
medical services, hospitals and hospital-affiliated physicians usually agree to
process claims with third-party payors. Most hospital-affiliated physicians and
certain hospitals bill the third-party payor before requesting payment from the
patient for any deductible, co-payment or other amount due on account of
uncovered services (collectively the "Patient Obligations"). Most hospitals and
certain hospital-affiliated physicians bill the patient in full or for the
estimated Patient Obligations at the same time they bill the third-party payer.
Obtaining reimbursement from third-party payors is becoming increasingly
difficult because of changes in reimbursement formula, pre-admission
certification and utilization review and administrative procedures generated by
third-party payors in an effort to control costs. In addition, healthcare
providers are increasingly unable to collect charges or deposits of estimated
net balances directly from their patients at the time medical services are
rendered. Consequently, healthcare providers often assume the responsibility for
obtaining reimbursement from third-party payors. To be successful in obtaining
reimbursement from third-party payors, healthcare providers need regulatory and
technical skills to manage complex billing and collection requirements. Even
then, accounts receivable management efforts, if successful, generally result in
the loss of a portion of established charges to patient bad debts, the
incurrence of collection costs and the deferral of cash receipts. Accounts
receivable management performance varies widely depending on patient
demographics and the type of service provided.
Many third-party payors administer reimbursement claims through locally
established operating divisions or through local independent contractors. In
many cases, locally established third-party processing centers establish
independent methods and procedures for handling reimbursement claims.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA"), a division of the U.S. Department of Health and Human
Services. HCFA has established guidelines pursuant to which claims for physician
services are reimbursed in accordance with a resource-based relative value
guide, the values in which vary by geographic location. HCFA currently contracts
with numerous insurance carriers to process regional reimbursement claims.
Although HCFA has established the regulatory framework for Medicare claims
administration, Medicare intermediaries have authority to independently develop
procedures for administering the claims reimbursement process.
The Medicaid program is subject to federal regulation but is administered
by state governments. State governments provide for Medicaid claims
reimbursement either through the establishment of state-owned and operated
processing centers or through contractual arrangements with third-party
administrators. The requirements and procedures for reimbursement implemented by
local Medicaid program administrators differ from state to state.
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Similar to the claims administration process of Medicare and Medicaid,
several national health insurance companies administer reimbursement claims
through local or regional offices. Consequently, because guidelines for
reimbursement of claims are generally established by third-party payors at local
or regional levels, reimbursement managers for healthcare providers must become
familiar with the local methods and procedures of third-party payors.
When physicians and hospitals provide services to patients covered by
certain government programs and when healthcare providers enter into
participation arrangements with Medicare or certain commercial insurers such as
Blue Cross/Blue Shield and most health maintenance organizations, such
healthcare providers are required to accept reimbursement amounts which may be
less than the healthcare providers' established charges. In such cases,
healthcare providers calculate and write off the difference between their
established charges and the charges allowed. In cases in which healthcare
providers enter into participation arrangements, such write-offs, referred to as
contractual allowances, may not be charged to patients.
Nearly all health insurance contracts, self-insured employers, health
maintenance organizations, preferred provider organizations and Medicare require
patients to pay a portion of medical fees in the form of deductibles and
co-payments for services received. Hospital-affiliated physicians generally are
unable to determine the amount of patients' deductibles and co-payments at the
time services are rendered. Consequently, such physicians do not collect such
amounts until an explanation of insurance benefits has been provided by a
third-party payor when the third-party payor remits cash to the physician in
response to a claim, often 60 days or more after the time healthcare services
are rendered. Hospitals generally will require a patient to make an advance
payment or deposit at the time healthcare services are rendered in situations
where the amount of the patient's deductible or co-pay is considered
significant.
Third-party payors reimburse their insurance program beneficiaries, or
their assignees, only for services covered under the terms of the policy.
Typically, but not always, medical services provided for illness and injuries
are covered, whereas routine checkups, physicals, certain injections and other
types of preventive medical services are not. When patients and healthcare
providers are uncertain whether a payor's coverage limitations are applicable to
a particular medical treatment or service, they must either contact the payor's
client service representative or submit a claim and wait for a determination of
whether the claim will be paid or denied.
Third-party payors also make reimbursement contingent on the coordination
of covered services with the benefits available pursuant to any other insurance
policy covering the same beneficiary. A substantial number of patients are
covered by multiple insurance policies. Common examples of such patients include
families with two wage earners as well as Medicare beneficiaries who have
insurance policies which provide reimbursement for certain amounts not funded by
Medicare, usually deductible and co-payments amounts. Whether an insurance
policy's coverage is primary or secondary in payment priority to another policy
is often difficult to determine. Furthermore, regular health insurance coverage
often has subrogation rights with respect to worker's compensation and
automobile insurance coverage for injuries suffered in the workplace or in an
automobile accident and require special handling.
Claims submitted to third-party payors for reimbursement may be denied or
returned for many reasons, including ineligible beneficiary status as a result
of employment changes or other reasons, noncovered services, secondary payer
liability, the failure to submit required information and the submission of
incorrect billing information. The great quantity of informational variables
relating to the administration of claims, including numerous possible diagnoses,
treatment procedures and responsible third-party payors, result in multiple
errors which make time-consuming corrections a costly component of the
reimbursement process.
Additionally, commercial payors and the governmental reimbursement programs
engage in various types of utilization review of claims filed for reimbursement.
The purpose of utilization review programs is to verify that medical services
provided to patients are medically necessary and are eligible for coverage. The
utilization review process further complicates and results in delays in the
reimbursement process.
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GOVERNMENT REGULATION
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection service in certain limited
circumstances. The Medicare statutes that restrict the assignment of Medicare
claims are supplemented by Medicare regulations and provisions in the Manual.
The Medicare regulations and the Manual provide that a billing service that
prepares and sends bills for the provider or physician and does not receive and
negotiate the checks made payable to the provider or physician does not violate
the restrictions on assignment of Medicare claims. Management believes that its
practices do not violate the restrictions on assignment of Medicare claims
because, among other things, it bills only in the name of the medical provider,
checks and payments for Medicare services are made payable to the medical
provider and the Company lacks any power, authority or ability to negotiate
checks made payable to the medical provider. 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. See "-- Legal Proceedings."
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Successful
plaintiffs can receive up to 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 clients, may become the
subject of a federal or state investigation or may ultimately be required to
defend a false claims action, may be subjected to government investigation and
intendspossible criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a result
of such an action. The government on its own may also institute a Civil False
Claims Act case, either in conjunction with a criminal prosecution or as a stand
alone civil case. Whether instituted by a qui tam plaintiff or by the
government, the government can recover triple its damages together with civil
penalties of $5,000-$10,000 per false claim. Under applicable case law, a party
successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. The
Company recently became aware that it was a defendant in a qui tam litigation.
There can be no assurance that Medaphis will not be the subject of additional
false claims or qui tam proceedings relating to assert them vigorously.
Governmental Budgetary Constraintsits billing and collection
activities or that Medaphis will not be the subject of further government
scrutiny or investigations relating to its billing and accounts receivable
management services operations. See "-- Legal Proceedings" and "Risk
Factors -- Existing Government Regulation." 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 Act sets forth various provisions designed
to eliminate abusive, deceptive and unfair debt collection practices by debt
collectors. The Federal Fair Debt Act also provides for, among other things, a
civil right of action against any debt collector who fails to comply with the
provisions thereof. Various states have also promulgated laws and regulations
that govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties and injunctions for failure to comply with such
laws and regulations. Although most of the Company's billing and accounts
receivable management services the Company provides to its clients are not
considered debt collection services, the Company may be subjected to regulation
as a "debt collector" under the Federal Fair Debt Act and as a "collection
agency" under certain state collection agency laws and regulations. Management
believes that the Company operates in accordance with the Federal Fair Debt Act
and complies in all material respects with the applicable collection agency laws
and regulations governing collection practices in the states in which it
conducts its business or is exempt from such laws and regulations.
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The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Hospitals are paid a predetermined amount for operating expenses
relating to each Medicare patient admission based on the patient's diagnosis.
Additional changes in the reimbursement provisions of the Medicare and Medicaid
programs may continue to reduce the rate of increase of federal expenditures for
hospital inpatient costs and charges. Such changes 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.
GOVERNMENTAL BUDGETARY CONSTRAINTS 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.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements. See "Risk
Factors -- Government Investigatory Resources and Healthcare Reform."
In 1996, Congress enacted the 1995
sessionHealth 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 titles of the United States Congress,Code, including 18, 26, 29 and 42
U.S.C.) (the "Health Insurance Act"), which includes an expansion of certain
fraud and abuse provisions, such as expanding the application of Medicare and
Medicaid fraud penalties to other federal healthcare programs, and creating
additional criminal offenses relating to healthcare benefit programs, which are
defined to include both public and private payor programs. The Health Insurance
Act also provides for forfeitures and asset freezing orders in connection with
such healthcare offenses. Civil monetary penalties and program exclusion
authority available to the OIG also have been expanded. The Health Insurance Act
contains provisions for instituting greater coordination of federal, state and
local enforcement agency resources and actions through the OIG. There also have
been several recent healthcare reform proposals which have included an expansion
of the anti-kickback laws to include referrals of any patients regardless of
payor source.
In recent years, the focus of healthcare legislation washas been on budgetary
and related funding mechanism issues. A number of reports, including the 1995
Annual Report of the Board of Trustees of the Federal Hospital Insurance
Program, (Medicare) have projected that the Medicare "trust
fund"trust fund is likely to become insolvent by
the year 2002 if the current growth rate of approximately 10% per annum in
Medicare expenditures continues. Similarly, federal and state expenditures under
the Medicaid program are projected to increase significantly during the same
seven-year period. In response to these projected expenditure increases, and as
part of an effort to balance the federal budget, both the Congress and the
Clinton Administration have made proposals to reduce the rate of increase in
projected Medicare and Medicaid expenditures and to change funding mechanisms
and other aspects of both programs. In late 1995, Congress has passed legislation
that would substantially reduce projected expenditure increases
substantially and would make
significant changes in the Medicare and the Medicaid programs. The Clinton Administration has proposed alternate measures to
reduce, to a lesser extent, projected increasesBalanced
Budget Act of 1997 instituted substantial reductions in Medicare and Medicaidprogram
expenditures. AsMedaphis anticipates that future legislation may change aspects of
the datepresent methods of this Proxy Statement/Prospectus, neither
proposal has become law.
The Medicare legislation that has been adopted by Congress would reduce
projected expenditure increases by a variety of means, including limitations on
payments to providers, increased beneficiary premiums for physicianpaying physicians under such programs and certain
other services, and limitedprovide
incentives for Medicare and Medicaid beneficiaries to enroll in health
maintenance organizations and other managed care plans or to accept
Medicare coverage with a substantially increased deductible, with the savings
being available to the beneficiaries to pay non-covered expenses. Medaphis
cannot predict the effect on it if such Medicare legislation is adopted into
law. The proposed changes in physician payments alter the formula for
determining aggregate Medicare funds available for physician payments and are
designed to ensure that such payments do not decline in the 1996-2002 federal
fiscal years, but Medaphis cannot determine whether the physician payment
changes would in future years have an adverse effect on its revenues or
earnings. If the incentives for Medicare beneficiaries to enroll in health
maintenance organizations and other managed care plans result in an increase in
physician payments made by health maintenance organizations and other managed
care plans, fees paid to Medaphis by physicians for billing and collection
services provided by Medaphis could be adversely affected. Changes in the
Medicaid program would reduce the number and extent of federal mandates
concerning how state Medicaid programs operate (including levels of benefits
provided and levels of payments to providers) and would change the funding
mechanism from a sharing formula between the federal government and a state to
"block grant" funding.plans. Medaphis cannot predict
the effect of any such legislation, if adopted, on its operations.
Although Congress, in 1995, did not consider healthcare reform proposals,
Medaphis anticipates that numerous healthcare reform proposals will continue to
be introduced in future sessions of Congress. Medaphis cannot predict whether
any such proposal will be adopted or the effect on Medaphis of any proposal that
does become law.
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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.
These state reform laws have, in many cases, not been fully implemented.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These marketmedical reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among
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hospitals and physicians into comprehensive delivery systems. Consolidation of
management and billing services by integrated delivery systems may result in a
decrease in demand for Medaphis' billing and collection services for particular
physician practices, but this decrease may be offset by an increase in demand
for Medaphis' consulting and comprehensive business management services
(including billing and collection services) for the new provider systems.
Existing Government Regulation. Existing governmental regulation can
adversely affect Medaphis' business66
74
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
David E. McDowell.................................. 55 Chairman and Chief Executive
Officer and Director
C. James Schaper................................... 46 Executive Vice President and Chief
Operating Officer
Allen W. Ritchie................................... 40 Executive Vice President and Chief
Financial Officer
Randolph L. M. Hutto............................... 49 Executive Vice President and
General Counsel
Harvey Herscovitch................................. 60 Senior Vice President -- Strategy
and Organization
Robert C. Bellas, Jr. ............................. 55 Director
David R. Holbrooke, M.D. .......................... 57 Director
John C. Pope....................................... 48 Director
Dennis A. Pryor.................................... 55 Director
C. Christopher Trower.............................. 49 Director
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President and Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
among other things, its potential
to reduce the amount of reimbursement received by Medaphis' clients for
healthcare services. A significant portion of Medaphis' revenue is derived from
management fees which are based upon a percentage of net collections of
healthcare receivables. During the past decade, federal and state governments
have implemented legislation designed to stimulate a reductionMcKesson Drug Company in the increaseUnited States and Medis Health and Pharmaceutical
Services, Inc. in Canada. Prior to 1992, Mr. McDowell served for over 25 years
as a senior executive at IBM, including as a Vice President and President of the
National Services Division.
C. JAMES SCHAPER joined Medaphis in March 1997 as President of Medaphis
Healthcare Information Technology Company and Executive Vice President of
Medaphis. In January, 1998, he was appointed Chief Operating Officer of
Medaphis. From 1994 to 1997, Mr. Schaper held numerous positions with Dun &
Bradstreet Software, including President, Chief Executive Officer, Chief
Operating Officer, Executive Vice President, and Senior Vice President, Field
Operations and Marketing. From 1989 to 1994, Mr. Schaper held several positions
with Banyan Systems, Inc., including Senior Vice President, Worldwide Sales and
Marketing, Vice President, North America Field Operations and Regional Vice
President.
ALLEN W. RITCHIE joined Medaphis in January 1998 as Executive Vice
President and Chief Financial Officer. From October 1997 to January 1998, Mr.
Ritchie served as President and Chief Executive Officer of Royal Precision, Inc.
From July 1996 until January 1997 he served as President, Finance and
Administration of AGCO Corporation and President from January 1996 to July 1996.
From September 1991 until July 1994, he was AGCO's Chief Financial Officer, and
after July 1994 also served as Executive Vice President.
RANDOLPH L. M. HUTTO joined Medaphis in August 1997 as Executive Vice
President and General Counsel. From 1992 to 1996, Mr. Hutto was employed by
First Data Corporation (formerly known as First Financial Management
Corporation) where he served in a variety of executive positions, including
Senior Executive Vice President -- General Counsel and, most recently, Senior
Vice President -- Planning and Development. Prior to that, Mr. Hutto was a
partner in the law firm of Sutherland, Asbill & Brennan.
HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
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ROBERT C. BELLAS, JR. became a director of the Company in 1987. He has been
a general partner of Morgenthaler Ventures, a private equity investment firm
based in Cleveland, Ohio, since 1984, where he is responsible for the firm's
investments in healthcare costsservices, medical devices and itbiomedical ventures. Mr.
Bellas is anticipated that such legislative initiatives will
continue. Medaphis also is subject to applicable federal and state billing and
credit collection agency laws and regulations. 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.
Competition; Industry and Market Changes. The management services business
to physicians and hospitals is highly competitive. Medaphis competes with
certain national and regional physician and hospital reimbursement organizations
and collection businesses, certain national information and data processing
organizations and certain physician groups and hospitals which provide their own
business management services. Potential industry and market changes that could
adversely affect the billing and collection aspectsmember 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, and (ii) new alliances between
healthcare providers and third-party payors in which healthcare providers are
employed by such third-party payors.
Evolving Industry Standards; Rapid Technological Changes. The markets for
Medaphis' software products are characterized by rapidly changing technology,
evolving industry standards and frequent new products and product enhancements.
Medaphis' success in its business will depend upon its continued ability to
enhance its existing products, to introduce new products on a timely and cost
effective basis to meet evolving customer requirements, to achieve market
acceptance for new product offerings and to respond to emerging industry
standards and other technological changes. There can be no assurance that
Medaphis will be able to respond effectively to technological changes or new
industry standards. Moreover, there can be no assurance that competitors of
Medaphis will not develop competitive products, or that any such competitive
products will not have an adverse effect upon Medaphis' operating results.
Systems Integration Projects. Medaphis' systems integration operations
typically have large projects which involve re-engineering various client
operations through the use of imaging, client/server and other advanced
technologies. Medaphis' systems integration contracts typically include
significant initial license fees. Failure to meet expectations with respect to a
major project could damage Medaphis' reputation as a systems integrator, affect
its ability to attract new systems integration business, result in the payment
of liquidated or other damages to the client and jeopardize Medaphis' ability to
collect for systems integration services already performed on the project.
Moreover, given the size and complexity of the large-scale systems integration
contracts entered into by Medaphis and the license fees associated therewith,
the results of operations for Medaphis' Technology Systems Division could be
subject to significant quarterly fluctuations based upon the timing of receipt
of large-scale re-engineering contracts. However, management of Medaphis
anticipates that the episodic nature of its existing systems integrations
operations should be partially offset over
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time by the results of operations of BSG and Rapid Systems, which historically
have had a larger number of smaller systems integration projects that have not
included initial license fees.
Possible Volatility of Stock Price. Medaphis believes factors such as
announcements with respect to healthcare reform measures, the Federal
Investigation, acquisitions 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 healthcare
reform measures, the Federal Investigation, acquisitions or any shortfall in
revenue or earnings from levels expected by securities analysts could have an
immediate and significant 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.
Dependence on Senior Management. Medaphis' success depends upon the
continued contributions of its senior management. Medaphis enters into
confidentiality and non-solicitation agreements with its executive officers and
key employees. In general, these agreements contain certain covenants on the
part of the executive or key employee concerning confidential and proprietary
information of Medaphis, respectively, and preclude the executive or key
employee from soliciting customers or employees of Medaphis, respectively,
during the twelve-month period following termination of employment. The loss of
services of certain of Medaphis' executive officers could have a material
adverse effect upon the respective businesses of Medaphis.
GENERAL INFORMATION
This Proxy Statement/Prospectus is being furnished to stockholders of HDS
in connection with the solicitation of proxies by the Board of Directors of HDS
from holdersCardioThoracic Systems, Inc.,
Vical, Inc., and several privately held healthcare companies.
DAVID R. HOLBROOKE, M.D. became a director of outstanding sharesthe Company in 1994. Dr.
Holbrooke has been the President and Chief Executive Officer of HDS Capital Stock for use at the Special
Meeting. At the Special Meeting, the stockholdersAdvocates Rx,
Inc., a medical management and healthcare venture development company, since
1995. From 1983 to 1995, Dr. Holbrooke served as President and Chief Executive
Officer of HDS will be asked to
considerHolbrooke & Associates. Dr. Holbrooke has a 25 year history of
entrepreneurship, management, medical practice, and vote upon a proposal to approve the Merger Agreement. If the Merger
is consummated, each outstanding share of HDS Capital Stock (other than treasury
shares and shares held by stockholders of HDS who perfect their appraisal rights
under Delaware law) will be converted into the right to receive .7750 of a share
of Medaphis Common Stock, plus cash for any fractional shares of Medaphis Common
Stock after such conversion.
This Proxy Statement/Prospectus also constitutes the Prospectus of Medaphis
with respect to the shares of Medaphis Common Stock to be issuednew business development
experience in the Merger.
Informationhealthcare services industry. He currently is active as a
board member and investor in this Proxy Statement/Prospectus with respect to Medaphisseveral privately held healthcare companies.
JOHN C. POPE became a director of the Company in 1997. He has been supplied by Medaphis and the information with respect to HDS has been supplied
by HDS.
THE HDS SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Special Meeting will be held on , 1996, at [10:00] a.m.
local time, at the Mission Inn, 3649 Seventh Street, Riverside, California. At
the Special Meeting, holders of HDS Common Stock and HDS Preferred Stock, voting
together as a single class, and holders of Series F Preferred Stock, voting as a
separate class, will be asked to consider and vote upon a proposal to approve
the Merger Agreement.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of shares of HDS Common Stock, HDS Series B
Preferred Stock, HDS Series C Preferred Stock, and HDS Series F Preferred Stock
at the close of business on , 1996 (the "Record Date"), are entitled
to notice of and to vote at the Special Meeting. As of such date, there were
4,081,990 shares of HDS Common Stock issued and outstanding held by 157 holders
of record, 742,000 shares of HDS Series B Preferred Stock issued and outstanding
held by 147 holders of record, 1,312,500 shares of HDS Series C Preferred Stock
held by 49 holders of record, and 1,605,353 shares of HDS Series F Preferred
Stock issued and outstanding held by 12 holders of record. Holders of record of
HDS Common Stock and HDS Preferred Stock on the Record Date for the Special
Meeting are entitled to one vote per share on any matter that may properly come
before the Special Meeting.
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VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
The presence in person or by proxy of the holders of a majority of the
shares of HDS Common Stock and HDS Preferred Stock outstanding as of the Record
Date is necessary to constitute a quorum at the Special Meeting. The affirmative
vote of (i) the holders of a majority of the total outstanding shares of HDS
Common Stock and HDS Preferred Stock, voting together as a single class, and
(ii) the holders of at least 85% of the total outstanding shares of HDS Series F
Preferred Stock, voting as a separate class, in each case present (in person or
by proxy) and entitled to vote at the Special Meeting, is necessary to approve
the Merger Agreement. Abstentions will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
Special Meeting. Abstentions and broker nonvotes with respect to the proposal to
approve the Merger Agreement will have the effect of a vote against such
proposal at the Special Meeting.
As of the Record Date, the executive officers and directors of HDS
beneficially owned an aggregate of 1,954,023 shares of HDS Common Stock and HDS
Preferred Stock (not including any shares which might be deemed to be
beneficially owned on account of outstanding options), or approximately 25.24%
of the shares of HDS Common Stock and HDS Preferred Stock then outstanding, and
2,040 shares of HDS Series F Preferred Stock, or less than 1% of the shares of
HDS Series F Preferred Stock outstanding.
SOLICITATION AND REVOCATION OF PROXIES
HDS has prepared a form of proxy card for the HDS Common Stock, the HDS
Series B Preferred Stock and the HDS Series C Preferred Stock and a separate
form of proxy card for the HDS Series F Preferred Stock. HDS has enclosed the
applicable proxy card or cards with this Proxy Statement/Prospectus. Holders of
HDS Common Stock, HDS Series B Preferred Stock or HDS Series C Preferred Stock
are requested to sign and return the proxy marked "HDS Common and Series B and C
Preferred Stock." Holders of HDS Series F Preferred Stock are requested to sign
and return the proxy marked "HDS Series F Preferred Stock." Holders of HDS
Series F Preferred Stock who are also holders of any other class of HDS Capital
Stock are requested to sign and return both proxy cards enclosed. All shares of
HDS Common Stock and HDS Preferred Stock represented by properly executed
proxies, unless such proxies have been previously revoked, will be voted in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted for approval of the Merger Agreement
and, in the discretion of the proxy holder, as to any other matter which may
properly come before the Special Meeting.
Any HDS stockholder who has previously delivered a properly executed proxy
may revoke such proxy at any time before its exercise. A proxy may be revoked
either by (i) filing with the Secretary of HDS prior to the Special Meeting, at
HDS's principal executive offices, either a written revocation of such proxy or
a duly executed proxy bearing a later date or (ii) attending the Special Meeting
and voting in person, regardless of whether a proxy has previously been given.
Presence at the Special Meeting will not revoke a stockholder's proxy unless
such stockholder votes in person.
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THE MERGER
BACKGROUND OF THE MERGER
Beginning in early May, 1996, Medaphis and HDS engaged in substantive
discussions regarding a possible acquisition transaction. A definitive merger
agreement was executed on May 23, 1996. Prior to the execution of the Merger
Agreement, there was no material relationship between Medaphis and HDS.
REASONS FOR THE MERGER
HDS. The Board of Directors of HDS formed a Special Committee consisting
of the three non-employee membersChairman
of the Board of MotivePower Industries, Inc., a manufacturer of locomotives and
locomotive components, since December 1995. From January 1988 to consider the proposed termsJuly 1994, Mr.
Pope held various positions with UAL Corporation and its subsidiary, United
Airlines, Inc., most recently as President, Chief Operating Officer and
Director. Mr. Pope is also a member of
the Merger. In approving and adopting the Merger Agreement and formulating its
recommendation that the stockholders of HDS approve and adopt the Merger
Agreement and consummate the Merger, the HDS Board of Directors considered a
number of factors, including, without limitation, the following: (i) the
recommendation of the Special Committee that the Board of Directors approve and
adopt the Merger Agreement; (ii) the current privately-held status of HDS; (iii)
the quality of, and risks associated with, Medaphis Common Stock to be received
by HDS stockholders in the Merger; (iv) the terms of the Merger Agreement; (v)
the expectation that the Merger will be treated as a tax-free reorganization for
federal income tax purposes so that generally no gain or loss will be recognized
by HDS stockholders in connection with the exchange of HDS Common Stock and HDS
Preferred Stock for Medaphis Common Stock in the Merger; (vi) the opinion
rendered to the HDS Board of Directors by Hambrecht & Quist that the
consideration to be received by the holders of HDS Common Stock and HDS
Preferred Stock in the Merger is fair, from a financial point of view, to such
stockholders, the full text of which opinion is set forth as Annex C to this
Proxy Statement/Prospectus (See "-- Opinion of Financial Advisor to HDS"); and
(vii) certain strategic and business reasons for the Merger as set forth below
as Medaphis' reasons for pursuing the Merger.
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
MEDAPHIS. First, the Merger provides Medaphis with an advanced clinical
information management system which organizes data and processes around a
patient-centered model and facilitates the delivery of protocol-based care on a
real-time basis. ULTICARE, HDS's lead system, represents an integrated
information management system which addresses a healthcare enterprise's
information needs through the integrated monitoring, scheduling, documentation
and control of all patient care activities. As the evolving healthcare
environment continues to promote consolidation among healthcare providers and
the growth of managed care, Medaphis believes that the demand for clinical
information management systems designed to reduce costs within a healthcare
enterprise and improve the quality of care across the enterprise should
increase. The Merger provides Medaphis with established and deliverable products
and expertise to take immediate advantage of this market opportunity. Moreover,
management of Medaphis believes that ULTICARE will complement Medaphis' existing
product and service offerings.
Second, Medaphis believes that the Merger will present opportunities for
Medaphis to cross sell systems and services among the consolidated Medaphis/HDS
customer base. Through its recent acquisitions of BSG and Rapid Systems,
Medaphis has become one of the leading client/server systems integration and
work flow engineering companies in the United States. Management of Medaphis
believes that Medaphis' systems integration and work flow engineering resources
and expertise should prove helpful in connection with the sale and installation
of HDS's clinical information systems, particularly in Integrated Healthcare
Delivery Systems ("IHDS") and other large healthcare enterprises which have an
ever increasing need for integration of clinical, financial, operational,
administrative and analytical systems and data across the enterprise. Similarly,
management of Medaphis believes that opportunities exist for Medaphis to provide
business management outsourcing services and information management systems to
the HDS client base, and to offer HDS's clinical information systems to
Medaphis' existing base of healthcare providers and payers clients. Medaphis
currently
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provides business management services and systems to approximately 19,700
physicians and over 2,200 hospitals in all 50 states and subrogation and
recovery services to 45 payors covering in excess of 24 million lives.
Third, Medaphis believes that the Merger will enhance Medaphis ability to
pursue its mission of seeking to achieve an unequaled level of measurable
quality and productivity in the delivery of information technology systems and
business services which respond to the wants, needs and values of its customers.
Management believes that HDS's clinical information systems and expertise
together with Medaphis' existing product development expertise should assist
Medaphis in developing a proprietary data model for its clients which captures
and organizes data relating to the delivery of healthcare services and utilizes
such data in real-time to reduce costs, increase efficiency and improve the
quality of care provided. It has been estimated that the healthcare industry
spends in excess of $40 billion per year and employs in excess of 1 million
people to capture data on healthcare services provided and then to price, bill
and collect for such services. Management of Medaphis believes that the Merger
will provide Medaphis with a necessary component to address the cost and
management problems currently confronting the healthcare industry.
TERMS OF THE MERGER AGREEMENT
General. The Merger Agreement provides that, following approval of the
Merger Agreement by the stockholders of HDS and the satisfaction or waiver of
the other conditions to the consummation of the Merger, Newco will be merged
with and into HDS at the Effective Time in accordance with the DGCL. HDS will be
the surviving corporation in the Merger. As a result of the Merger, the separate
corporate existence of Newco will cease, and HDS will become a wholly owned
subsidiary of Medaphis.
Conversion Ratio. Each share of HDS Common Stock and HDS Preferred Stock
issued and outstanding at the time of the Merger (other than treasury shares and
shares held by HDS stockholders who perfect their appraisal rights under the
DGCL) will be converted into the right to receive .7911 of a share of Medaphis
Common Stock (the "Conversion Ratio").
Cash will be paid in lieu of issuing fractional shares of Medaphis Common
Stock in an amount equal to the Average Closing Price of Medaphis Common Stock
multiplied by the fraction of a share which the holder of HDS Capital Stock
would otherwise be entitled to receive.
Issuance of Additional Options. In connection with the Merger, Medaphis
has agreed to issue additional options covering 100,000 shares of Medaphis
Common Stock to certain employees of HDS. The exercise price for such options
will be the fair market value of Medaphis Common Stock at the time of grant and
the options shall vest over five years.
Conditions to the Merger. The obligations of both Medaphis and HDS to
consummate the Merger are subject to the satisfaction of certain conditions,
including, among others: (i) the approval of the Merger Agreement by the
stockholders of HDS; (ii) the absence of any injunction, writ or preliminary
restraining order or any order of any nature issued by a court or governmental
agency of competent jurisdiction to the effect that the Merger may not be
consummated as provided in the Merger Agreement and the absence of any lawsuit
or proceeding (actual or as to which written notice has been received) by any
governmental or regulatory agency for the purpose of obtaining any such
injunction, writ or preliminary restraining order; (iii) the receipt by Medaphis
and HDS of a written opinion of King & Spalding concerning certain federal
income tax consequences of the Merger; (iv) the receipt by Medaphis and HDS of a
written opinion from Deloitte & Touche LLP that, in accordance with generally
accepted accounting principles, the Merger qualifies to be treated as a pooling
of interests for accounting purposes; (v) the effectiveness of the Registration
Statement under the Securities Act and the absence of (a) any stop order
suspending the effectiveness of the Registration Statement or any proceedings by
the Commission (actual or threatened) for such purpose and (b) the absence of
any stop order suspending the effectiveness of any qualification or registration
of the Medaphis Common Stock under the state securities laws or any proceeding
by authorities of any such state (actual or threatened) for such purpose; (vi)
the shares of Medaphis Common Stock to be issued pursuant to the Merger
Agreement shall have been listed on The Nasdaq Stock Market; and (vii) the
applicable waiting periods shall have terminated under the HSR Act.
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The obligation of Medaphis to consummate the Merger is subject to certain
additional conditions, including, among other things, that: (i) HDS's
representations and warranties contained in the Merger Agreement shall be true
and correct as of the date of the Merger Agreement and as of the Effective Time;
(ii) HDS shall have performed in all material respects all covenants and
agreements required to be performed by it under the Merger Agreement; (iii)
Medaphis shall have received legal opinions and accountants' letters with
respect to various matters; (iv) all corporate action necessary by HDS to
authorize the execution, delivery and performance of the Merger Agreement and
the consummation of the transactions contemplated thereby shall have been duly
and validly taken; (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been made (with certain limited
exceptions); (vi) Medaphis shall have received consents to assignment of certain
material contracts of HDS or written waivers of the provisions under any such
contracts requiring the consents of third parties; (vii) HDS shall have received
letters from each stockholder of HDS who is an affiliate of HDS regarding
certain restrictions on the transfer of the Medaphis Common Stock received
pursuant to the Merger for a specified period of time; (viii) Medaphis shall
have received certificates from certain officers of HDS as to compliance with
certain conditions of the Merger Agreement; (ix) holders of not more than 10% of
the outstanding shares of HDS Capital Stock shall have elected to exercise
appraisal rights pursuant to the DGCL; (x) 70% of the holders of HDS Options
shall have executed and delivered to Medaphis Option Assumption Agreements; (xi)
during the course of its due diligence review following the execution of the
Merger Agreement, Medaphis shall not have discovered prior to the close of
business on June 20, 1996, specified types of information that would have a
material adverse effect on the assets, liabilities, results of operations,
financial condition or business of HDS; and (xii) each of the directors of HDS
shall have tendered resignation letters to Medaphis.
The obligation of HDS to consummate the Merger also is subject to certain
additional conditions, including, among others, that: (i) Medaphis'
representations and warranties contained in the Merger Agreement shall be true
and correct as of the date of the Merger Agreement and as of the Effective Time;
(ii) Medaphis shall have performed in all material respects all covenants and
agreements required to be performed by it under the Merger Agreement; (iii) HDS
shall have received legal opinions and accountants' letters with respect to
various matters; (iv) all corporate action necessary by Medaphis to authorize
the execution, delivery and performance of the Merger Agreement and the
consummation of the transactions contemplated thereby shall have been duly and
validly taken; (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been obtained (with certain
limited exceptions); (vi) the Board of Directors of HDS shall have received a
written opinion of Hambrecht & Quist toFederal-Mogul
Corporation and Wallace Computer Services, Inc.
DENNIS A. PRYOR joined the effect that the Merger is fair to
HDS and its stockholders from a financial point of view; and (vii) Medaphis
shall have furnished HDS with a certificate of certain officers of Medaphis as
to compliance with certain conditions of the Merger Agreement.
Amendment. The Merger Agreement may be amended by the mutual agreement of
the parties thereto. Any amendment to the Merger Agreement must beCompany in writing
and signed by the parties to the Merger Agreement.
Termination. The Merger Agreement may be terminated (i) by mutual
agreement of the Boards of Directors of HDS and Medaphis; (ii) by HDS or
Medaphis, if the conditions to such parties' obligations to consummate the
Merger have not been complied with or performed and such noncompliance or
nonperformance has not been cured or eliminated on or before August 15, 1996;
(iii) by Medaphis or HDS, if the Merger Agreement has not been approved by the
holders of a majority of the outstanding shares of HDS Common Stock and HDS
Preferred Stock, voting together as a single class, and the holders of at least
85% of the outstanding shares of HDS Series F Preferred Stock, voting as a
separate class; and (iv) by HDS if the Average Closing Price is less than $37.
Fees and Expenses. Medaphis will pay its own fees, costs and expenses
incurredJanuary 1993 in connection with the
Merger Agreementacquisition of CompMed, Inc. and the transactions
contemplated thereby. HDS will pay its own fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
but such fees,
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costs and expenses shall not exceed certain specified amounts and the reasonable
fees and expenses of accountants and counsel for HDS. In addition, HDS has
agreed that, if (i) the Merger Agreement is terminated solely assubsequently became a resultdirector of the failureCompany.
In 1993, Mr. Pryor also served as Chief Executive Officer of HDS's stockholders to approveCompMed. From 1976
through 1992, Mr. Pryor was the Merger Agreement, (ii) on or prior
to the date scheduled for the Special Meeting, HDS receives a proposal or offer
from another entity concerning an Acquisition Transaction, (iii) HDS engages in
negotiations or enters into a letter of intent, agreement in principle or
definitive agreement with another entity concerning an Acquisition Transaction
within 182 days after the date of such termination of the Merger Agreementprincipal owner and
(iv) such Acquisition Transaction is consummated during or after such 182-day
period, then HDS shall pay Medaphis $7,500,000 to reimburse and compensate
Medaphis for its expense, time and effort in connection with the matters
contemplated by the Merger Agreement.
Exchange of HDS Stock Certificates. Prior to the Effective Time,
instructions and a letter of transmittal will be furnished to all stockholders
of HDS for use in exchanging their stock certificates for certificates
evidencing the shares of Medaphis Common Stock they will be entitled to receive
as a result of the Merger. STOCKHOLDERS OF HDS SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL INSTRUCTIONS AND THE LETTER OF TRANSMITTAL ARE
RECEIVED.
No Solicitation. The Merger Agreement provides that until the Effective
Time or until the Merger Agreement is terminated in accordance with its terms,
HDS will not directly or indirectly solicit or initiate (including by way of
furnishing information) discussions with any third party (other than Medaphis or
its authorized representatives pursuant to the Merger Agreement) concerning an
Acquisition Transaction involving HDS. HDS has agreed to notify Medaphis
promptly in writing if HDS receives any inquiries or proposals with respect to
an Acquisition Transaction and shall provide Medaphis with copies of any such
written proposals or inquiries actually received.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
relating thereto with the Secretary of State of the State of Delaware. The
Merger Agreement provides that the parties thereto will cause such certificate
of merger to be filed after each of the conditions to consummation of the Merger
has been satisfied or waived. The Merger cannot become effective until the HDS
stockholders have approved the Merger Agreement. Thus, there can be no assurance
as to whether or when the Merger will become effective.
RECOMMENDATION OF THE HDS BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF HDS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF HDS AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HDS STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR TO HDS
HDS engaged Hambrecht & Quist to act as its financial advisor in connection
with the Merger and to render an opinion as to the fairness from a financial
point of view to the holders of the outstanding shares of HDS Common Stock and
HDS Preferred Stock of the consideration to be received in the Merger. Hambrecht
& Quist undertook a presentation to the Board of Directors of HDS on May 20,
1996 and to a special committee of the Board of Directors on May 22, 1996 and
rendered its oral opinion (subsequently confirmed in writing) that, as of such
date, the consideration to be received in the Merger is fair to the holders of
the HDS Common Stock and the HDS Preferred Stock from a financial point of view.
A COPY OF HAMBRECHT & QUIST'S OPINION DATED MAY 22, 1996, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE REVIEW
UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST, IS ATTACHED AS
ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS. HDS SHAREHOLDERS ARE ADVISED TO READ
THE OPINION IN ITS ENTIRETY. No limitations were placed on Hambrecht & Quist by
the Board of Directors of HDS with respect to the investigation made or the
procedures followed in preparing and rendering its opinion.
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In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things, (i) reviewed the publicly available consolidated
financial statements of Medaphis for recent years and interim periods to date
and certain other relevant financial and operating data of Medaphis made
available to Hambrecht & Quist from published sources and from the internal
records of Medaphis; (ii) discussed with certain members of the management of
Medaphis the business, financial condition and prospects of Medaphis; (iii)
reviewed certain financial and operating information, including certain
projections of Medaphis, relating to Medaphis and discussed such projections
with certain members of the management of Medaphis; (iv) reviewed the
consolidated financial statements of HDS for recent years and interim periods to
date and certain other relevant financial and operating data of HDS made
available to Hambrecht & Quist from the internal records of HDS; (v) reviewed
certain internal financial and operating information, including certain
projections, relating to HDS prepared by the senior management of HDS; (vi)
discussed the business, financial condition and prospects of HDS with certain
members of its senior management; (vii) compared certain financial information
of HDS and Medaphis with certain financial information and the recent reported
common stock prices and trading activity of companies engaged in businesses
Hambrecht & Quist considered comparable to that of HDS and Medaphis; (viii)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions; (ix) reviewed the Merger
Agreement and certain ancillary agreements; and (x) performed such other
analyses and examinations and considered such other information, financial
studies, analyses and investigations and financial, economic and market data as
Hambrecht & Quist deemed relevant.
In rendering their opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all of the information concerning Medaphis or HDS
considered in connection with their review of the Merger, and Hambrecht & Quist
did not assume any responsibility for independent verification of such
information. Hambrecht & Quist did not prepare any independent valuation or
appraisal of any of the assets or liabilities of Medaphis or HDS, nor did they
conduct a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections made available
to Hambrecht & Quist and used in their analysis, Hambrecht & Quist assumed that
they reflect the best currently available estimates and judgments of the
expected future financial performance of Medaphis and HDS, respectively. For
purposes of their opinion, Hambrecht & Quist assumed that neither Medaphis nor
HDS was a party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Merger and
those activities undertaken in the ordinary course of conducting their
respective businesses. Hambrecht & Quist's opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can be
evaluated as of the date of their opinion and any change in such conditions
would require a reevaluation of such opinion. Hambrecht & Quist expressed no
opinion as to the price at which Medaphis common stock will trade subsequent to
the Effective Time (as defined in the Merger Agreement). Hambrecht & Quist was
not requested to, and did not, solicit indications of interest from any other
parties in connection with a possible acquisition of, or business combination
with, HDS.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
in arriving at its opinion, Hambrecht & Quist did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor. No
company or transaction used in Hambrecht & Quist's analyses is identical to
Medaphis, HDS or the Merger. Accordingly, the analyses performed by Hambrecht &
Quist were not purely mathematical; rather they involved complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading values
of the companies or company to which they are compared. Accordingly, Hambrecht &
Quist believes that its analyses and the summary set forth below must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the summary, without considering all factors and
analyses, could create an incomplete view of the processes underlying the
analyses set forth in the Hambrecht & Quist presentation to the HDS Board and
its opinion. In performing its analyses, Hambrecht & Quist made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of HDS and
Medaphis. The analyses performed by Hambrecht & Quist (and
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summarized below) are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
Comparable Public Company Analyses. Hambrecht & Quist compared selected
historical and projected financials, operating and stock market performance data
of HDS to the corresponding data of certain publicly traded healthcare
information services companies that Hambrecht & Quist considered comparable
based on market value and strategic focus. Comparisons were analyzed for the
following companies in the healthcare information services business: Cerner
Corp., Citation Computer Systems, Inc., Enterprise Systems, Inc., HBO & Co.,
Medicus Systems Corp., Oacis Healthcare Systems, Inc., Pace Health Management
Systems, Inc., Phamis, Inc., and Shared Medical Systems Corp. For each of the
foregoing companies, Hambrecht & Quist analyzed the equity market value of each
company as a multiple of 1995 net income, 1996 estimated net income, and 1997
forecasted net income, and Hambrecht & Quist analyzed the enterprise value of
each company (calculated as market equity value plus preferred stock and
long-term debt minus cash) as a multiple of each company's last twelve months'
revenue and last twelve months' EBIT. All multiples were based on closing stock
prices on May 21, 1996. All forecasted data for such comparable companies were
based on publicly-available independent estimates by selected investment banking
firms. With respect to the financial forecasts for HDS, Hambrecht & Quist
analyzed three distinct cases: a management case (the "Management Case"), a base
case (the "Base Case"), and a more conservative case (the "Conservative Case").
Relative to the Management Case, the Base Case included a 25% reduction in the
revenue forecasts for 1996 and 1997, a 20% reduction in operating expenses in
1996 and 1997, and a 40% reduction in pre-tax income for 1996 and 1997. Relative
to the Management Case, the Conservative Case included a 25% reduction in the
revenue forecasts for 1996 and 1997, a 14% reduction in operating expenses in
1996 and 1997, and a 45% reduction in pre-tax income for 1996 and 1997.
Specifically, the average 1995 net income multiple for the comparable companies
implied an equity value for HDS of $406 million; the average 1996 net income
multiple for the comparable companies implied an equity value for HDS of $776
million in the case of the Management Case, $459 million in the Base Case, and
$438 million for the Conservative Case; and the average 1997 net income multiple
for the comparable companies implied an equity value for HDS of $884 million in
the Management Case, $523 million in the Base Case, and $499 million for the
Conservative Case. The average last twelve months' net revenue multiple implied
an equity value for HDS of $337 million, and the average last twelve months'
EBIT multiple implied an equity value of $293 million. In its discussion with
the Board of Directors of HDS regarding the range of potential valuation,
Hambrecht & Quist placed somewhat greater reliance on the historic multiples,
rather than the multiples of projected operating performance. Hambrecht & Quist
also observed that the creation of the implied public market values for HDS was
not meant to suggest that HDS could undertake an initial public offering in the
then-current environment, and that financing in the private equity market would
typically be undertaken at a 40% discount to public market valuations. The
foregoing implied values were compared with a valuation of HDS of approximately
$245 million as implied by the Merger.
Selected Acquisitions Analysis. Using publicly-available information,
Hambrecht & Quist analyzed the purchase prices and transaction values (as equity
value multiples of net income, tangible book value, cash flow from operations,
and as enterprise value multiples of revenue, EBIT, EBITDA, and net operating
assets) in the following selected completed and pending merger and acquisition
transactions in the healthcare information services industry in 1995 and 1996:
CyCare Systems, Inc./HBO & Co., BSG Corp./Medaphis Corp., Rapid Systems
Solutions, Inc./Medaphis Corp., Pyxis Corp./Cardinal Health, Inc., Medical
Management Sciences, Inc./Medaphis Corp., Consort Technologies, Inc./Medaphis
Corp., Clinicom, Inc./HBO & Co., Healthcare Recoveries, Inc./Medaphis Corp.,
Medical Consultants, Inc./Medaphis Corp., Health Systems Group, Inc./HBO & Co.,
MMC Healthcare - Software Systems/Medicus Systems Corp., and Automation
Atwork/Medaphis Corp. Specifically, the average last twelve months' net income
multiple for the comparable transactions implied an equity value for HDS of
approximately $225 million; the average tangible book value multiple for the
comparable transactions implied an equity value for HDS of approximately $857
million; the average operating cash flow multiple for the comparable
transactions implied a negative equity value for HDS. The average 1996
forecasted net income multiple for comparable transactions implied
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an equity value for HDS of $548 million in the Management Case, $324 million in
the Base Case, and $310 million in the Conservative Case. The average last
twelve months' revenue multiple for comparable transactions implied an equity
value for HDS of $199 million; the average last twelve months' EBIT multiple for
comparable transactions implied an equity value for HDS of $288 million; the
average net operating asset multiple for comparable transactions implied an
equity value for HDS of $799 million. The average 1996 forecasted revenue
multiple for comparable transactions implied an equity value for HDS of $214
million in the Management Case, $166 million in the Base Case, and $164 million
in the Conservative Case.
Stock Trading History Analysis. Hambrecht & Quist examined the history of
the trading prices and volume of the shares of the common stock of Medaphis, and
the relationship between movement in the prices of such shares and movements in
the NASDAQ Composite Index and an index derived from the comparable companies
(the "Inpatient Systems Companies") during the period from May 20, 1995 to May
20, 1996. Such data was used to analyze the historical public market valuation
of Medaphis as compared with the historic public market valuation of the
companies comprising the Inpatient Systems Companies. At any given point in the
period, such data indicated whether the Medaphis share value was higher or lower
relative to such blended indices. For such period, Medaphis common stock
under-performed on a relative basis the public stocks comprising the Inpatient
Systems Companies and performed approximately comparably with the NASDAQ
composite index.
Contribution Analysis. Hambrecht & Quist reviewed certain historical and
estimated future operating and financial information (including revenues,
operating income and pretax income) for HDS, Medaphis and the pro forma combined
entity resulting from the Merger based on Medaphis management estimates and the
Management Case, Base Case and Conservative Case. Hambrecht & Quist observed
that HDS shareholders would own approximately 8.2% (or 8.6% including the
assumption of HDS options) of the post-Merger entity. Hambrecht & Quist further
observed that HDS accounted for approximately 5.5% of the revenues, 6.8% of the
operating income, and 11.0% of the pretax income of the combined company in
1995. With respect to 1996 and 1997 and relying on the Management Case,
Hambrecht & Quist noted that HDS would account for approximately 7.2% of 1996
combined revenues, 15.3% of 1996 combined operating income, 19.4% of 1996
combined pretax income, 7.5% of 1997 combined revenues, 13.2% of 1997 combined
operating income, and 19.5% of 1997 combined operating income. Relying on the
Base Case, Hambrecht & Quist noted that HDS would account for approximately 5.6%
of 1996 combined revenues, 11.5% of 1996 combined operating income, 12.7% of
1996 combined pretax income, 5.8% of 1997 combined revenues, 9.8% of 1997
combined operating income, and 12.7% of 1997 combined operating income. Relying
on the Conservative Case, Hambrecht & Quist noted that HDS would account for
approximately 5.5% of 1996 combined revenues, 9.1% of 1996 combined operating
income, 12.0% of 1996 combined pretax income, 5.7% of 1997 combined revenues,
7.8% of 1997 combined operating income, and 12.0% of 1997 combined operating
income.
The foregoing description of Hambrecht & Quist's opinion is qualified in
its entirety by reference to the full text of such opinion which is attached at
Annex C to this Proxy Statement/Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Hambrecht & Quist, together with its affiliates, owns approximately 0.5% of the
outstanding HDS Common Stock (on an as-converted basis). Hambrecht & Quist was
familiar with Medaphis and provided investment banking and other financial
advisory services to Medaphis in the past, and they have received fees for
rendering these services. Specifically, Hambrecht & Quist acted as financial
advisor to Medaphis in 1995 in connection with its acquisition of Healthcare
Recoveries, Inc. In the ordinary course of business, Hambrecht & Quist acts as a
market maker and broker in the publicly traded securities of Medaphis and
receives customary compensation in connection therewith, and also provides
research coverage for Medaphis. In the ordinary course of business, Hambrecht &
Quist actively trades in the equity securities of Medaphis for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities. Hambrecht & Quist may in the future
provide additional investment banking or other financial advisory services to
Medaphis.
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Pursuant to an engagement letter dated May 12, 1996, HDS has agreed to pay
Hambrecht & Quist a customary fee upon the delivery of a fairness opinion and
the consummation of the Merger. HDS has agreed to reimburse Hambrecht & Quist
for its reasonable out of pocket expenses, and to indemnify Hambrecht & Quist
against certain liabilities, including liabilities under the federal securities
laws or relating to or arising out of Hambrecht & Quist's engagement as
financial advisor.
See "HDS Options" for a discussion of a prior opinion concerning valuation
of the HDS Capital Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, holders of HDS Common Stock and HDS Preferred
Stock should be aware that certain executive officers and directors of HDS have
certain interests that may present them with potential conflicts of interest
with respect to the Merger.
Ownership of HDS Capital Stock. As of the date of this Proxy
Statement/Prospectus, executive officers and directors of HDS beneficially owned
an aggregate of 1,954,023 shares of HDS Capital Stock (not including any shares
which might be deemed to be beneficially owned on account of outstanding
options). If the Special Meeting had been held on the Last Trading Date, the
executive officers and directors of HDS would have been entitled to receive in
the Merger an aggregate of 1,545,828 shares of Medaphis Common Stock having an
aggregate market value of approximately $60.9 million based on the closing price
per share of Medaphis Common Stock reported on The Nasdaq Stock Market on the
Last Trading Date. See "Ownership of HDS Capital Common Stock."
Employment Agreements. In connection with the Merger, each Key Employee
will enter into an Employment Agreement, pursuant to which Medaphis will agree
to employ each of them for a term of two years. It is also contemplated that
certain other employees of HDS will enter into Employment Agreements providing
for a one-year term. Each person entering into an Employment Agreement will be
paid an annual salary and will also be entitled to receive certain incentive
compensation payments. The Employment Agreements will contain certain
non-competition and non-solicitation covenants and will be in form and substance
mutually satisfactory to each party. Each Key Employee and certain other
stockholders of HDS will also enter into a Non-Compete Agreement with Medaphis
that will be in form and substance mutually satisfactory to each party.
CERTAIN AGREEMENTS IN CONNECTION WITH THE MERGER
Certain additional agreements will be entered into in connection with the
consummation of the Merger.
Employment Agreements. In connection with the Merger, each Key Employee
will enter into an Employment Agreement. See "-- Interests of Certain Persons in
the Merger -- Employment Agreements." These Employment Agreements generally will
provide for a term of employment of two years and will contain certain
non-competition and non-solicitation covenants. It is also contemplated that
certain other employees of HDS will enter into Employment Agreements.
Non-competition, Non-solicitation and Confidentiality Agreements. In
connection with the Merger, the Key Employees will enter into Non-Compete
Agreements with Medaphis. The Non-Compete Agreements will be in form and
substance mutually satisfactory to each party.
HDS OPTIONS
Pursuant to the Merger, Medaphis shall assume all of HDS's rights and
obligations with respect to outstanding and unexercised HDS Options. Prior to
the Effective Time, Medaphis will request that each holder of an HDS Option
enter into an Option Assumption Agreement with Medaphis. Upon receipt of an
Option Assumption Agreement from a holder of an HDS Option following the
Effective Time, Medaphis will issue to such holder a Non-Qualified Option to be
granted under the Medaphis Stock Option Plan. Each Non-Qualified Option issued
to a holder of an HDS Option will be subject to vesting as follows: the Option
shall vest as to 25% of the shares of Medaphis Common Stock for which it may be
exercised for each year that the Optionholder has been employed by HDS.
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Pursuant to the Merger Agreement, Medaphis is not entitled or required to
substitute a Non-Qualified Option for an HDS Option until it has received from
the holder of an HDS Option a properly completed and executed Option Assumption
Agreement with respect to the HDS Option. Each Non-Qualified Option issued in
substitution for an HDS Option will evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product of the number of shares of
HDS Common Stock covered by the HDS Option immediately prior to the Effective
Time multiplied by the Conversion Ratio. The exercise price for each such
Non-Qualified Option will be equal to the quotient obtained by dividing the
exercise price of the HDS Option immediately prior to the Effective Time by the
Conversion Ratio.
In addition, Medaphis has agreed to issue new options to certain employees
of HDS. See "-- Terms of the Merger Agreement -- Issuance of Additional
Options."
HDS has granted to employees options to purchase shares of HDS Common Stock
having exercise prices of not less than 100% of the fair market value of the
shares at the time such options are granted. In connection therewith, HDS
received in February 1996 an opinion from an investment banking firm relating to
options covering 181,750 shares of HDS Common Stock having an exercise price of
$2.50 per share granted from November 1, 1990 through June 1, 1992, and options
covering 387,400 shares of HDS Common Stock having an exercise price of $3.00
per share granted from January 1, 1995 through January 15, 1996. Among other
things, such opinion noted the 1995 private sale of HDS Series F Preferred Stock
for $16.50 per share. The opinion states that "[a]s is the case with [HDS], the
Common Stock usually has a value much less than the Preferred Stock. The opinion
concludes that the exercise prices of the HDS Options "represent a fair and
reasonable value for such stock." See "Opinion of Financial Advisor to HDS" for
a discussion of a more recent opinion concerning valuation of HDS Capital Stock.
ACCOUNTING TREATMENT
The Merger is expected to qualify to be treated as a pooling of interests
for financial accounting purposes. The obligations of Medaphis and HDS to
consummate the Merger are conditioned upon the receipt of an opinion of Deloitte
& Touche LLP, Medaphis' independent auditors, to the effect that, in accordance
with generally accepted accounting principles, the Merger will qualify to be
treated as a pooling of interests for accounting purposes. Accordingly, the
Merger will be treated as a continuation of the existing businesses of Medaphis
and HDS accounted for by combining the historical balances and results of
Medaphis and HDS. The assets and liabilities of Medaphis and HDS will be carried
forward at their recorded amounts. Income of Medaphis after the Merger will
include the income of Medaphis and HDS for the entire fiscal period in which the
Merger occurs. The reported income of Medaphis and HDS for prior periods will be
combined and restated as income of the combined company. See "Unaudited Pro
Forma Combined Financial Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General. The following summary has been included in reliance upon the
opinion of King & Spalding, counsel to Medaphis, as to the material federal
income tax consequences of the Merger to the stockholders of HDS. The summary is
based on the provisions of the Code, the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect as of the date hereof. Such laws or interpretations may differ at the
Effective Time, and relevant facts also may differ.
Tax Consequences to Stockholders of HDS. HDS and Medaphis expect that the
Merger will be treated as a tax-free reorganization for federal income tax
purposes so that no gain or loss will be recognized by stockholders of HDS,
except in respect of cash received in lieu of fractional shares of Medaphis
Common Stock or payments received by stockholders exercising appraisal rights.
The obligations of Medaphis and of HDS to consummate the Merger are conditioned
upon the receipt of an opinion of King & Spalding to the effect that the Merger
will qualify as a tax-free reorganization for federal income tax purposes under
the Code. The opinion of King & Spalding, however, will not be binding upon the
Internal Revenue Service or the courts, and will be subject to a number of
assumptions, qualifications and limitations. If the Merger is consummated, and
it is later determined that the Merger did not qualify as a tax-free
reorganization under the
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Code, stockholders of HDS would recognize taxable gain or loss upon the receipt
of Medaphis Common Stock in the Merger.
Cash received in the Merger by a stockholder of HDS in lieu of a fractional
share of Medaphis Common Stock will be treated under Section 302 of the Code as
having been received by such stockholder in exchange for such fractional share,
and such stockholder generally will recognize capital gain or loss in such
exchange equal to the difference between the cash received and such
stockholder's tax basis allocable to the fractional share.
Any gain or loss recognized will be capital gain or loss if such HDS or
Medaphis fractional share interest was a capital asset in the hands of the
stockholder of HDS, and will be long-term capital gain or loss if such HDS
fractional share interest was held by such stockholder for more than one year.
In general, the federal income tax rates applicable to long-term capital gains
and ordinary income (including short-term capital gains) of taxpayers who are
individuals may differ, while for corporations capital gains and ordinary income
are generally taxed at the same rate. The deductibility of capital losses is
subject to limitations for both individuals and corporations.
Tax Consequences of Converting HDS Options. Holders of HDS Options will
not be required to recognize taxable income on receipt of Non-Qualified Options
granted by Medaphis. However, the Non-Qualified Options will not qualify as
incentive stock options under Section 422 of the Code, and a holder of a
Non-Qualified Option will recognize ordinary compensation income upon the
exercise of such option in an amount equal to the excess of the fair market
value of the Medaphis Common Stock at the time of exercise over the amount such
holder pays for such stock. Additionally, Medaphis will be required to treat the
amount of ordinary compensation income attributable to an employee's exercise of
a Non-Qualified Option as wages subject to employment taxes and income tax
withholding. Medaphis will be allowed compensation expense deductions for
federal income tax purposes equal to the compensation income recognized by the
holders upon exercise of the Non-Qualified Options.
THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THIS DISCUSSION. EACH STOCKHOLDER AND OPTION HOLDER OF HDS SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER
TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
TAX LAWS.
RESALE OF MEDAPHIS COMMON STOCK
Shares of Medaphis Common Stock to be issued to stockholders of HDS in
connection with the Merger will be freely transferrable under the Securities
Act, except for (i) shares issued to any person or entity who, at the time of
the Special Meeting, may be deemed an "affiliate" of HDS within the meaning of
Rule 145 under the Securities Act and (ii) shares subject to the transfer
restrictions described in the following paragraph. In general, affiliates of HDS
include its executive officers and directors and any other person or entity who
controls, is controlled by or is under common control with HDS. Rule 145, among
other things, imposes certain restrictions upon the resale of securities
received by affiliates in connection with certain reclassifications, mergers,
consolidations or asset transfers. These restrictions will consist of volume and
manner of sale restrictions on the resale of shares of Medaphis Common Stock
issued to such person and entities. It is a condition to Medaphis' obligation to
consummate the Merger that HDS shall cause each stockholder of HDS who is
identified by HDS as an affiliate of HDS to deliver to Medaphis on or prior to
the Effective Time a written statement to the effect that such person will not
sell any shares of Medaphis Common Stock received in the Merger in any
transaction, private or public, or in any other way reduce such affiliate's
risk, except in accordance with applicable accounting provisions of the
Securities Act and the rules and regulations of the Commission, including the
Commission's accounting rules for pooling of interests transactions. Medaphis
may
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place legends on certificates representing shares of Medaphis Common Stock that
are issued to stockholders of HDS in the Merger to restrict such transfers.
COMPARISON OF RIGHTS OF HOLDERS OF MEDAPHIS COMMON STOCK AND HDS COMMON STOCK
AND HDS PREFERRED STOCK
The following is a summary of material differences between the rights of
holders of Medaphis Common Stock and the rights of holders of HDS Common Stock
and HDS Preferred Stock, which votes as a class with and is convertible into HDS
Common Stock, other than the rights of holders of HDS Preferred Stock described
below under "Comparison of Rights of Holders of Medaphis Common Stock and HDS
Preferred Stock" and the rights of certain holders of HDS Common Stock and
certain holders of HDS Preferred Stock described below under "HDS Preferred
Stock Purchase Agreements" and "Certain Repurchase Rights and Transfer
Restrictions." As each of Medaphis and HDS is organized under the laws of
Delaware, these differences arise from various provisions of the Amended and
Restated Certificate of Incorporation of Medaphis (the "Medaphis Charter") and
the Amended and Restated Bylaws of Medaphis (the "Medaphis Bylaws") and the
Certificate of Incorporation, as amended (the "HDS Charter") and the Restated
Bylaws of HDS (the "HDS Bylaws"). HDS stockholders' rights are currently
governed by the HDS Charter and the HDS Bylaws. Upon consummation of the Merger
and to the extent they receive shares of Medaphis Common Stock, HDS stockholders
will become stockholders of Medaphis and their rights thereafter will be
governed by the Medaphis Charter and the Medaphis Bylaws. The following summary
does not purport to be a complete statement of the rights of the stockholders of
Medaphis and HDS. This summary is qualified in its entirety by reference to the
full text of the Medaphis Charter, the Medaphis Bylaws, the DGCL, the HDS
Charter and the HDS Bylaws.
Authorized Shares. Under the Medaphis Charter, Medaphis is authorized to
issue 200 million shares of Medaphis Common Stock and 600,000 shares of
Nonvoting Common Stock, par value $.01 per share ("Medaphis Nonvoting Common
Stock"). The powers, preferences and rights of the Medaphis Common Stock and the
Medaphis Nonvoting Common Stock are identical except that (i) the Medaphis
Common Stock has one vote per share on all matters submitted to a vote of
stockholders and the Medaphis Nonvoting Common Stock has no right to vote on any
such matters except as provided by law, and (ii) the Medaphis Nonvoting Common
Stock may be converted at any time into shares of Medaphis Common Stock on a
share-for-share basis and the Medaphis Common Stock has no such conversion
rights. Under the HDS Charter, HDS is authorized to issue 10 million shares of
HDS Common Stock, par value $.10 per share, and 5 million shares of Preferred
Stock, par value $.10 per share, the terms of which shall be fixed by HDS's
Board of Directors at the time of issuance.
Special Meeting of Stockholders. Under the Medaphis Bylaws, a special
meeting of the stockholders of Medaphis may be called by the Chairman of the Board of
Directors, the President, by orderCompMed.
C. CHRISTOPHER TROWER became a director of the BoardCompany in 1997, and is
engaged in the private practice of Directors, or, upon
the written requestlaw in Atlanta, Georgia. Mr. Trower is a
former partner of the holders of at least 50% of the outstanding shares of
Medaphis Common Stock entitled to vote at such meeting, by the President or
Secretary of Medaphis. Under the HDS Bylaws, special meetings of the
stockholders of HDS may be called by the Chief Executive Officer, the Board of
Directors, or the holders of shares entitled to cast not less than 25% of the
votes at the meeting.
Stockholder Nominations. Under the Medaphis Bylaws, only persons nominatedAtlanta law firm, Sutherland, Asbill & Brennan. Mr. Trower
has wide-ranging experience with both public and private companies in accordance with the procedures set forth therein will be eligible for
election as directors. Stockholders who are entitled to vote for the election of
directors are entitled to nominate persons for election to the Board of
Directors of Medaphis only if a timely notice in writing is sent to the
Secretary of Medaphis. To be timely, a stockholder's notice must be received at
the principal executive offices of Medaphis not less than 60 days nor more than
90 days prior to the date of the meeting at which directors are to be elected
(subject to limited exceptions). Such notice must set forth certain information,corporate,
partnership, and tax matters, including among other things, (i) with respect to each person whom the
stockholder proposes to nominate for election as a director, (a) the name, age,
business addressacquisitions/divestitures, securities
offerings, and residence address of such person, (b) the principal
occupation or employment of such person, (c) the number of shares of Medaphis
Common Stock beneficially owned by such persontax planning and (d) other information that
would be required to be disclosed in connection with the solicitation of proxies
for the election of directors pursuant to Regulation 14A under the Exchange Act,
and (ii) with respect to such stockholder giving such
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notice, (x) the name and address of such stockholder and (y) the number of
shares of Medaphis Common Stock beneficially owned by such stockholder. The HDS
Charter and HDS Bylaws do not contain provisions prescribing requirements
relating to nomination of directors by stockholders.
Stockholder Proposals. Under the Medaphis Bylaws, at an annual meeting of
stockholders, only business properly brought before the meeting may be
conducted. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of Medaphis. To be timely, a stockholder's notice must be received
at the principal executive offices of Medaphis not less than 60 days nor more
than 90 days prior to the annual meeting (with limited exceptions). Such notice
must set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business to be brought and the
reasons for conducting such business; (ii) the name and address of such
stockholder; (iii) the number of shares of Medaphis Common Stock beneficially
owned by such stockholder; and (iv) any material interests of the stockholder in
such proposed business. The HDS Charter and HDS Bylaws do not contain provisions
prescribing requirements relating to stockholder proposals.
Action without a Meeting. Under the Medaphis Bylaws, any action required
to be taken at any annual or special meeting of stockholders or any action which
may be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing setting forth the actions so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing. Under
the HDS Bylaws, any action which may be taken at any meeting of stockholders may
be taken without a meeting and without prior notice if written consents setting
forth the actions so taken are signed by the holders of the outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. If the unanimous written consent of all such
stockholders shall not have been received, prompt notice of any corporate action
approved by the stockholders without a meeting shall be given to those
stockholders entitled to vote on such matters that have not consented thereto in
writing.
Board of Directors. Under the Medaphis Bylaws, the Board of Directors of
Medaphis consists of such number of directors as determined from time to time by
the Board of Directors, which cannot in any case be less than three nor more
than 10. The Board of Directors of Medaphis currently consists of five members,
all of whom are elected at each annual meeting of stockholders. Under the HDS
Bylaws, the HDS Board of Directors consists of such number of directors as is
determined by resolution of the HDS Board of Directors or by the HDS
stockholders at the annual meeting; provided, however, that such number of
directors cannot in any case be less than five nor more than eight. The HDS
Board of Directors currently consists of five members.
Quorum. Under the Medaphis Bylaws, the presence of 50% of the total number
of directors currently comprising the Board of Directors is necessary to
constitute a quorum. Under the HDS Bylaws, the presence of a majority of the
directors is necessary to constitute a quorum.
Indemnification of Directors and Officers. Under the Medaphis Bylaws,
Medaphis is required to indemnify, to the fullest extent permitted by the DGCL,
any person who is involved in any action, suit or proceeding by reason of the
fact that the person is or was a director, officer, employee or agent of
Medaphis, provided that if such person initiated the action, suit or proceeding,
such person will be entitled to indemnification only if the proceeding was
authorized by the Board of Directors of Medaphis. Medaphis is also required to
advance expenses to any such director, officer, employee or agent of Medaphis
provided that, in the case of a director or officer of Medaphis, he or she
delivers the undertaking required by the DGCL. Under the HDS Bylaws, HDS is
required to indemnify its officers, directors, employees and agents to the
extent permitted by the DGCL.
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COMPARISON OF RIGHTS OF HOLDERS OF MEDAPHIStax disputes.
MANAGEMENT COMMON STOCK AND HDS PREFERRED STOCK
The following is a summary of material differences between the rights of
holders of Medaphis Common Stock and the rights of holders of HDS Preferred
Stock, other than the rights of holders of HDS Preferred Stock described above
under "Comparison of Rights of Holders of Medaphis Common Stock and HDS Common
Stock and HDS Preferred Stock" and described below under "HDS Preferred Stock
Purchase Agreements." These differences arise primarily from various provisions
of the Medaphis Charter and the Medaphis Bylaws and the HDS Charter and the HDS
Bylaws. The following summary does not purport to be a complete statement of the
rights of the stockholders of Medaphis and the holders of HDS Preferred Stock.
This summary is qualified in its entirety by reference to the text of the
Medaphis Charter, the Medaphis Bylaws, the DGCL, the HDS Charter and the HDS
Bylaws.
Voting Rights. The Medaphis Charter provides that each holder of Medaphis
Common Stock shall have one vote for each share of stock held by such holder.
The HDS Charter provides that holders of HDS Preferred Stock are entitled to
vote with HDS Common Stock as a single class on all matters on which holders of
HDS Common Stock are entitled to vote. In any such vote, each holder of shares
of HDS Preferred Stock is entitled to such number of votes as shall be equal to
the whole number of shares of HDS Common Stock into which such holder's
aggregate number of shares of HDS Preferred Stock are convertible.
In addition, so long as any shares of HDS Series B Preferred Stock or HDS
Series C Preferred Stock remain outstanding, the vote or consent of at least a
majority of the outstanding shares of either such series is required to: (i)
amend the HDS Charter or HDS Bylaws in a manner which would alter the rights of
the holders of either such series; (ii) reclassify any HDS Common Stock into
shares with priority over the shares of either such series or (iii) pay a
dividend upon or redeem any shares of HDS Common Stock (with certain limited
exceptions). So long as any shares of HDS Series F Preferred Stock remain
outstanding, the vote or consent of at least 85% of the outstanding shares of
such series is required to: (i) amend the HDS Charter or HDS Bylaws in a manner
which would alter the rights of the HDS Series F Preferred Stock; (ii) pay a
dividend on any shares of junior stock; (iii) increase the authorized number of
shares of HDS Series F Preferred Stock; (iv) redeem any shares of junior stock
(with certain limited exceptions); or (v) reclassify any junior stock into
shares with priority over the shares of HDS Series F Preferred Stock.
Additionally, in connection with any merger, consolidation or sale of all or
substantially all of HDS's assets (including without limitation the Merger), at
least 85% of the shares of the HDS Series F Preferred Stock outstanding must
vote in favor of or consent to the consideration to be received by such holders
in such transaction.
Dividend Preference. Holders of Medaphis Common Stock are not entitled to
any dividend preference. Holders of HDS Series B Preferred Stock and HDS Series
C Preferred Stock are entitled to receive non-cumulative dividends, when and if
declared by the HDS Board of Directors, at the rate of $.40 and $.56,
respectively per share per annum, before any dividend is paid on HDS Common
Stock; provided, however, that such dividends may not exceed 25% of HDS's
pre-tax income for any quarter. Holders of HDS Series F Preferred Stock are
entitled to receive dividends at the rate of $1.15 per share per annum, payable
in preference to any dividends on any shares of junior stock. Dividends on HDS
Series F Preferred Stock shall only accrue and be cumulative if HDS declares a
cash dividend on any shares of capital stock; in such case, unpaid dividends
shall bear interest at the rate of 10% per annum.
Liquidation Preference. In the event of any liquidation of Medaphis, the
holders of Medaphis Common Stock and the holders of Medaphis Non-Voting Common
Stock are entitled to share pro rata in all assets of Medaphis available for
distribution to its stockholders. Upon any liquidation, dissolution or winding
up of HDS, before any distribution or payment shall be made to the holders of
HDS Common Stock, the holders of HDS Series B Preferred Stock, HDS Series C
Preferred Stock and HDS Series F Preferred Stock are concurrently entitled to be
paid out of the assets of HDS an amount per share equal to $5.63, $8.00 and
$16.50, plus any unpaid dividends, respectively. If the assets and funds thus
distributed among the holders of the HDS Preferred Stock shall be insufficient
to permit the payment to such holders of the full preferential amount, then the
entire assets of HDS legally available for distribution shall be distributed
ratably among the holders of the HDS Preferred Stock in proportion to the
preferential amount each such holder would have been entitled to receive.
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Conversion. Each share of HDS Preferred Stock may be converted into shares
of HDS Common Stock. The number of shares of HDS Common Stock to which a holder
of HDS Preferred Stock is entitled upon conversion is equal to the product
obtained by multiplying the number of shares of HDS Preferred Stock being
converted by the conversion rate. The current conversion rate for each of the
HDS Series B Preferred Stock, HDS Series C Preferred Stock and HDS Series F
Preferred Stock is one-to-one. Medaphis Common Stock is not convertible.
HDS PREFERRED STOCK PURCHASE AGREEMENTS
Certain holders of HDS Common Stock (consisting of those holders of HDS
Common Stock who originally purchased HDS Series A Preferred Convertible Stock,
par value $0.10 per share ("HDS Series A Preferred Stock"), which was
subsequently converted into HDS Common Stock ("HDS Converted Common Stock")) and
the holders of HDS Preferred Stock have certain additional rights, and their
shares are subject to certain additional restrictions, under the terms of the
respective HDS Preferred Stock Purchase Agreements ("HDS Preferred Stock
Purchase Agreements") pursuant to which such shares of HDS Series A Preferred
Stock and HDS Preferred Stock were originally issued. These rights and
restrictions include, among others, the following:
Rights of First Refusal. Holders of HDS Converted Common Stock and
HDS Preferred Stock have rights of first refusal to purchase, subject to
certain exceptions, on a pro rata basis with all other holders holding such
rights of first refusal, all or any portion of "New Securities" which HDS
may, from time to time, propose to sell and issue. "New Securities" means
any capital stock of HDS, including HDS Common Stock or HDS Preferred Stock
whether now authorized or not, and rights, options or warrants to purchase
HDS Capital Stock, and securities of any type whatsoever that are, or may
become, convertible into HDS Capital Stock, subject to certain exceptions.
These rights, as they relate to the HDS Converted Common Stock, HDS Series
B Preferred Stock and HDS Series C Preferred Stock, will expire at the
Effective Time. These rights, as they relate to the holders of the HDS
Series F Preferred Stock, will continue following the Effective Time. It is
a condition to Medaphis' obligation to consummate the Merger that it shall
have obtained a waiver of such rights from the holder of the HDS Series F
Preferred Stock that may be deemed at the time of the Special Meeting to be
an "affiliate" of HDS within the meaning of Rule 145 under the Securities
Act.
Registration Rights. Holders of HDS Converted Common Stock and HDS
Preferred Stock have demand registration rights pursuant to which they may
cause HDS to register their shares of HDS Converted Common Stock and the
shares of HDS Common Stock into which the shares of HDS Preferred Stock are
convertible (collectively, "HDS Registerable Securities"), subject to
certain limitations. Additionally, holders of HDS Registerable Securities
have certain piggyback registration rights which they may exercise in the
event of a registration of HDS Common Stock initiated by HDS, subject to
certain limitations. To date, no holders of HDS Registerable Securities
have exercised any of their demand registration rights or piggyback
registration rights. HDS is required to pay the expenses arising from a
registration of HDS Common Stock as to which holders of HDS Registerable
Securities exercise their piggyback registration rights, subject to certain
exceptions. With respect to a registration undertaken in response to an
exercise by holders of HDS Registerable Securities of their demand
registration rights, expenses incurred in connection therewith are payable
in certain instances and to a certain extent by HDS and in other instances
and to another extent by the holders of HDS Registerable Securities. These
rights will expire at the Effective Time.
Restrictions on Transferability. The HDS Converted Common Stock, the
HDS Preferred Stock and shares of HDS Common Stock that would be issued
upon conversion of the HDS Preferred Stock are subject to certain
restrictions on transfer, and a holder of any of such shares must cause any
proposed transferee thereof to agree to take and hold those shares subject
to the provisions and upon the conditions specified in the respective HDS
Preferred Stock Purchase Agreement pursuant to which the shares in question
were issued. Subject to certain exceptions, such shares are not
transferable to any person who directly or indirectly is a competitor of
HDS, or who is an officer, director, employee, consultant,
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substantial creditor or stockholder of any such competitor. These
restrictions will expire at the Effective Time.
Holders of HDS Converted Common Stock and HDS Preferred Stock should refer
to the HDS Preferred Stock Purchase Agreements pursuant to which the HDS
Converted Common Stock and HDS Preferred Stock were issued for a complete
description of the rights and restrictions relating to HDS and holders of HDS
Converted Common Stock and HDS Preferred Stock thereunder. The foregoing summary
is qualified in its entirety by reference to the HDS Preferred Stock Purchase
Agreements.
CERTAIN REPURCHASE RIGHTS AND TRANSFER RESTRICTIONS
Certain shares of HDS Common Stock owned by employees of HDS are subject to
Revised Buy-Out Agreements with HDS (the "Buyout Agreements"). Pursuant to the
Buyout Agreements, until the later of (i) four years from the start of such
employee's employment by HDS, or (ii) the date of an initial public offering of
HDS as specified therein, such shares of Common Stock are subject to (a)
restriction upon transfer, including the right of HDS to purchase such shares of
Common Stock from the holder at the price and upon the terms of the proposed
transfer, or at the option of HDS at the cost of such shares of Common Stock,
and (b) the right of HDS to purchase such shares in the event of termination of
the employment of the holder by HDS. These provisions will expire as of the
Effective Time.
APPRAISAL RIGHTS
Holders of HDS Common Stock and HDS Preferred Stock are entitled to
appraisal rights under Section 262 of the DGCL. A person having a beneficial
interest in shares of HDS Common Stock or HDS Preferred Stock held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights the beneficial owner may
have.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by the full
text of Section 262, which is reprinted in its entirety as Annex B to this Proxy
Statement/Prospectus. All references in Section 262 and in this summary to a
"stockholder" are to the record holder of the shares of HDS Common Stock or HDS
Preferred Stock as to which appraisal rights are asserted.
Under the DGCL, holders of shares of HDS Common Stock and HDS Preferred
Stock who follow the procedures set forth in Section 262 will be entitled to
have their shares of HDS Common Stock or HDS Preferred Stock or both, as the
case may be, appraised by the Delaware Court of Chancery and to receive payment
of the "fair value" of such shares, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair rate
of interest, if any, as determined by such court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, the corporation,
not less than 20 days prior to the meeting, must notify each of its stockholders
who was a stockholder on the record date of the meeting with respect to shares
for which appraisal rights are available that such appraisal rights are
available and include in such notice a copy of Section 262. This Proxy
Statement/Prospectus shall constitute such notice to the holders of shares of
HDS Common Stock and HDS Preferred Stock and the applicable statutory provisions
of the DGCL are attached to this Proxy Statement/Prospectus as Annex B. Any
stockholder who wishes to exercise such appraisal rights or who wishes to
preserve his or her right to do so should review the following discussion and
Annex B carefully because failure to timely and properly comply with the
procedures specified will result in the loss of appraisal rights under the DGCL.
A holder of shares of HDS Common Stock or HDS Preferred Stock or both, as
the case may be, wishing to exercise his or her appraisal rights must deliver to
HDS, before the vote on the Merger Agreement at the Special Meeting, a written
demand for appraisal of his or her shares of HDS Common Stock or HDS Preferred
Stock or both, as the case may be, and must not vote in favor of adoption of the
Merger Agreement. Because a proxy which does not contain voting instructions
will, unless revoked, be voted for adoption of the
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Merger Agreement, a holder of shares of HDS Common Stock or HDS Preferred Stock
or both, as the case may be, who votes by proxy and who wishes to exercise his
or her appraisal rights must (i) vote against adoption of the Merger Agreement
or (ii) abstain from voting on adoption of the Merger Agreement. A vote against
adoption of the Merger Agreement, in person or by proxy, will not in and of
itself constitute a written demand for appraisal satisfying the requirements of
Section 262. In addition, a holder of shares of HDS Common Stock or HDS
Preferred Stock or both, as the case may be, wishing to exercise his or her
appraisal rights must hold of record such shares on the date the written demand
for appraisal is made and must continue to hold such shares until the Effective
Time.
Only a holder of record of shares of HDS Common Stock or HDS Preferred
Stock is entitled to assert appraisal rights for the shares of HDS Common Stock
or HDS Preferred Stock registered in that holder's name. A demand for appraisal
should be executed by or on behalf of the holder of record, fully and correctly,
as his or her name appears on his or her stock certificates. If the shares of
HDS Common Stock or HDS Preferred Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the shares of HDS Common Stock or HDS
Preferred Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners. A
record holder such as a broker who holds shares of HDS Common Stock or HDS
Preferred Stock as nominee for several beneficial owners may exercise appraisal
rights with respect to the shares of HDS Common Stock or HDS Preferred Stock
held for one or more beneficial owners while not exercising such rights with
respect to the shares of HDS Common Stock or HDS Preferred Stock held for other
beneficial owners; in such case, the written demand should set forth the number
of shares of HDS Common Stock or HDS Preferred Stock as to which appraisal is
sought, and where no number of shares of HDS Common Stock or HDS Preferred Stock
is expressly mentioned, the demand will be presumed to cover all shares of HDS
Common Stock or HDS Preferred Stock held in the name of the record owner.
Stockholders who hold their shares of HDS Common Stock or HDS Preferred Stock in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such a nominee. All
written demands for appraisal should be sent or delivered to HDS at 268 West
Hospitality Lane #300, San Bernardino, California 92408 Attention: Secretary.
Within ten days after the Effective Time, HDS, as the surviving corporation
in the Merger, must send a notice as to the effectiveness of the Merger to each
person who has satisfied the appropriate provisions of Section 262 and did not
vote for approval and adoption of the Merger Agreement. Within 120 days after
the Effective Time, but not thereafter, HDS or any stockholder entitled to
appraisal rights under Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be. HDS is under no
obligation to, and has no present intention to file a petition with respect to,
the appraisal of the fair value of the shares of HDS Common Stock or HDS
Preferred Stock. Accordingly, it is the obligation of the stockholders to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the Effective Time, any stockholder who has complied
with the requirements for exercise of appraisal rights will be entitled, upon
written request, to receive from HDS a statement setting forth the aggregate
number of shares of HDS Common Stock and HDS Preferred Stock not voted in favor
of adoption of the Merger Agreement and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such statements must be mailed within ten days after a written request therefor
has been received by HDS.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights and thereafter will appraise the shares of HDS
Common Stock or HDS Preferred Stock, or both, as the case may be, owned by such
stockholders, determining the fair value of such shares of HDS Common Stock or
HDS Preferred Stock, or
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both, as the case may be, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest to be paid, if any, upon the amount determined to be the fair value. In
determining fair value, the Delaware Court of Chancery is to take into account
all relevant factors. In Weinberger v. UOP Inc., et. al., the Delaware Supreme
Court discussed factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value the court must consider "market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts which were
known or which could be ascertained as of the date of merger which throw any
light on future prospects of the merged corporation." The Delaware Supreme Court
has construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered." However,
the court noted that Section 262 provides that fair value is to be determined
"exclusive of any element of value arising from the accomplishment or
expectation of the merger."
HDS stockholders considering seeking appraisal rights should be aware that
the fair value of their shares of HDS Common Stock or HDS Preferred Stock, or
both, as the case may be, determined under Section 262 could be more than, the
same as, or less than the value of the merger consideration they will be
entitled to receive pursuant to the Merger Agreement if they do not seek
appraisal of their shares of HDS Common Stock or HDS Preferred Stock, and that
opinions of investment banking firms as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262. The cost
of the appraisal proceeding may be determined by the Delaware Court of Chancery
and taxed upon the parties as the Delaware Court of Chancery deems equitable in
the circumstances. Upon application of a dissenting stockholder, the Delaware
Court of Chancery may order that all or a portion of the expenses incurred by
any dissenting stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts, be charged pro rata against the value of all shares of HDS
Common Stock and HDS Preferred Stock entitled to appraisal. In the absence of
such a determination or assessment, each party bears its own expenses.
Any holder of HDS Common Stock or HDS Preferred Stock, or both, as the case
may be, who has duly demanded an appraisal in compliance with Section 262 will
not, after the Effective Time, be entitled to vote the shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be, subject to such
demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares of HDS Common Stock or HDS Preferred Stock as of
a date prior to the Effective Time).
If any stockholder who demands appraisal of his or her shares of HDS Common
Stock or HDS Preferred Stock, or both, as the case may be, under Section 262
fails to perfect, or effectively withdraws or loses, his or her right to
appraisal, as provided in the DGCL, the shares of HDS Common Stock or HDS
Preferred Stock, or both, as the case may be, of such stockholder will be
converted into the right to receive the merger consideration. A stockholder will
fail to perfect, or effectively lose or withdraw, his or her right to appraisal
if no petition for appraisal is filed within 120 days after the Effective Time,
or if the stockholder delivers to HDS a written withdrawal of his or her demand
for appraisal and acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time will require the
written approval of HDS as the surviving corporation.
Failure to follow any of the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a stockholder will be entitled to receive the merger consideration). In
view of the complexity of these provisions of Delaware law, stockholders who are
considering dissenting from the approval and adoption of the Merger Agreement
and exercising their rights under Section 262 should consult their legal
advisors.
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BUSINESS OF MEDAPHIS
GENERAL
Medaphis is a leading provider of business management services and systems
to the healthcare industry. Medaphis' business management services are designed
to assist its hospital and physician clients with the business management
functions associated with the delivery of healthcare services, thereby
permitting such clients to focus on providing quality medical services to their
patients. Medaphis also provides subrogation and related recovery services to
healthcare payors and a multi-specialty physician group. These services assist
healthcare payors in recovering the related benefits provided to insureds who
are injured in accidents or under other circumstances where a third-party is
ultimately responsible for such benefits. Medaphis currently provides business
management services to approximately 19,700 physicians and over 875 hospitals
and subrogation and recovery services to healthcare plans covering in excess of
24 million people throughout the United States.
Medaphis also is a leading provider of information management systems and
systems integration and workflow engineering systems and services to various
participants in the healthcare and other industries. Medaphis currently provides
scheduling and information management systems to hospitals, emerging integrated
healthcare delivery systems ("IHDS") and certain specialty departments or staffs
within a hospital or IHDS. Medaphis' scheduling and information management
systems are designed to enable healthcare providers to control costs and improve
efficiency by automating certain scheduling and related management functions
within a facility, department or staff group. Medaphis systems integration and
workflow engineering systems and services are designed to increase flexibility,
improve end-user access to information and increase decision making through the
strategic use and development of client/server, imaging and other advanced
technologies. Medaphis currently provides systems integration and workflow
engineering systems and services to participants in the healthcare and other
industries.
Medaphis' business strategy is to develop a national organization which
provides high quality business management services and systems to the healthcare
industry. In addition, Medaphis intends to continue to develop and exploit its
core competencies in the systems integration and workflow engineering fields in
various industries outside of healthcare which are experiencing similar demands
for more effective and open client/server IT systems. Management anticipates
that the demand for systems integration and workflow engineering systems and
services within and outside the healthcare industry will continue to grow as
companies increasingly face rapidly changing competitive landscapes and enhanced
demands for improved customer service, greater employee satisfaction and
increased profitability. Medaphis intends to pursue its business strategy
through both internal growth and acquisitions. Since 1988, Medaphis has acquired
42 businesses which provide business management services and systems primarily
to physicians and hospitals involving aggregate consideration of approximately
$1.3 billion.
Medaphis is incorporated under the laws of the State of Delaware. Medaphis
Common Stock is traded on The Nasdaq Stock Market under the symbol "MEDA."
Unless the context otherwise requires, reference to Medaphis includes Medaphis
Corporation and its subsidiaries. Medaphis' principal executive offices are
located at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, and its
telephone number is (770) 319-3300.
MEDAPHIS RE-ENGINEERING PROJECT
In order to increase efficiency and position Medaphis to take advantage of
the opportunities being created by ongoing changes in the healthcare industry,
Medaphis has commenced a re-engineering project which will involve, among other
things, the consolidation of the billing and accounts receivable processing
function of its billing and accounts receivable management business, which is
currently operated out of approximately 300 local business offices around the
country, into approximately 10 remote processing centers. In addition to the
consolidation of processing operations, the re-engineering project will involve
the establishment of advanced client/server computing at the local sales and
service offices and at remote processing centers. This computing infrastructure
will be designed to significantly reduce paper handling and greatly increase the
speed
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of record recovery while permitting communication over a wide-area network and
across geographic markets and linking together all of Medaphis' operating
divisions. The local sales and service offices and remote processing centers
will operate in a client/server environment in which client work stations and
graphical user interfaces connect with distributed file, database, transaction
and groupware servers. Concurrent with the consolidation of processing
operations and the establishment of an advanced client/server environment,
Medaphis will continue to assess the processing practices of each office, as
well as the practices of successful transaction processors in other industries.
The purpose of this assessment is to identify the best practices for each core
process, and then adopt these best practices as standards and engineer the
workflow and new technology to achieve or exceed each of the identified
standards. Medaphis believes the re-engineering project will provide its
customers and employees with the full information processing and communications
power of an advanced distributed computing system. The re-engineering project is
designed to enable Medaphis to continue to grow and achieve economies of scale
in several areas, including training, client service, patient and payor
relations, transaction processing operations and electronic data interchange
capabilities. The project is expected to be substantially completed during 1997.
Although the re-engineering project will involve consolidation of the processing
functions of its billing and accounts receivable management services, Medaphis
intends to continue to maintain and place increased emphasis on the sales and
customer service functions of this Business on a local basis.
RECENTLY COMPLETED AND FUTURE ACQUISITIONS
Medaphis has recently completed three major acquisitions and four other
insignificant acquisitions and intends to continue to pursue additional
acquisitions in the future. A general summary of the major acquisitions is set
forth below.
COMPLETED ACQUISITIONS
BSG Corporation. As of May 6, 1996, Medaphis acquired BSG Corporation
("BSG") in a merger transaction for approximately 7,500,000 shares of Medaphis
Common Stock. In addition, Medaphis assumed BSG stock options representing
approximately 2,300,000 additional shares of Medaphis Common Stock. BSG provides
information technology and change management services to organizations seeking
to transform their operations through the strategic use of client/server and
other advanced technologies. BSG focuses on customers and industries where
technology-enabled change and re-engineering can have a significant competitive
impact. BSG seeks to establish long-term alliances with its customers, enabling
them to increase revenue, raise productivity and improve product quality.
Management believes that the acquisition of BSG, when combined with Rapid
Systems and Medaphis' existing systems integration and workflow engineering
operations, will position Medaphis as one of the leading client/server systems
integration and workflow engineering companies in the United States.
Rapid System Solutions, Inc. As of April 3, 1996, the Medaphis acquired
Rapid Systems in a merger transaction for approximately 1.1 million shares of
Medaphis Common Stock. Rapid Systems is a client server/systems integration
company whose core competencies include: network design integration and
management; database design and development; graphical user interface
application design, development and implementation; and strategic systems
engineering and computer security. During 1995, Rapid Systems had revenue of
$14.7 million. As a result of the pooling-of-interests accounting treatment for
the Rapid Systems merger, Medaphis expects to record a charge of approximately
$900,000 in the second quarter of 1996 related to fees, costs and expenses
incurred in connection with the Rapid Systems Merger.
Medical Management Sciences, Inc. As of December 29, 1995, Medaphis
acquired MMS in a merger transaction for approximately 4,000,000 shares of
Medaphis Common Stock. MMS is a provider of practice management and billing and
accounts receivable management services to radiologists and radiation
oncologists. Through a network of nine service centers, MMS currently provides
its services in 12 states to approximately 100 radiology and radiation oncology
practices consisting of approximately 1,700 radiologists and radiation
oncologists. MMS' practice management and billing and accounts receivable
management services assist physicians in improving their cash flow through
better management of their billing and accounts receivable and through reducing
the administrative costs associated with the delivery of healthcare services.
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MMS also operates a management service organization located in Maryland,
which specializes in providing network formation and administration, marketing,
contracting, management and information systems services to physicians and
physician networks in connection with managed care, capitation and alternative
reimbursement systems. MMS currently provides these services to approximately
220 primary and specialty network physicians serving more than 200,000 covered
lives.
PENDING AND FUTURE ACQUISITIONS
An important component of Medaphis' business strategy involves growth
through acquisitions. In connection therewith, Medaphis evaluates various
acquisition candidates on an ongoing basis. In general, these acquisition
candidates include companies which provide business management systems or
services to healthcare providers or system integration services. Management of
Medaphis currently anticipates that Medaphis will place increased emphasis over
the next several quarters on expanding Medaphis' technology business, including
its systems integration operations.
As of the date of this Proxy Statement/Prospectus, Medaphis has no
definitive agreement to acquire any other specific business whose operations
would be material or significant to Medaphis. However, Medaphis may, prior to
the consummation of the Merger, acquire certain additional businesses whose
operations are not material or significant to Medaphis. Moreover, Medaphis
currently anticipates that it will continue to make acquisitions of businesses
which provide business management systems or services to healthcare providers
and/or systems integration services. The consummation of future acquisitions
will be subject to, among other things, favorable market conditions, the
availability of financing on terms and conditions satisfactory to Medaphis and
suitable acquisition candidates.
RESULTS OF OPERATIONS
Medaphis expects to record charges of approximately $900,000 and $6.5
million in the quarter ended June 30, 1996 associated with the acquisitions of
Rapid Systems and BSG, respectively, which are being accounted for as
poolings-of-interests. The charges relate to transaction fees, costs and
expenses incurred in connection with the mergers. Medaphis also expects to incur
an additional charge of $3.8 million for similar fees, costs and expenses in
connection with the Merger. The charge is expected to be recorded in the period
in which the Merger is consummated.
OTHER EVENTS
For a discussion of the Federal Investigation and certain putative
stockholder class action lawsuits, see "Risk Factors -- Pending Federal
Investigation; Putative Class Action Lawsuits."
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Combined Financial Statements are based on the
historical presentation of the consolidated financial statements of Medaphis and
the historical presentation of the consolidated financial statements of HDS. The
Unaudited Pro Forma Combined Statements of Operations for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996 give
effect to (i) the Merger as if it had occurred on January 1, 1993 and (ii)
certain pro forma adjustments related to the Atwork, MMS, Rapid Systems and BSG
Mergers. The Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1995 and the three months ended March 31, 1996 also give
effect to the 1995 acquisitions, which include the acquisition of Medical
Management, Inc., Medical Billing Service, Computers Diversified, Inc. and the
Receivables Management Division of MedQuist Inc. (the "1995 Acquisitions") as if
each had occurred as of January 1, 1995. The Unaudited Pro Forma Combined
Balance Sheet as of March 31, 1996 gives effect to the Merger as if it had
occurred on March 31, 1996. The Unaudited Pro Forma Combined Financial
Statements do not include the effects of the Decisions Support Group, Medical
Office Consultants, Inc., Consort, Billing and Professional Services, Inc., The
Halley Exchange, Inc., Medical Management Computer Sciences, Inc., CBT Financial
Services, Inc., Intelligent Visual Computing, Inc. and The MEDICO Group, Ltd.
acquisitions, as they are not considered significant individually or in the
aggregate.
The Merger is expected to be accounted for under the pooling-of-interests
method of accounting. Each of the 1995 Acquisitions has been accounted for under
the purchase method of accounting. The total purchase price for each of these
acquisitions has been allocated to tangible and identifiable intangible assets
and liabilities based upon management's estimate of their respective fair market
values with the excess of cost over net assets acquired allocated to goodwill.
The allocation of the purchase price for certain of the 1995 Acquisitions is
subject to revision when additional information concerning asset and liability
valuation is obtained. Management believes the asset and liability valuations
utilized for these acquisitions will not be materially different from the pro
forma information presented herein.
For purposes of preparing the Unaudited Pro Forma Combined Statements of
Income for the years ended December 31, 1993 and 1994, HDS's operating results
for the years ended March 31, 1994 and 1995 were combined with Medaphis'
operating results for the years ended December 31, 1993 and 1994, respectively.
The Unaudited Pro Forma Combined Statement of Income for the year ended December
31, 1995 was prepared by combining Medaphis' 1995 operating results with HDS's
1995 operating results, which were restated to a calendar year basis.
Accordingly, HDS's operating results for the three months ended March 31, 1995
were duplicated in each of the years ended December 31, 1994 and 1995. HDS's
revenues and net income for that three month period were $14,018,000 and
$6,314,000, respectively.
Each of the Unaudited Pro Forma Combined Statements of Operations includes
the historical operating results of each of the acquired companies included
therein from the beginning of the period covered by such statement until the
earlier of the date of acquisition or the end of the period covered by such
statement.
The Unaudited Pro Forma Combined Financial Statements do not purport to be
indicative of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented and they are not
necessarily indicative of operating results to be expected in future periods.
The Unaudited Pro Forma Combined Financial Statements and notes thereto should
be read in conjunction with the historical financial statements and notes
thereto of Medaphis, which are incorporated herein by reference and the
historical financial statements and notes thereto of HDS which are included
elsewhere herein, and of certain of the 1995 Acquisitions, contained in certain
documents incorporated herein by reference.
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YEAR ENDED DECEMBER 31, 1993
------------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................... $259,575 $ -- $259,575 $19,763 $-- $279,338
Salaries and wages.................... 158,703 (8,689)(1) 150,014 5,670 -- 155,684
Other operating expenses.............. 66,412 -- 66,412 5,157 -- 71,569
Depreciation.......................... 6,960 -- 6,960 232 -- 7,192
Amortization.......................... 5,317 -- 5,317 2,561 -- 7,878
Interest expense, net................. 6,517 -- 6,517 56 -- 6,573
Restructuring and other charges....... -- -- -- -- -- --
-------- ----------- --------- ------- --- ---------
Total expenses............... 243,909 (8,689) 235,220 13,676 -- 248,896
Income (loss) before taxes............ 15,666 8,689 24,355 6,087 -- 30,442
Income taxes.......................... 7,049 4,655(5) 11,704 -- -- 11,704
-------- ----------- --------- ------- --- ---------
Net income (loss)..................... $ 8,617 $ 4,034 $ 12,651 $6,087 -- 18,738
========= =========== ========== ======== =========== ==========
Net income per common share........... $ 0.19 $ 0.28 0.36
========= ========== ==========
Weighted average shares outstanding... 45,505 45,505 6,540 52,045
========= ========== ======== ==========
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................................. $376,870 $ -- $376,870 $22,115 $-- $398,985
Salaries and wages...................... 221,575 (6,716)(1) 214,859 5,402 -- 220,261
Other operating expenses................ 90,836 -- 90,836 4,589 -- 95,425
Depreciation............................ 9,269 -- 9,269 114 -- 9,383
Amortization............................ 7,748 -- 7,748 2,943 -- 10,691
Interest expense, net................... 5,896 -- 5,896 30 -- 5,926
Restructuring and other charges......... 1,905 -- 1,905 -- -- 1,905
-------- ----------- --------- ------- --- ---------
Total expenses................. 337,229 (6,716) 330,513 13,078 -- 343,591
Income (loss) before taxes.............. 39,641 6,716 46,357 9,037 -- 55,394
Income taxes............................ 13,155 5,147(5) 18,302 3,000 -- 21,302
-------- ----------- --------- ------- --- ---------
Net income (loss)....................... $ 26,486 $ 1,569 $ 28,055 $6,037 $-- $ 34,092
========= =========== ========== ======== =========== ==========
Net income per common share............. $ 0.48 $ 0.51 $ 0.56
========= ========== ==========
Weighted average shares outstanding..... 54,623 54,623 6,540 61,163
========= ========== ======== ==========
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YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------------
MEDAPHIS HDS
PRIOR PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ACQUISITIONS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ------------ ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................. $552,132 $ 22,679 $ -- $ 574,811 $22,249 $ -- $ 597,060
Salaries and wages...... 318,014 10,794 (2,925)(1) 325,883 5,330 -- 331,213
Other operating
expenses.............. 130,714 6,586 -- 137,300 10,091 -- 147,391
Depreciation............ 14,346 628 -- 14,974 85 -- 15,059
Amortization............ 14,112 580 75(2) 14,767 3,135 -- 17,902
Interest expense, net... 10,417 (16) 1,787(3) 12,188 (201) -- 11,987
Restructuring and other
charges............... 54,950 -- (750)(4) 54,200 -- -- 54,200
-------- ------------ ----------- --------- ------- ----------- ---------
Total
expenses.... 542,553 18,572 (1,813) 559,312 18,440 -- 577,752
Income (loss) before
taxes................. 9,579 4,107 1,813 15,499 3,809 -- 19,308
Income taxes............ 6,903 -- 5,648(5) 12,551 1,524 14,075
-------- ------------ ----------- --------- ------- ----------- ---------
Net income (loss)....... $ 2,676 $ 4,107 $(3,835) $ 2,948 $ 2,285 $ -- $ 5,233
======== ========= ========= ======== ======= ========= ========
Net income per common
share................. $ 0.04 $ 0.05 $ 0.08
======== ======== ========
Weighted average shares
outstanding........... 61,520 61,520 6,540 68,060(6)
======== ======== ======= ========
THREE MONTHS ENDED MARCH 31, 1996
------------------------------------------------------------------------
MEDAPHIS HDS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
MEDAPHIS ADJUSTMENTS COMBINED HDS(9) ADJUSTMENTS COMBINED
-------- ----------- --------- ------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue......................... $159,869 $ -- $ 159,869 $3,743 $ $ 163,612
Salaries and wages.............. 88,963 -- 88,963 1,564 90,527
Other operating expenses........ 38,618 -- 38,618 760 39,378
Depreciation.................... 4,917 -- 4,917 33 4,950
Amortization.................... 4,023 -- 4,023 886 4,909
Interest expense, net........... 2,242 -- 2,242 (137 ) 2,105
Restructuring and other
charges....................... 150 -- 150 -- 150
-------- ----------- --------- ------ ----------- ---------
Total expenses........ 138,913 -- 138,913 3,106 -- 142,019
Income (loss) before taxes...... 20,956 -- 20,956 637 -- 21,593
Income taxes.................... 8,613 (354)(5) 8,259 255 8,514
-------- ----------- --------- ------ ----------- ---------
Net income (loss)............... $ 12,343 $ 354 $ 12,697 $ 382 $ -- 13,079
======== ========= ======== ====== ========= ========
Net income per common share..... $ 0.18 $ 0.18 $ 0.17
======== ======== ========
Weighted average shares
outstanding................... 69,164 69,164 6,540 75,704
======== ======== ====== ========
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PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1996
MARCH 31, 1996
-----------------------------------------------
HDS PRO
FORMA PRO FORMA
MEDAPHIS HDS(9) ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 3,308 $ 14,167 $ -- $ 17,475
Restricted cash.................................. 16,473 -- -- 16,473
Accounts receivable, billed...................... 98,811 7,544 -- 106,355
Accounts receivable, unbilled.................... 85,100 10,834 -- 95,934
Other............................................ 18,523 106 -- 18,629
-------- -------- ----------- ---------
222,215 32,651 -- 254,866
Property and equipment............................. 120,202 687 -- 120,889
Intangible assets.................................. 463,278 7,768 -- 471,046
Other.............................................. 4,340 13,937 -- 18,277
-------- -------- ----------- ---------
$810,035 $ 55,043 $ -- $ 865,078
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................. $ 9,431 $ 7,430 $ -- $ 16,861
Accrued compensation............................. 29,711 992 -- 30,703
Accrued expenses................................. 58,405 540 3,750(7) 62,695
Current portion of long-term debt................ 10,651 -- -- 10,651
-------- -------- ----------- ---------
Total current liabilities................ 108,198 8,962 3,750 120,910
Long-term debt..................................... 191,823 -- -- 191,823
Other obligations.................................. 17,710 -- -- 17,710
Deferred income taxes.............................. 24,074 1,300 -- 25,374
Convertible subordinated debentures................ -- -- -- --
-------- -------- ----------- ---------
Total liabilities........................ 341,805 10,262 3,750 355,817
Stockholders' Equity:
Preferred Stock.................................. 16 366 (366)(8) 16
Common stock..................................... 609 274 (213)(8) 670
Paid-in capital.................................. 454,387 42,134 579(8) 497,100
Retained earnings (accumulated deficit).......... 13,218 2,007 (3,750)(7) (11,475)
-------- -------- ----------- ---------
Total stockholders' equity............... 468,230 44,781 (3,750) 509,261
$810,035 $ 55,043 $ -- $ 865,078
======== ======== ========= ========
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The pro forma adjustment to salaries and wages represents the
elimination of distributions that are non-recurring net of the compensation
expected to be paid to the former shareholders of Atwork and shareholders and
executive officers of MMS and the companies acquired in certain of the 1995
Acquisitions pursuant to employment contracts with Medaphis.
(2) The pro forma adjustment to amortization expense represents the change
in amortization expense recorded in conjunction with the 1995 Acquisitions,
which results from the adjustments to intangible assets recorded as part of the
purchase price allocations and conforming the historical amortization policies
to those of Medaphis, whereby goodwill is amortized using the straight-line
method generally over 25-40 years, client lists are amortized over their
estimated useful lives of 7-20 years and capitalized software is amortized over
its estimated useful life of 4-7 years.
(3) The pro forma adjustment to interest expense represents the interest
expense on indebtedness incurred by Medaphis (which accrued at an annual rate of
approximately 7.75% in 1995) in connection with the 1995 Acquisitions, net of
reductions in interest expense for obligations not assumed by Medaphis or for
obligations that Medaphis assumed and refinanced under the Medaphis Senior
Credit Facility to obtain lower interest rates.
(4) The pro forma adjustment to restructuring and other charges represents
the elimination of distributions that are non-recurring net of the compensation
to be paid to the former shareholders of Atwork pursuant to employment contracts
with Medaphis.
(5) The pro forma adjustment to income taxes represents (i) the imputed tax
expense on the operating results of Atwork, MMS, Consort, Rapid Systems and BSG,
at statutory rates in effect during the periods presented (as Atwork, MMS,
Consort, Rapid Systems and BSG were "S" corporations for income tax purposes and
therefore did not provide for federal income taxes), (ii) the tax impact of
applying Medaphis' pro forma effective tax rate to the income of certain of the
1995 Acquisitions (which were not "S" corporations for income tax purposes) as
well as the pro forma adjustments and (iii) the reversal of the adjustment
recorded to historical income taxes for the change in the tax status of Atwork,
MMS and Consort in 1995.
(6) The pro forma weighted average shares outstanding give effect to (i)
the additional shares of Medaphis Common Stock to be issued and (ii) common
stock equivalents assumed in connection with the Merger.
(7) The pro forma adjustment to accrued expenses and retained earnings
represents the estimated costs associated with the Merger.
(8) The pro forma adjustments to preferred stock, common stock and paid-in
capital represent the adjustments necessary to give effect to the issuance of
Medaphis common stock to effect the Merger.
(9) Certain HDS amounts have been reclassified in order to conform to
Medaphis' presentation.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION OF HDS
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED YEAR ENDED MARCH 31,
----------------- MARCH 31, ---------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
STATEMENT OF OPERATIONS DATA(1)
Net sales.............................. $20,593 $24,451 $4,646 $26,040 $30,454 $22,727
Cost of sales.......................... 10,953 12,419 739 11,875 13,767 15,185
Gross margin........................... 9,640 12,032 3,907 14,165 16,687 7,542
Expenses:
Research and development............. 1,145 1,308 903 1,775 1,754 1,793
Sales and marketing.................. 3,044 2,577 1,406 3,028 3,672 4,870
General and administrative........... 2,029 2,873 1,676 3,219 2,194 6,107
Interest............................. 735 8 45 129 232 265
Income from operations............... 2,687 5,266 (123) 6,014 8,835 (5,493)
Interest income...................... 86 58 36 73 202 620
Income before provision for income
taxes............................. 2,773 5,324 (87) 6,087 9,037 (4,873)
Provision for income taxes........... 1,130 1,810 -- -- 3,000 1,700
Income before extraordinary item..... 1,643 3,514 (87) 6,087 6,037 (3,173)
Extraordinary credit from NOL
utilization....................... 1,130 1,810 -- -- -- --
Net income........................... 2,773 5,324 (87) 6,087 6,037 (3,173)
AS OF SEPTEMBER
30, AS OF MARCH 31,
----------------- ----------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ---------- ------- ------- -------
BALANCE SHEET DATA(1)
Working capital........................ $ 4,931 $ 9,046 $8,630 $14,102 $22,760 $23,689
Intangible assets...................... 4,360 6,226 6,905 7,822 8,014 7,768
Total assets........................... 20,297 26,973 23,203 35,448 46,529 55,043
Convertible subordinated debentures.... 7,000 -- -- -- -- --
Redeemable preferred stock............. -- -- -- 6,910 6,565 --
Stockholders' equity................... 12,284 17,672 17,584 16,554 22,289 44,781
- ---------------
(1) HDS changed its fiscal year-end in 1993 from September 30 to March 31.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HDS
OVERVIEW
HDS provides information technology services and products to healthcare
organizations through the strategic use of standards-based approaches, such as
client/server and UNIX, that support HDS's proprietary applications products,
such as HDS's integrated patient care system known as ULTICARE(R). HDS has
experienced substantial growth since its inception in 1983, deriving most of its
revenue from software sales, consulting services, hardware sales, software
maintenance and support, training services, and ongoing upgrade and
implementation services. HDS typically provides its products under fixed fee
arrangements, and provides its services under both fixed fee and time and
materials arrangements. Software revenue is recognized when software is
delivered and there are no further significant vendor obligations. Hardware
revenues are recognized upon shipment. Maintenance and service revenues are
recognized as services are delivered. Some large integrated projects are
recognized on a percentage-of-completion basis whereby revenue is recorded over
the term of a contract based upon the percentage of work performed to date. All
projects in which revenue is being recognized over time are monitored monthly.
HDS's strategy has been to increase staffing in anticipation of revenue
increases. At times, this strategy has had the effect of adversely affecting net
income. A significant portion of HDS's revenues has been, and will continue to
be, derived from substantial contracts signed with large customers. The timing
of such contracts and their fulfillment can cause material fluctuations in
operating results, particularly on a quarterly basis. HDS manages this situation
by closely monitoring the sales process and staffing levels and requirements,
adjusting staffing levels as necessary.
In fiscal 1996, HDS realigned operations in order to devote greater
resources to its core service and product offerings and to expand its customer
relationships and capabilities. The realignment included, among other things,
the reduction of headcount, streamlining of processes and contracts, settlement
of longstanding vendor/term issues, and more effective utilization management.
HDS believes the realignment will reduce its annual operating expenses, enhance
its long-term growth strategy and support higher levels of earnings.
RESULTS OF OPERATIONS
The following table sets forth certain items from HDS's consolidated
statement of operations as a percentage of revenue for the periods indicated:
YEAR ENDED MARCH 31,
----------------------
1994 1995 1996
---- ---- ----
Net sales....................................................... 100 % 100 % 100 %
Cost of sales................................................... 46 45 67
Gross margin.................................................... 54 55 33
Expenses:
Research and development...................................... 7 6 8
Sales and marketing........................................... 11 12 21
General and administrative.................................... 12 7 27
Interest...................................................... 1 1 1
Income (loss) from operations................................... 23 29 (24 )
Interest income................................................. -- 1 3
Income before provision for income taxes........................ 23 30 (21 )
Provision for income taxes...................................... -- 10 (7 )
---- ---- ----
Net income...................................................... 23 20 (14 )
==== ==== ====
Net Sales. Net sales in fiscal 1996 decreased 25% to $22.7 million from
$30.5 million in fiscal 1995. Timing issues associated with software and service
delivery delayed the recognition of significant revenue into
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fiscal 1997. HDS's estimated backlog as of March 31, 1996 was $184.3 million;
such backlog is for services/products to be delivered in future periods.
Cost of Sales. Cost of sales consists primarily of compensation and
benefits paid to professionals providing services to customers, cost of hardware
and hardware maintenance. Cost of sales increased by 10% to $15.2 million (67%
of revenue) from $13.8 million (45% of revenue) in 1995. The higher cost of
sales percentage of revenue was due primarily to the impact of hiring
professional staff in anticipation of future project needs and change in product
mix that resulted in an increase in the hardware component for fiscal 1996.
Research and Development Expenses. Research and development expenses
remained constant at $1.8 million from 1995 to 1996. HDS is the recipient of a
grant from the Department of Commerce to fund product development. Amounts
received under this grant are recorded as a reduction of incurred research and
development expenses. Incurred research and development expenditures increased
in 1996 from 1995 but were offset by grant funding of $912,000.
Sales and Marketing Expenses. Sales and marketing expenses increased 33%
to $4.9 million from $3.7 million in 1995. This increase was due primarily to
increased provisions for doubtful accounts.
General and Administrative Expenses. General and administrative expenses
increased 178% to $6.1 million in 1996 from $2.2 million in 1995. This increase
was due primarily to the settlement of a dispute regarding pricing and
contractual issues with a vendor, the outcome of which was a renegotiated,
extended contract with terms beneficial to HDS, which resulted in a $2.7 million
charge in fiscal 1996. Legal fees increased approximately $372,000.
Loss from Operations. The loss from operations was $5.5 million in fiscal
1996 compared to income from operations of $8.8 million in fiscal 1995. The
decline was due primarily to timing differences in several large contracts in
which software delivery was delayed. In addition, in fiscal 1996 HDS realigned
operations in order to devote greater resources to its core service and product
offerings and to expand its customer relationships and capabilities. Management
believes these actions, together with the passage of time which will allow
products and services to be delivered from backlog, as well as higher demand for
HDS products and services, will support higher levels of earnings in future
periods.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
Net Sales. Net sales increased 17% to $30.5 million from $26.0 million in
fiscal 1994 as demand for HDS's products and services increased and as an
increasing number of customers commenced system operations. At fiscal year end,
HDS committed to enter into the eldercare and health maintenance organization
marketplaces, acquiring as customers some of the largest providers in each
industry.
Cost of Sales. Cost of sales increased by 16% to $13.8 million from $11.9
million in fiscal 1994. The higher cost of sales was primarily due to the
increased costs of professional staff and hardware to support the growth in
sales.
Research and Development Expenses. Research and development expenses
remained constant at $1.8 million in 1995 when compared to 1994.
Sales and Marketing Expenses. Sales and marketing expenses increased 21%
in 1995 to $3.7 million from $3.0 million in 1994. This was due to increases in
advertising, commissions and growth in sales related personnel costs, recruiting
and related expenses.
General and Administrative Expenses. General and administrative expenses
decreased 32% in 1995 to $2.2 million from $3.2 million in 1994. This was due
primarily to a decrease in legal fees and a reduction in exchange loss from
Canadian activity when compared to the prior period.
Income from Operations. Income from operations was $8.8 million in 1995
compared to $6.0 million in 1994. This improvement was due primarily to the
increase in revenue and the improved operating performance of the organization.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital as of March 31, 1996 was $23.7 million compared to $22.8
million as of the prior year end. The increase resulted from the proceeds from
the sale of Series F Preferred Stock which were used to retire the Series E
Preferred Stock, pay down bank loans and accounts payable, and increase cash and
cash equivalents by $10.4 million over the prior year.
HDS has a $3 million unsecured revolving line of credit with Riverside
National Bank due October 1, 1997, bearing interest at prime. As of March 31,
1996, HDS had no borrowings under its line of credit. The credit line contains
certain financial covenants and requires maintenance of certain financial
ratios. At March 31, 1996, HDS was not in compliance with one of these covenants
and has obtained a waiver of default from the bank.
Capital expenditures in the year ended March 31, 1996 of $493,000 consisted
principally of computer equipment and office equipment expenditures to support
HDS's operations. HDS also incurred software development costs of $3,052,000
which were capitalized during the year ended March 31, 1996. As of March 31,
1996, HDS had no material or unusual purchase commitments outstanding.
HDS believes that existing cash balances and cash flow from operations will
be sufficient to support HDS's working capital requirements for at least the
next 12 months. Thereafter, if cash generated from operations is insufficient to
satisfy HDS's working capital requirements and if the Merger is not consummated,
HDS may be required to raise additional funds. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to HDS. To the extent HDS raises
additional capital by issuing equity or convertible debt securities, ownership
dilution to HDS's stockholders will result. In the event that adequate funds are
not available, HDS's business may be adversely affected.
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BUSINESS OF HDS
HDS is a developer and supplier of healthcare information systems to
institutions, payers, healthcare networks, and providers. HDS offers a product
line generally known as ULTICARE(R), an integrated information system which
addresses a healthcare enterprise's information needs through the integrated
monitoring, scheduling, documentation, and control of patient care activities.
To accomplish this, patient care workstations are situated throughout the
enterprise: at patient bedsides, at nursing stations, in ancillaries
(laboratory, radiology, pharmacy, etc.), in physician offices and with mobile
health workers such as home care staff. HDS forms relationships throughout the
organization, especially with senior management of integrated delivery systems
(whether payer, provider, or practitioner based).
HDS has extensive experience in most phases of patient care automation:
nursing, physicians, laboratory, radiology, pharmacy, case management, and
quality assurance, among others. HDS customers include hospitals, integrated
healthcare enterprises, health maintenance organizations, municipal healthcare
systems, and elder care organizations.
INDUSTRY BACKGROUND
Changes in the healthcare industry over the past ten years have
significantly altered the information needs of healthcare providers.
Historically, healthcare information systems were developed primarily to serve
the needs of financial departments. Because providers and practitioners were
reimbursed by payers on a fee-for-service basis, the focus was on billing,
procedure, and revenue maximization rather than cost controls, operational
efficiency, and patient outcomes. The costs associated with inefficient data
management and information systems were passed on to payers as part of overhead
and the organization's overall cost structure. Changes in the payment system,
from fee-for-service to capitated arrangements (whether called capitation, case
management, managed care, or by other terms), have shifted risk to providers.
Providers must now focus on cost controls, operational efficiency, and patient
outcomes.
DEMAND FOR INFORMATION TECHNOLOGY
Competition and experience have forced modern managed care organizations to
realize that a key to effective cost control and quality management is the
compilation and analysis of comprehensive medical information regarding provider
utilization, pricing, and outcomes.
While many computer systems have been developed to ensure that the right
person was billed for the correct amount in a timely fashion after a procedure
was performed, few systems are available that enable the user to decide whether
the procedure was necessary in the first place. It has been estimated by some
that as much as one-half of the time spent by patients in hospitals is medically
unnecessary, while 24% of all hospital stays and 15% of all office visits are
unwarranted. Wide variations in the practice of medicine exist throughout the
United States, even within small geographic areas. These variations include
discrepancies in the number of procedures performed, the way they are performed,
where they are performed, and how much they cost. Significant savings can be
achieved by the elimination of unnecessary care; however, it is only with
accurate information systems that payers can begin to distinguish between care
which is necessary and care which is not.
THE HDS APPROACH
HDS provides a comprehensive and integrated set of products and services to
the healthcare industry. Utilizing client/server, UNIX, and other advanced
technologies, HDS systems and services allow customers, whether providers,
payers, or practitioners, to better respond to new healthcare requirements.
HDS has pioneered the concept of patient-centered, point-of-care based,
fully integrated approaches. Because HDS systems are important to continued
organizational progress, HDS's relationships with its customers generally extend
for several years. Under its customer support program, HDS upgrades customers
regularly to its most current product release, providing them with new features
and functions. This kind of service differentiates HDS from many of its
competitors.
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THE ULTICARE SYSTEM
ULTICARE is a UNIX-based software system which collects and reviews patient
information on a patient-centered basis. This means that physician activities,
nursing activities, and ancillary activities are merged into a single,
operations-based, patient-centered approach. Because system integration is the
cornerstone of the ULTICARE System, nurses, doctors, and even housekeepers can
immediately retrieve necessary information from any location where access is
available, including bedsides, mobile units, and providers' homes.
The ULTICARE System has been designed to operate unattended most of the
time. As a result, the System requires minimal intervention and support from
computer personnel and ULTICARE software specialists. The functional
applications are designed to be supported by applications-oriented users in
hospital departments.
ULTICARE offers functional modules to meet the specific information needs
of each customer. They may be purchased together as a package or separately, by
module. ULTICARE Modular, a four-module package, is an affordable and flexible
way to obtain patient information throughout an enterprise without having to
purchase the entire system at once. It combines HDS's patient-centered
Registration/ADT, order communications, nursing, and results reporting modules
to provide a highly functional core clinical information system. A wide
selection of additional modules are also available for integration. The
following show some of the currently available ULTICARE modules:
- Patient Registration/ADT
- Point-of-Care Nursing Support
- Physician Support
- Health Maintenance Record
- Case Management/Critical Pathways
- Order Communication/Charge Capture
- Result Reporting
- Quality Assurance/Utilization Review
- Laboratory Departmental Processing
- Medical Records Departmental Processing
- Pharmacy Departmental Processing
- Radiology Department Processing
- Other Ancillary Department Processing
- Patient Scheduling and Control
- Call Center Management
- Physician/Professional Staff Registry
- Cost Finding and Analysis
- Outpatient Appointment and Encounter Processing
- Report Writer/Query Processor
- Criteria Evaluation Processor
- Electronic Mail
Utilizing a common patient database, a single application support
environment, and a unified hardware environment, data entered anywhere in the
System, or in a legacy system connected to the ULTICARE Integration Engine, is
immediately available to all authorized users. Not only does this improve
communications throughout the enterprise, it reduces the duplicate entry of
data.
SECURITY AND PRIVACY ASSURANCE
Access to the ULTICARE System is controlled by means of a
magnetically-encoded key (an "ULTIKEY(TM)") or a magnetic striped card (an
"ULTICARD(TM)") and a keyboard sign-on password
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corresponding to the inserted key or card. Both the ULTIKEY/ULTICARD and the
appropriate sign-on password for that key or card for that time period must be
present to obtain system access. In addition, functionality is restricted so
that users can only view on a menu selection display and have access to those
functions for which they are authorized.
Extensive audit trails are provided throughout the System. Data-generating
transactions and accesses to the patient medical record are logged with the
date, time, and the identification code of the person signed onto the terminal
at the time the transaction is recorded. The System allows for automatic
supervisor intervention in those cases in which a problem should be referred to
higher levels. The addition, changing, and deletion of security parameters are
under the control of the healthcare enterprise. Audit and control data are
available for review by administration.
OTHER PRODUCTS
HDS supports several other products as adjuncts to its core ULTICARE
System. These include:
ULTI-DATA(TM). This is a near-real-time copy of transaction data
modified for optimal access by standard query tools, designed for data
queries, searches, and analyses. ULTI-Data is designed to allow extensive
data manipulation and analysis without compromising the power, throughput
and responsiveness of the on-line environment.
ULTI-NET(TM). ULTI-Net provides connection to the Internet for the
operation of ULTICARE from remote sites and locations. Using the Netscape
browser, it supports secure operations from remote sites with transparent
connection to the ULTICARE host.
ULTI-LINK(TM). HDS was the development partner with AT&T cellular
communications for the use of CDPD digital cellular in healthcare. The
ULTI-Link product fully supports real-time cellular access to all
authorized ULTICARE functionality.
SERVICES
In addition to providing the various core and adjunctive ULTICARE products,
HDS provides service support to its customers. Such services include:
Implementation Consulting. ULTICARE systems are typically large and
complex, and proper configuration and System building are key to achieving
anticipated economies and operational enhancements. HDS provides implementation
services covering hardware, networking, and software.
Reengineering Consulting. HDS's products may be differentiated from those
of its competitors by the existence of a comprehensive model of healthcare
delivery processes, together with an integral model of healthcare data. The
process model allows work within the enterprise to be reengineered, and HDS
provides services to support and optimize this process.
System Support. HDS Systems typically have hundreds or thousands of access
points impacting thousands or tens of thousands of users. The requirement for
the System to be operational and capable of servicing the enterprise's needs at
all times is critical to most organization's operations. Support services ensure
that questions are answered, problems are addressed, and that uptime is
maximized.
Interface/Integration Consulting. ULTICARE is often connected to a large
number of disparate legacy systems. HDS often provides integration services,
using its integration engine, to ensure effective incorporation of such legacy
systems into the ULTICARE environment.
Database Consulting. Although users' databases are customizable by them,
many users procure additional services from HDS to assist in such database
building and maintenance.
MARKET AND CUSTOMERS
HDS focuses on providing services to organizations in the healthcare
delivery system, including integrated delivery systems, payers, elder-care
providers, acute care hospitals, physicians and others.
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Since its inception in 1983, HDS has provided services to organizations
representing bedded institutions with over 30,000 beds, and well over 100,000
providers. Thousands of physicians offices are also using the ULTICARE system.
SALES AND MARKETING
HDS markets its services to prospective customers through its three
regional managers and its five person direct sales force operating regionally
out of offices in Dallas, Chicago, Orlando, Phoenix, Boston, Washington, DC, and
in Canada. Because healthcare enterprises are increasingly making decisions
about their information technology and systems at the highest executive levels,
HDS's sales and marketing staff generally focus their customer communications on
the appropriate decision makers, often the chief executive officer, chief
operating officer, or chief information officer. HDS is often represented in
these discussions by members of its senior staff. HDS believes this approach
provides customers with the full breadth of HDS's expertise while also providing
local contact and support.
Marketing to existing customers is also an increasingly important part of
HDS's sales and marketing strategy. HDS professionals working with customers
invest significant time in understanding customer's issues and future business
and information technology needs. HDS uses that understanding to develop new
products and to market such products or other projects to its customers.
HDS's sales efforts are supplemented by HDS's marketing professionals.
These marketing professionals support HDS's sales efforts through organizing
seminars and other support activities, addressing RFPs, and coordinating HDS's
participation in trade shows. In addition, collaterals and newsletters are
prepared by this group.
BUSINESS RELATIONSHIPS
HDS has developed a number of formal and informal relationships with
various manufacturers of computer hardware and software and serves as a reseller
of hardware and software products on a commission basis. These relationships
also support HDS's services offerings to its customers. From many of its
vendors, HDS receives the latest information concerning the vendor's product and
strategic plans, the performance features and weaknesses of specific products,
access to technical support, and depending on the customer's volume requirements
and HDS's vendor relationship, favorable pricing with respect to the vendor's
products.
HDS is a party to several agreements with vendors of hardware and software
products; these agreements, among other things, enable HDS to receive discounts
from the vendor's list prices for certain hardware and software products. Under
these agreements, HDS serves as an intermediary between the vendor and its
customer and does not maintain inventory of products. The percentage of revenue
attributable to customer sales under these agreements has generally decreased
over the last few years, and is expected to continue to do so.
HDS also conducts product evaluation, including beta testing, and
contributes to product development activities with certain hardware and software
manufacturers. As a result of these activities, HDS receives free or discounted
licenses for software products, semi-permanent loans of hardware, and access to
product support and information concerning future plans for new products and
product enhancements.
HDS EMPLOYEES
As of March 31, 1996, HDS employed 179 people, including 51 in research and
development; 68 in installation, consulting, and support; 24 in sales, marketing
and publications; and 36 in finance and administration, including all clerical
support for the organization.
HDS's business depends to a significant degree upon the continuing
contributions of its key management, research and development, installation and
support, and sales and marketing staff, including Ralph A. Korpman, M.D., HDS's
Chief Executive Officer; Peter Gladkin, HDS's Chief Operating Officer; and
Janice E. Ticich, Jere E. Chrispens and John A. Lauer, all vice-presidents, as
well as others. Any loss of such key people could have a material adverse effect
on HDS. HDS believes that its business will continue to depend
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upon its ability to attract and retain additional high-skilled managerial,
professional, development, and sales and marketing staff. Competition for such
staff is intense, and there can be no assurance that HDS will be successful in
attracting and retaining such people. The failure to attract and retain key
people could have a material adverse effect on HDS's business, operating
results, and financial condition.
None of HDS's employees is represented by a collective bargaining
agreement, nor has HDS experienced any work stoppages. HDS believes that its
relations with its employees are good.
COMPETITION
The healthcare information systems industry is highly fragmented and
characterized by rapid change and intense competition. The healthcare
marketplace includes competitors from a variety of service areas, including
financial systems, ancillary systems, analytical systems, and consulting. In
addition, the software and product development units of major computer equipment
manufacturers also sometimes compete in this area.
Many of HDS's competitors have long operating histories, substantially
greater financial, technical and marketing resources, and generate greater
revenues than HDS. The introduction of lower priced competition or significant
product development coupled with significant price reductions by HDS's current
or potential competitors, or such competitors' ability to respond more quickly
than HDS to new or emerging changes in customer requirements or technology
trends could have a material adverse effect on HDS's business, financial
condition, and results of operations.
HDS believes that the principal competitive factors in the healthcare
information systems industry are product strength, customer responsiveness,
technical expertise and service, ability to analyze and address healthcare
business systems needs, ability to reengineer critical healthcare processes,
price, rapid development of product functionality to respond to marketplace
changes, ability to transfer knowledge of products to customer personnel, and
ability to effectively and efficiently implement systems. There can be no
assurance that competition from current or potential competitors will not have a
material adverse effect on HDS's business, financial condition, or results of
operations.
PROPRIETARY TECHNOLOGY
HDS has proprietary rights in products developed by it, either alone or
with customer partners. HDS relies on a combination of trade secret, copyright
and trademark laws, nondisclosure agreements, and other contractual arrangements
and technical measures to protect its proprietary rights. To the extent
possible, HDS seeks to protect its software, as well as documentation and other
written materials relating to its business, under trade secret and copyright
laws, which provide only limited protection. HDS does not currently hold any
patents, nor does HDS have any applications pending with respect to any
patentable technology. HDS generally enters into confidentiality agreements with
its employees and consultants, customers, and business partners and limits
access to and dissemination of its proprietary information. There can be no
assurance, however, that the steps taken by HDS to protect its proprietary
technology will be adequate to deter misappropriation of such technology or that
HDS will be able to detect unauthorized use and take sufficient measures to
enforce its rights. HDS believes that its trademarks and proprietary technology
do not infringe upon the proprietary rights of third parties, although there can
be no assurance that competitors or other parties will not develop technology
and software with features similar to that of HDS's proprietary technology and
software. Furthermore, there can be no assurance that third parties will not
assert infringement claims against HDS in the future or that such claims will
not require HDS to enter into royalty arrangements or result in costly
litigation, any of which could have a material adverse effect on HDS's business,
financial condition, and results of operations.
FACILITIES
HDS currently maintains an office in San Bernardino, California which
accounts for approximately 50,000 square feet of leased space. The lease for
this facility expires in 2004. Employees in other cities work from their homes
or from small offices on leases of one year or less.
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HDS believes that its current facilities are adequate for its current level
of business. HDS anticipates that additional space will be needed as its
business expands in various geographic regions and as new customer alliances are
established which require regional space to be leased. HDS believes that it will
be able to obtain suitable space as required to meet such needs.
BACKLOG
HDS's backlog as of March 31, 1996 was approximately $184 million. Backlog
consists of unperformed services under agreements which HDS is obligated and/or
scheduled to perform. Variations in customer requirements, as well as the
rescheduling or cancellation of contracts, may result in substantial fluctuation
of backlog from period to period. HDS therefore believes that its backlog cannot
be considered a meaningful indicator of future financial results.
LEGAL PROCEEDINGS
HDS is currently not a party to any material litigation and is currently
not aware of any pending or threatened litigation that could have a materially
adverse effect on HDS's business, financial condition, or operating results.
OWNERSHIP OF HDS CAPITAL STOCK
The following table sets forth certain information regarding the beneficial
ownership of HDSthe Common Stock and HDS Preferred Stock, as of ,December 31, 1997, by (i) each person who is known by HDS to own beneficially more than five percent of HDS's Common Stock, the
HDS Series B Preferred Stock,Company's directors, (ii) the HDS Series C Preferred
Stock or the HDS Series F Preferred Stock; (ii) each of HDS'sCompany's named executive officers (as defined)
and (iii) such directors and
executive officers; and (iii) all executive officers and directors of HDS as a group.
SHARES OF COMMON
STOCK BENEFICIALLY PERCENT OF
NAME OWNED(1) CLASS
- ---- ------------------ ----------
David E. McDowell........................................... 120,000(2) *
Randolph L. M. Hutto........................................ 1,000 *
C. James Schaper............................................ 83,334(3) *
Allen W. Ritchie............................................ -- --
Jerome H. Baglien........................................... 83,334(3) *
Harvey Herscovitch.......................................... 20,334(4) *
Robert C. Bellas, Jr. ...................................... 12,915(5) *
David R. Holbrooke, M.D. ................................... 38,700(6) *
John C. Pope................................................ -- --
Dennis A. Pryor............................................. 104,000(7) *
C. Christopher Trower....................................... 700 *
All executive officers and directors as a group (11
persons).................................................. 380,983 *
- ---------------
* Beneficial ownership represents less than 1% of the outstanding Common
Stock.
(1) Under the rules of the Commission, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which
includes the power to vote or to direct the voting of such
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security, or "investment power," which includes the power to dispose of or
to direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities which that person has the right to
acquire within sixty (60) days. Under these rules, more than one person may
be deemed to be a beneficial owner of the same securities and a person may
be deemed to be a beneficial owner of securities as to which he has no
economic or pecuniary interest. Except as indicatedset forth in the footnotes to the table,below,
the persons named in
the tablebelow have sole voting and investment power with respect
to all shares of HDS Common Stock, HDS Series B Preferred Stock, HDS Series C Preferred Stock or
HDS Series F Preferred Stock shown as being beneficially owned by them,them.
(2) Includes 120,000 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans; does not include 210,000 shares that may be acquired
upon the exercise of stock options granted under the Company's stock option
plans which are subject to community property laws where applicable.an accelerated vesting schedule based on
appreciation in the market value of the Common Stock as described elsewhere
in this Proxy Statement.
(3) Includes 83,334 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
(4) Includes 13,334 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
(5) Includes 1,143 shares that are held by the Bellas Family Partnership. Also
includes 7,200 shares that are not currently outstanding, but that may be
acquired under the Non-Employee Director Stock Option Plan (the "Director
Plan").
(6) Includes 1,500 shares held in a bank account for the benefit of Dr.
Holbrooke's son, a minor. Also includes 7,200 shares that are not currently
outstanding, but may be acquired under the Director Plan.
(7) Includes 104,000 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options granted under the Company's
stock option plans.
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MANAGEMENT COMPENSATION
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of (i) the Company's
Chief Executive Officer, (ii) the four other most highly compensated executive
officers of the Company (determined as of December 31, 1997) and (iii) one
additional individual who would have been among the Company's four most highly
compensated executive officers, but for the fact that he was not serving as an
executive officer of the Company at December 31, 1997 (referred to herein as the
"named executive officers") for 1996 and 1997.
SUMMARY COMPENSATION TABLE
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- ---------------- -----------------LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
OF OF OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASSOTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
- -------------------------------- --------- ------- ------ ------- ------- ------- --------- ---------------------------------- ---- -------- -------- --------------- ------------ ---------------
Ralph A. Korpman, M.D........... 843,640(3) 20.59 11,750(3) 1.58 1,350(3) * 1,440 *
268 W. Hospitality Lane
San Bernardino, CA 92408
JereDavid E. Chrispens............... 543,000(4) 13.27 10,000(4) 1.35 1,000(4) *McDowell............ 1997 $300,000 $150,000 $119,812 810,000* $ 4,661
Chief Executive Officer 1996 42,692 -- -- 268 W. Hospitality Lane
San Bernardino, CA 92408
Charles S. Grobe................ 276,001(5) 6.74810,000 519,770(3)
(11/96 - Present)
Randolph L. M. Hutto......... 1997 102,612 $100,000(4) -- 250,000 101,909(5)
Executive Vice President 1996 -- -- -- -- --
and General Counsel
(7/97 - Present)
C. James Schaper............. 1997 182,692 187,500(6) -- 501 N. Cliffwood Avenue
Los Angeles, CA 90049
Brian S. Bull................... 294,796(6) 7.16500,000* 104,071(7)
Executive Vice President 1996 -- -- -- -- --
--
24489 Barton Road
Loma Linda, CA 92354
Janice E. Ticich................ 179,350 4.38 5,500 * 3,000 * 600 *
268 W. Hospitality Lane
San Bernardino, CA 92408
Kingsbury Capital............... 375,000 8.41(2/97 - Present)
and Chief Operating Officer
(1/98 - Present)
Jerome H. Baglien............ 1997 219,538 187,500(6) 34,308 500,000* 4,296
Senior Vice President and 1996 -- -- 375,000 28.57 -- -- c/o Kingsbury Associates
3655 Nobel Drive
Suite 490
San Diego, CA 92122
William Beaumont Hospital....... 250,000 5.77--
Chief Financial Officer
(1/97 - 1/98)
Harvey Herscovitch........... 1997 120,616 155,000(6)(8) 36,147 130,000* 340
Senior Vice President, 1996 -- -- 250,000 19.05 -- -- 3601 W. Thirteen Mile Rd.
Royal Oak, MI 48073-6769--
Strategy and Organization
(4/97 - Present)
54- ---------------
* Reflects the repricing, exchange and reissuance of certain stock options
outstanding as of April 25, 1997. See "Management Compensation -- Stock
Option Grants."
(1) Includes amounts reimbursed for certain personal expenses, including housing
and travel expenses.
(2) Includes amounts paid by the Company on behalf of each named executive
officer for matching 401(k) plan contributions, matching non-qualified
deferred compensation plan contributions, and life, medical and dental
insurance premiums.
(3) Includes $500,000 signing incentive received by Mr. McDowell in connection
with his entering into a five-year employment agreement with the Company on
November 19, 1996, and $19,000 prepaid rent and security deposit paid by the
Company on behalf of Mr. McDowell for housing in Atlanta, Georgia.
(4) Reflects incentive compensation for 1997 guaranteed under Mr. Hutto's
employment agreement.
(5) Includes $100,000 loan by the Company to Mr. Hutto in connection with his
entering into a three-year employment agreement with the Company on July 28,
1997. This loan will be forgiven in whole by the Company in the event Mr.
Hutto remains employed with the Company through and until July 28, 1998. In
the event Mr. Hutto terminates his employment with the Company prior to July
28, 1998, Mr. Hutto must repay a pro-rata portion of the loan to the Company
in accordance with the employment agreement.
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6378
(6) Reflects the amount earned by this executive in 1997 pursuant to a letter
agreement in which the Company agreed that if this executive remained
employed by the Company on December 31, 1997, then the Company would pay
this amount to him as a special one time bonus.
(7) Includes $100,000 signing incentive received by Mr. Schaper in connection
with his entering into a three-year employment agreement with the Company on
February 25, 1997.
(8) Reflects $50,000 incentive compensation for 1997.
Stock Option Grants
The following table sets forth information with respect to options granted
under the Company's Amended and Restated Non-Qualified Stock Option Plan, as
amended (the "Stock Option Plan"), to each of the named executive officers
during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- ---------------- ----------------- -------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBERINDIVIDUAL GRANTS
----------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASSSTOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------------
NAME GRANTED 1997 (PER SHARE)(1) DATE 5% 10%
- -------------------------------- --------- ------- ------ ------- ------- ------- --------- ----------- ---------- ------------ -------------- ---------- ------------- -------------
Helix (PEI) Inc................. -- -- -- -- 125,000 9.52 -- --
c/o Helix Investments
(Canada) Inc.
70 York Street
Suite 1700
Toronto, Ontario M5J 1S9
US West Master Trust............ -- -- -- -- 85,602 6.52 -- --
c/o Boston Safe Deposit
and Trust Co.
One Boston Place
Boston, MA 02106
Pitt & Co....................... -- -- -- -- 75,912 5.78 -- --
c/o Bankers Trust Company
P.O. Box 2444
Church Street Station
New York, NY 10008
RCS III......................... -- -- 95,948 12.93 88,847 6.77 -- --
c/o Robertson, Stephens & Co.
Bank of America Building
555 California Street
Suite 2600
San Francisco, CA 94104
Pioneer Associates.............. -- -- 84,369.44 11.37 -- -- -- --
c/o Asen & Co., Inc.
224 East 49th Street
First Floor
New York, NY 10017
Pioneer III..................... -- -- 65,472.08 8.82 -- -- -- --
c/o Asen & Co., Inc.
224 East 49th Street
First Floor
New York, NY 10017
GeoCapital Ventures............. -- -- 43,028.45 5.80 -- -- -- --
One Bridge Plaza
Fort Lee, NJ 07024
RCS Ltd......................... -- -- 39,964 5.39 -- -- -- --
c/o Robertson, Stephens & Co.
Bank of America Building
555 California Street
Suite 2600
San Francisco, CA 94104
Health Systems.................. 1,234,544 23.22 -- -- -- -- 1,234,544 76.90
International, Inc.
225 North Main Street
Pueblo, CO 81003
Genesis Holdings, Inc........... 303,030 6.91 -- -- -- -- 303,030 18.88
c/o Genesis Health Ventures
148 West State Street
Kennett Square, PA 19348
Herbert J. Richman.............. 283,759(7) 6.50 23,231 3.13 -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
Peter Gladkin................... 228,000(8) 5.29 -- -- -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
55
64
COMMON STOCK (1) SERIES B(2) SERIES C(2) SERIES F(2)
--------------------- ---------------- ----------------- -------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
OF OF OF OF OF OF OF OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- -------------------------------- --------- ------- ------ ------- ------- ------- --------- -------
Peter P. Tong................... 170,800(9) 4.09 6,750 David E. McDowell........... 600,000* 5.36% $ 5.38 11/19/07 $2,176,292.64 $5,606,708.59
210,000(3)* 350 * -- --
268 W. Hospitality Lane
San Bernardino, CA 924081.88% 5.38 11/19/07 $ 761,702.42 $1,962,348.01
Randolph L. M. Hutto........ 250,000 2.23% 9.06 7/28/07 $1,424,839.39 $3,610,822.76
C. James J. Harrison............... 64,474(10) 1.42 1,332 * -- -- -- --
268 W. Hospitality Lane
San Bernardino, CA 92408
All Executive Officers and
Directors of HDS
as a group.................... 2,313,023(11) 51.30 58,563 7.89 5,700 * 2,040 *Schaper............ 250,000 2.23% 10.25 2/25/08 $1,820,244.61 $4,748,611.56
250,000* 2.23% 5.38 2/25/08 $ 936,464.21 $2,431,512.39
Jerome H. Baglien........... 250,000 2.23% 11.38 2/07/08 $2,020,027.55 $5,269,800.63
250,000* 2.23% 5.38 2/07/08 $ 930,984.40 $2,413,809.43
Harvey Herscovitch.......... 40,000 .36% 10.50 2/11/08 $ 298,342.53 $ 778,309.02
40,000* .36% 5.38 2/11/08 $ 149,152.16 $ 386,837.80
50,000 .45% 5.38 4/25/08 $ 190,903.70 $ 498,025.11
- ---------------
* LessReflects the repricing, exchange and reissuance of certain stock options
outstanding as of April 25, 1997 and having an exercise price of $5.50 and
above, including certain options outstanding under the Stock Option Plan.
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. Such options may not be exercised
later than one percent (1%).
(1) The number11 years, or earlier than six months, after the original date of
sharesgrant.
(2) These amounts represent certain assumed rates of HDSappreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions. The amounts
reflected in this table may not necessarily be achieved.
(3) These options are subject to an accelerated vesting schedule based upon the
percent for each
beneficial owner reflectappreciation in the conversionmarket value of all sharesthe Company's common stock. The vesting
schedule is as follows: (i) 1/3 based on 100% appreciation in the market
price of HDS Preferred
Stock owned by such beneficial owner into shares of HDS Common Stock.
(2) Each share of HDS Series B, C and F Preferred Stock is convertible into one
share of HDSthe Company's Common Stock subject to adjustmentabove the closing price of the Company's
Common Stock on the Nasdaq National Market on November 19, 1996; (ii) 1/3
based on 200% appreciation in certain events.
(3) These shares are heldthe market price of record by Ralph A. Korpman, M.D., as Trustee under
declarationthe Company's Common Stock
above the closing price of trust.
(4) These shares are heldthe Company's Common Stock on the Nasdaq National
Market on November 19, 1996; and (iii) 1/3 based on 300% appreciation in the
market price of record by Jere and Marian Chrispens, as Trustees
under declarationthe Company's Common Stock above the closing price of trust. Mrs. Chrispens shares voting and investment
power to such shares with Mr. Chrispens.
(5) These shares are heldthe
Company's Common Stock on the Nasdaq National Market on November 19, 1996.
In any event, the options will vest on November 19, 2001 or upon a change in
control event.
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79
Stock Option Exercises
None of record by Charles S. Grobe and Ila S. Grobe, as
Trustees under declaration of trust. Mrs. Grobe shares voting and
investment power to such shares with Mr. Grobe.
(6) These shares are held of record by Brian S. Bull and Maureen H. Bull, as
Trustees under declaration of trust. Mrs. Bull shares voting and investment
power to such shares with Mr. Bull.
(7) Includes 100,000 shares subject tothe named executive officers exercised any stock options exercisable within 60 days of
.
(8) Includes 228,000 shares subject to options exercisable within 60 days of
.
(9) These shares are held of record by Peter P. Tong and Janet L. Tong, as
Trustees under declaration of trust. Mrs. Tong shares voting and investment
power to such shares with Mr. Tong.
(10) Includes 100 shares held of record by Brian Harrison, 100 shares held of
record by Timothy Harrison and 31,000 shares subject to options exercisable
within 60 days of .
(11)during
1997. The table below shows the number of shares of Common Stock covered by both
exercisable and the percent reflect the conversion
of all shares of Preferred Stock ownedunexercisable stock options held by the named executive officers and
directors of the Corporation and include 353,000 shares subject to options
exercisable within 60 days of .
EXPERTS
The supplemental consolidated financial statements of Medaphis
as of December 31, 19941997. The table also reflects the values for in-the-money
options based on the positive spread between the exercise price of such options
and 1995,the last reported sale price of the Common Stock on December 31, 1997, the
last trading date in 1997 for the Common Stock.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
David E. McDowell................................ 120,000 690,000 $135,000 $776,250
Randolph L. M. Hutto............................. -- 250,000 -- --
C. James Schaper................................. -- 250,000 -- $281,250
Jerome H. Baglien................................ -- 250,000 -- $281,250
Harvey Herscovitch............................... -- 90,000 -- $101,250
Compensation of Directors
In July 1997, the Company adopted a non-employee director compensation
plan. The intent of this plan is to compensate non-employee members of the Board
fairly for their talents and time spent on behalf of the Company. The plan
provides both cash and equity compensation. The cash compensation consists of an
annual retainer in the amount of $16,000 and a fee in the amount of $1,000 for
each Board meeting attended. Each Board committee chairman receives an annual
retainer in the amount of $2,000 and a fee in the amount of $750 for each
committee meeting attended, and each Board committee member other than a
committee chairman receives a fee in the amount of $650 for each committee
meeting attended. Equity compensation under the plan consists of an initial
grant of 10,000 stock options (upon first election or appointment to the Board)
and an annual grant of 2,000 stock options for each year of service thereafter.
The stock option plan under which these options are granted is the Company's
Non-Employee Director Stock Option Plan. Non-employee directors may elect to
defer receipt and taxation of the cash compensation under this plan by
participating in the Company's Non-Employee Director Deferred Stock Credit Plan
(the "Deferred Stock Credit Plan"). Deferral of taxation is accomplished under
the Deferred Stock Credit Plan using a cash-based feature similar in substance
to a restricted stock program (i.e., the prospective economic benefit to each
participant reflects the full market price per share of the Common Stock, and
varies with fluctuations in that price). The pay element is paid to the
participant upon retirement from the Board.
The Company reimburses each director for out-of-pocket expenses associated
with each Board or committee meeting attended and for each other business
meeting at which the Company has requested the director's presence.
Employment Agreements
In November 1996, the Company and David E. McDowell, the Company's Chairman
and Chief Executive Officer, entered into a five-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. McDowell received a signing
incentive of $500,000 and is to receive a base salary of at least $300,000 per
year. Mr. McDowell is entitled to reimbursement of certain expenses, including
housing and travel expenses, and is also entitled to receive an amount equal to
any federal and state income taxes payable by him as a result of such expense
reimbursement. Upon early termination of the agreement by the Company other than
for cause or by Mr. McDowell for "good reason" or by either party for any reason
following certain change in control events,
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80
the Company is obligated to pay Mr. McDowell his annual salary, to provide for
the continued vesting of stock option awards described in the agreement and to
provide for certain health insurance benefits to Mr. McDowell through November
19, 2001. Upon certain change in control events and a termination of the
agreement by Mr. McDowell, the Company will pay to Mr. McDowell (in lieu of its
obligation to make the foregoing payments of salary and to provide the foregoing
benefits), a termination payment in periodic installments or a lump sum (at Mr.
McDowell's option) equal to the salary that would have been payable to Mr.
McDowell pursuant to the agreement from the date of termination until November
18, 2001, and an additional amount sufficient to make Mr. McDowell whole with
respect to any tax which may be imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"). A "change in control event" is generally
defined in the agreement as the adoption of a plan of liquidation or approval of
the dissolution of the Company, certain mergers and consolidations of the
Company, the sale or transfer of substantially all of the Company's assets,
certain changes in the composition of the Company's Board of Directors, or the
acquisition of more than 30% of Common Stock by any individual, entity, group or
other person. Mr. McDowell also received options to purchase up to 810,000
shares of Common Stock.
In January 1997, the Company and Jerome H. Baglien, the Company's former
Senior Vice President and Chief Financial Officer, entered into a three-year
employment agreement which contains certain non-competition and nonsolicitation
provisions. Pursuant to that agreement, Mr. Baglien is to receive a base salary
of $250,000 per year (subject to adjustments by any increases given in the
normal course of business), and is entitled to an incentive compensation payment
equal to 80% of his base salary, subject to achievement of certain performance
objectives set by the Board. Mr. Baglien is entitled to reimbursement of certain
expenses, including relocation expenses, and is also entitled to receive an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. Upon early termination of Mr. Baglien's employment
by the Company other than for cause or by Mr. Baglien for "good reason," the
Company is obligated to continue to pay Mr. Baglien his annual salary and to
cover him under certain welfare plans as if his employment had not been
terminated. Mr. Baglien also received options to purchase up to 250,000 shares
of Common Stock. In June 1997, the Company and Mr. Baglien entered into a letter
agreement in which the Company agreed that if Mr. Baglien remained employed by
the Company on December 31, 1997, then the Company would pay him a special one
time bonus for 1997 in the amount of $187,500. Mr. Baglien resigned from his
position with the Company in January 1998. See also "Certain Transactions."
In February 1997, the Company and C. James Schaper, an Executive Vice
President of the Company, entered into a three-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Schaper received a signing bonus of
$100,000, and is to receive a base salary of $250,000 per year (subject to
adjustments by any increases given in the normal course of business), and is
entitled to an incentive compensation payment equal to 80% of his base salary,
payable at the discretion of the Board. At the end of the first year of the
agreement, Mr. Schaper is eligible to receive an additional payment of $100,000.
In the event Mr. Schaper's employment is terminated by the Company without
cause, the Company will remain subject to its obligations under the agreement as
if Mr. Schaper remained employed for the balance of the agreement's three-year
term. In the event that Mr. Schaper elects to resign from the Company following
a change in control of the Company, he is entitled to receive a severance
payment equal to the greater of one year of salary continuation at his then
current base salary or the amount of the payments due and owing to him through
the remaining term of the agreement. A "change in control" is generally defined
in the agreement as any consolidation, merger, reorganization or other
transaction in which the Company is not the surviving entity or the sale of a
substantial portion of the Company's assets. Mr. Schaper also received options
to purchase up to 250,000 shares of Common Stock. In June 1997, the Company and
Mr. Schaper entered into a letter agreement in which the Company agreed that if
Mr. Schaper remained employed by the Company on December 31, 1997, then the
Company would pay him a special one time bonus for 1997 in the amount of
$187,500. In January, 1998, Mr. Schaper was appointed the Chief Operating
Officer of the Company. See also "Certain Transactions."
In April 1997, the Company and Harvey Herscovitch, the Senior Vice
President, Strategy and Organization of the Company, entered into a two-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Herscovitch is
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81
to receive a base salary of $140,000 per year (subject to adjustments by any
increases given in the normal course of business), and is entitled to an
incentive compensation payment equal to 40% of his base salary, payable at the
discretion of the Board. Mr. Herscovitch is also entitled to a housing allowance
and to reimbursement of certain commuting expenses. In the event Mr.
Herscovitch's employment is terminated by the Company without cause, the Company
will remain subject to its obligations under the agreement as if Mr. Herscovitch
remained employed for the balance of the agreement's two-year term. In the event
that Mr. Herscovitch elects to resign from the Company following a change in
control of the Company, he is entitled to receive a severance payment equal to
the greater of one year of salary continuation at his then current base salary
or the amount of the payments due and owing to him through the remaining term of
the agreement. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or the sale of a substantial portion of the
Company's assets. Mr. Herscovitch also received options to purchase up to 40,000
shares of Common Stock. In June 1997, the Company and Mr. Herscovitch entered
into a letter agreement in which the Company agreed that if Mr. Herscovitch
remained employed by the Company on December 31, 1997, then the Company would
pay him a special one time bonus for 1997 in the amount of $105,000. See also
"Certain Transactions."
In July 1997, the Company and Randolph L. M. Hutto, the Executive Vice
President, General Counsel and Secretary of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Hutto received a signing bonus of $100,000 (structured as a loan to be
forgiven in the event Mr. Hutto remains employed by the Company on the first
anniversary of the agreement), and is to receive a base salary of $250,000 per
year (subject to adjustments by any increases given in the normal course of
business). Mr. Hutto also is entitled to an incentive compensation payment equal
to 80% of his base salary, payable at the discretion of the Board; provided,
however, that the payment of such incentive compensation for 1997 is guaranteed,
and is to be pro-rated based upon the number of months that Mr. Hutto is
employed by the Company during 1997. Upon early termination of Mr. Hutto's
employment by the Company other than for cause or by Mr. Hutto for "good
reason," Mr. Hutto is entitled to elect a severance payment equal to two years
of salary and benefit continuation, or his then current monthly salary
multiplied by the number of months remaining in the initial term of the
agreement, in each case excluding any incentive bonus payments. In the event Mr.
Hutto's employment by the Company is terminated in connection with a change in
control of the Company, he is entitled to receive a severance payment equal to
two years of salary and benefits, including incentive bonus payments. A "change
in control" is generally defined in the agreement as any consolidation, merger,
reorganization or other transaction in which the Company is not the surviving
entity or certain changes in the composition of the Company's Board of
Directors. Mr. Hutto also received options to purchase up to 250,000 shares of
Common Stock. See also "Certain Transactions."
In January 1998, the Company and Allen W. Ritchie, the Executive Vice
President and Chief Financial Officer of the Company, entered into a three-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Ritchie is to
receive a base salary of $300,000 per year, subject to adjustments in the normal
course of business, and he is entitled to an incentive compensation payment of
up to 80% of his base salary, payable at the discretion of the Board. Upon early
termination of Mr. Ritchie's employment by the Company other than for cause or
by Mr. Ritchie for "good reason," Mr. Ritchie is entitled to elect a severance
payment equal to two years of salary and benefit continuation, or his then
current monthly salary multiplied by the number of months remaining in the
initial term of the agreement, in each case excluding any incentive bonus
payments. In the event Mr. Ritchie's employment by the Company is terminated in
connection with a change in control of the Company, he is entitled to receive a
severance payment equal to two years of salary and benefits, including incentive
bonus payments. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or certain changes in the composition of the
Company's Board of Directors. Mr. Ritchie is also to receive options to purchase
up to 300,000 shares of Common Stock. See also "Certain Transactions."
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82
Compensation Committee Interlocks and Insider Participation
The Company has a Compensation Committee composed of Robert C. Bellas, Jr.,
(Chairman), David R. Holbrooke, M.D., and John C. Pope. Each member of the
Compensation Committee is a "non-employee director" as defined in Rule 16b-3 of
the Exchange Act and is an "outside director" as provided for in Section 162 (m)
of the Code.
CERTAIN TRANSACTIONS
Leases. MPSC leased certain offices in Chattanooga, Tennessee from
Financial Enterprises, III ("FE III"), a limited liability company in which
Dennis A. Pryor (a member of the Board of Directors) owns a 50% interest. MPSC
made payments on behalf of a client pursuant to a separate lease of offices in
Raleigh, North Carolina owned by FE III. MPSC paid FE III approximately $57,300
pursuant to such leases during 1997.
Acquisition Transactions. Effective May 6, 1996, the Company acquired all
of the outstanding stock of BSG in a merger transaction (the "BSG Merger")
pursuant to the terms of a Merger Agreement (the "BSG Merger Agreement") dated
as of March 15, 1996, among the Company, BSG and BSGSub, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company ("BSGSub"). In the BSG
Merger, BSGSub merged with and into BSG with BSG surviving such merger as a
wholly owned subsidiary of the Company. As a result of the BSG Merger, all of
the issued and outstanding stock of BSG converted into the right to receive a
total of 7,539,179 shares of Common Stock. The amount of Common Stock issued in
connection with the BSG Merger was determined by arm's-length negotiations
between the Company and BSG and included, among other factors, consideration of
BSG's historical and projected earnings and valuations of and purchase prices
paid for comparable companies.
Less than one percent of the outstanding capital stock of BSG was owned by
Steven G. Papermaster, and Mr. Papermaster received 1,150 shares of Common Stock
in connection with the BSG Merger. NP Ventures, Ltd., an affiliate of Mr.
Papermaster's, owned approximately 29.5% of the outstanding capital stock of BSG
and received 2,224,100 shares of Common Stock in connection with the BSG Merger.
On May 6, 1996, the Common Stock received by Mr. Papermaster and NP Ventures,
Ltd. had market values of $50,600 and $97,860,400, respectively, as calculated
based upon $44.00, the closing price of the Common Stock on the Nasdaq Stock
Market on May 6, 1996. Mr. Papermaster entered into an employment agreement with
BSG (now owned by the Company) with a two-year term which contains certain
non-competition and non-solicitation provisions and a separate non-competition
and non-solicitation agreement with a four-year term which also contains certain
non-competition and non-solicitation provisions. Pursuant to the employment
agreement, Mr. Papermaster is entitled to receive a base salary of $225,000 per
year and is also entitled to participate in the Company's incentive compensation
plan.
NFT Ventures, Inc. owned 58.84% of the outstanding capital stock of BSG and
received 4,436,205 shares of Common Stock in connection with the BSG Merger.
Such shares of Common Stock had a market value of $195,193,020 on May 6, 1996,
as calculated based upon $44.00, the closing price of the Common Stock on the
Nasdaq Stock Market on May 6, 1996.
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 the Company in connection with the BSG Merger. On the date
of the demand, Mr. Papermaster was an executive officer and a director of the
Company. Mr. Papermaster resigned such positions on March 21, 1997, and he
resigned from all offices with subsidiaries of the Company on October 14, 1997.
The indemnification demand claims damages of $35 million (the maximum damages
payable by the Company under the indemnification agreement) for the alleged
breach by the Company of its representations and warranties made in the BSG
Merger Agreement. On December 31, 1996, the Company entered into a standstill
and tolling agreement with Mr. Papermaster, Mr. Noorda and other former BSG
shareholders, which, as extended, runs through September 30, 1998.
Employment Agreements and Other Matters. As part of the Company's purchase
of CompMed, Inc., effective December 31, 1992, Dennis A. Pryor and the Company
entered into an employment agreement with a two-year term, which contains
certain non-competition and non-solicitation provisions. That agreement was
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subsequently amended in 1994 extending the term for an additional four years.
Pursuant to the amended agreement, during 1997, Mr. Pryor received a base salary
of $50,000 together with certain employee benefits.
As part of the Company's acquisition of HRI, effective August 28, 1995,
Patrick B. McGinnis and HRI entered into an employment agreement with a
three-year term, which contains certain non-competition, non-solicitation,
severance and other provisions concerning Mr. McGinnis' responsibilities.
Pursuant to that agreement, during 1997, Mr. McGinnis received salary and bonus
compensation of $77,637, together with certain employee benefits. The Company
agreed with Mr. McGinnis that, upon a sale by the Company of all the outstanding
common stock of HRI in a public offering, the Company would cause HRI to issue
to Mr. McGinnis a number of shares of HRI common stock equal to 0.8% of the
number of shares outstanding immediately prior to the offering. Pursuant to that
agreement, in connection with the HRI public offering in May 1997, Mr. McGinnis
received 80,000 shares of HRI common stock. Based on the public offering price
for HRI's common stock as reflected in HRI's final prospectus dated May 21,
1997, the shares issued to Mr. McGinnis had a value of approximately $1,120,000.
In June 1996, Michael L. Douglas, the Company's former Chief Operating
Officer and a former director of the Company, and the Company entered into an
employment agreement with a two-year term which contained certain
non-competition, non-solicitation, severance and other provisions concerning Mr.
Douglas' responsibilities. Pursuant to that agreement, Mr. Douglas received a
base salary of $225,000 per year, reimbursement of certain relocation expenses,
an incentive compensation payment and was also entitled to participate in the
Company's incentive compensation plan. Mr. Douglas also received 50,000
restricted shares of Common Stock and options to purchase up to 100,000 shares
of Common Stock. That agreement contained a provision which entitled Mr. Douglas
to a severance payment in the amount of 75% of his base salary upon (i)
termination of Mr. Douglas' employment with the Company or (ii) forfeiture of
the restricted shares of Common Stock. Effective January 31, 1997, Mr. Douglas
and the Company entered into an agreement which contains a mutual general
release and certain confidentiality, non-competition and non-solicitation
provisions. Pursuant to the agreement, Mr. Douglas is entitled to receive a
severance payment equal to $168,500, to be paid out in the form of nine months
of salary continuation at Mr. Douglas' regular base rate of pay of $225,000,
and, at the end of the salary continuation period, a lump sum payment equal to
four weeks of accrued vacation. The agreement contains an acknowledgment of the
termination of the foregoing employment agreement and of the forfeiture of all
of the stock options and restricted shares of Common Stock previously granted to
him.
Effective February 21, 1997, Michael R. Cote, the Company's former Chief
Financial Officer, and the Company entered into an agreement which contains a
general release of the Company and certain confidentiality and non-solicitation
provisions. Pursuant to that agreement, Mr. Cote is entitled to receive a
severance payment of $131,250, which is equal to nine months of salary
continuation at Mr. Cote's regular base rate of pay of $175,000. Mr. Cote's
restricted stock award dated August 12, 1994 will continue to vest in accordance
with the four-year vesting schedule set forth in the Company's Restricted Stock
Plan.
William R. Spalding, a former Executive Vice President of the Company,
received an advance from the Company in the amount of $300,000. In connection
with this advance, Mr. Spalding issued to the Company a Deferred Bonus Note,
dated January 1, 1996, in the principal amount of $300,000 (the "Deferred Bonus
Note"). No interest accrued or was payable with respect to the outstanding
principal balance of the Deferred Bonus Note. Under the terms of the Deferred
Bonus Note, the principal amount of the note was to be forgiven in three equal
installments in 1997, 1998 and 1999, provided that Mr. Spalding remained an
employee of the Company on the date that an installment of principal was due.
Upon a change in control followed by Mr. Spalding's termination of employment
for any reason within twelve months of such change in control or Mr. Spalding's
death or disability, the outstanding principal amount of the Deferred Bonus Note
was to be canceled. A change in control event is generally defined for purposes
of the Deferred Bonus Note to include the adoption of a plan of liquidation or
approval of the dissolution of the Company, certain mergers and consolidations
of the Company, the sale or transfer of substantially all of the Company's
assets, the sale or transfer of all of the assets or stock of an operating
subsidiary of the Company, other than as security for obligations of the
Company, or the sale or transfer of substantially all of the assets of an
operating division of the Company or its subsidiaries, other than as security
for obligations of the Company. On February 26, 1997,
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the Company transferred to a third party the assets of the Decision Support
Division of Medaphis Healthcare Information Technology Company, a wholly owned
subsidiary of the Company. On April 11, 1997, Mr. Spalding resigned as Executive
Vice President of the Company. As a result of the change in control of the
Decision Support Division and Mr. Spalding's subsequent termination of
employment, the outstanding principal balance of the Deferred Bonus Note was
canceled and no amount remains payable thereunder. Mr. Spalding incurred
approximately $137,000 in additional income tax liability as a result of the
cancellation of the Deferred Bonus Note, all of which was reimbursed by the
Company.
In January 1997, the Company and Jerome H. Baglien, the Company's former
Senior Vice President and Chief Financial Officer, entered into a three-year
employment agreement which contains certain non-competition and nonsolicitation
provisions. Pursuant to that agreement, Mr. Baglien is to receive a base salary
of $250,000 per year (subject to adjustments by any increases given in the
normal course of business), and is entitled to an incentive compensation payment
equal to 80% of his base salary, subject to achievement of certain performance
objectives set by the Board. Mr. Baglien is entitled to reimbursement of certain
expenses, including relocation expenses, and is also entitled to receive an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. Upon early termination of Mr. Baglien's employment
by the Company other than for cause or by Mr. Baglien for "good reason," the
Company is obligated to continue to pay Mr. Baglien his annual salary and to
cover him under certain welfare plans as if his employment had not been
terminated. Mr. Baglien also received options to purchase up to 250,000 shares
of Common Stock. In June 1997, the Company and Mr. Baglien entered into a letter
agreement in which the Company agreed that if Mr. Baglien remained employed by
the Company on December 31, 1997, then the Company would pay him a special one
time bonus for 1997 in the amount of $187,500. Mr. Baglien resigned from his
position with the Company in January 1998. See also "Management
Compensation -- Employment Agreements."
In February 1997, the Company and Daniel S. Connors, Jr., the Company's
former Senior Vice President, Personnel and Administration, entered into a
two-year employment agreement which contains certain non-competition and
non-solicitation provisions. Pursuant to that agreement, the Company agreed to
pay Mr. Connors a base salary of $150,000 per year (subject to adjustments by
any increases given in the normal course of business), and an incentive
compensation payment under the Company's incentive compensation plan of up to
40% of his base salary. The Company also agreed to reimburse Mr. Connors for
certain expenses, including relocation expenses, and also to reimburse him an
amount equal to any federal and state income taxes payable by him as a result of
such expense reimbursement. The Company loaned Mr. Connors $75,000 for the
purpose of obtaining a Georgia residence, the amount of which was to be forgiven
on a pro-rata basis over a five-year period, provided that Mr. Connors remained
employed by the Company. The agreement provides that in the event Mr. Connor's
employment is terminated by the Company without cause, the Company will remain
subject to its obligations under the agreement as if Mr. Connors remained
employed for the balance of the agreement's two-year term. Mr. Connors also
received options to purchase up to 50,000 shares of Common Stock. In June 1997,
the Company and Mr. Connors entered into a letter agreement in which the Company
agreed that if Mr. Connors remained employed by the Company on December 31,
1997, then the Company would pay him a special one time bonus for 1997 in the
amount of $112,500. Mr. Connors resigned from his position with the Company in
September 1997.
In February 1997, the Company and C. James Schaper, an Executive Vice
President of the Company, entered into a three-year employment agreement which
contains certain non-competition, non-solicitation and change in control
provisions. Pursuant to that agreement, Mr. Schaper received a signing bonus of
$100,000, and is to receive a base salary of $250,000 per year (subject to
adjustments by any increases given in the normal course of business), and is
entitled to an incentive compensation payment equal to 80% of his base salary,
payable at the discretion of the Board. At the end of the first year of the
agreement, Mr. Schaper is eligible to receive an additional payment of $100,000.
In the event Mr. Schaper's employment is terminated by the Company without
cause, the Company will remain subject to its obligations under the agreement as
if Mr. Schaper remained employed for the balance of the agreement's three-year
term. In the event that Mr. Schaper elects to resign from the Company following
a change in control of the Company, he is entitled to receive a severance
payment equal to the greater of one year of salary continuation at his then
current base
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salary or the amount of the payments due and owing to him through the remaining
term of the agreement. A "change in control" is generally defined in the
agreement as any consolidation, merger, reorganization or other transaction in
which the Company is not the surviving entity or the sale of a substantial
portion of the Company's assets. Mr. Schaper also received options to purchase
up to 250,000 shares of Common Stock. In June 1997, the Company and Mr. Schaper
entered into a letter agreement in which the Company agreed that if Mr. Schaper
remained employed by the Company on December 31, 1997, then the Company would
pay him a special one time bonus for 1997 in the amount of $187,500. See also
"Management Compensation -- Employment Agreements."
In April 1997, the Company and Harvey Herscovitch, the Senior Vice
President, Strategy and Organization of the Company, entered into a two-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Herscovitch is
to receive a base salary of $140,000 per year (subject to adjustments by any
increases given in the normal course of business), and is entitled to an
incentive compensation payment equal to 40% of his base salary, payable at the
discretion of the Board. Mr. Herscovitch is also entitled to a housing allowance
and to reimbursement of certain commuting expenses. In the event Mr.
Herscovitch's employment is terminated by the Company without cause, the Company
will remain subject to its obligations under the agreement as if Mr. Herscovitch
remained employed for the balance of the agreement's two-year term. In the event
that Mr. Herscovitch elects to resign from the Company following a change in
control of the Company, he is entitled to receive a severance payment equal to
the greater of one year of salary continuation at his then current base salary
or the amount of the payments due and owing to him through the remaining term of
the agreement. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or the sale of a substantial portion of the
Company's assets. Mr. Herscovitch also received options to purchase up to 40,000
shares of Common Stock. In June 1997, the Company and Mr. Herscovitch entered
into a letter agreement in which the Company agreed that if Mr. Herscovitch
remained employed by the Company on December 31, 1997, then the Company would
pay him a special one time bonus for 1997 in the amount of $105,000. See also
"Management Compensation -- Employment Agreements."
In July 1997, the Company and Randolph L. M. Hutto, the Executive Vice
President, General Counsel and Secretary of the Company, entered into a
three-year employment agreement which contains certain non-competition,
non-solicitation and change in control provisions. Pursuant to that agreement,
Mr. Hutto received a signing bonus of $100,000 (structured as a loan to be
forgiven in the event Mr. Hutto remains employed by the Company on the first
anniversary of the agreement), and is to receive a base salary of $250,000 per
year (subject to adjustments by any increases given in the normal course of
business). Mr. Hutto also is entitled to an incentive compensation payment equal
to 80% of his base salary, payable at the discretion of the Board; provided,
however, that the payment of such incentive compensation for 1997 is guaranteed,
and is to be pro-rated based upon the number of months that Mr. Hutto is
employed by the Company during 1997. Upon early termination of Mr. Hutto's
employment by the Company other than for cause or by Mr. Hutto for "good
reason," Mr. Hutto is entitled to elect a severance payment equal to two years
of salary and benefit continuation, or his then current monthly salary
multiplied by the number of months remaining in the initial term of the
agreement, in each case excluding any incentive bonus payments. In the event Mr.
Hutto's employment by the Company is terminated in connection with a change in
control of the Company, he is entitled to receive a severance payment equal to
two years of salary and benefits, including incentive bonus payments. A "change
in control" is generally defined in the agreement as any consolidation, merger,
reorganization or other transaction in which the Company is not the surviving
entity or certain changes in the composition of the Company's Board of
Directors. Mr. Hutto also received options to purchase up to 250,000 shares of
Common Stock. See also "Management Compensation -- Employment Agreements."
In January 1998, the Company and Allen W. Ritchie, the Executive Vice
President and Chief Financial Officer of the Company, entered into a three-year
employment agreement which contains certain non-competition, non-solicitation
and change in control provisions. Pursuant to that agreement, Mr. Ritchie is to
receive a base salary of $300,000 per year, subject to adjustments in the normal
course of business, and he is entitled to an incentive compensation payment of
up to 80% of his base salary, payable at the discretion of the
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Board. Upon early termination of Mr. Ritchie's employment by the Company other
than for cause or by Mr. Ritchie for "good reason," Mr. Ritchie is entitled to
elect a severance payment equal to two years of salary and benefit continuation,
or his then current monthly salary multiplied by the number of months remaining
in the initial term of the agreement, in each case excluding any incentive bonus
payments. In the event Mr. Ritchie's employment by the Company is terminated in
connection with a change in control of the Company, he is entitled to receive a
severance payment equal to two years of salary and benefits, including incentive
bonus payments. A "change in control" is generally defined in the agreement as
any consolidation, merger, reorganization or other transaction in which the
Company is not the surviving entity or certain changes in the composition of the
Company's Board of Directors. Mr. Ritchie is also to receive options to purchase
up to 300,000 shares of Common Stock. See also "Management
Compensation -- Employment Agreements."
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of December 31, 1997,
concerning each person known to the Board to be a "beneficial owner," as such
term is defined by the rules of the Securities and Exchange Commission, of more
than 5% of the outstanding shares of the Common Stock.
SHARES OF COMMON PERCENT
STOCK BENEFICIALLY OF
NAME AND ADDRESS OWNED(1) CLASS
---------------- ------------------ -------
Ardsley Advisory Partners and Philip J. Hempleman(2)........ 7,590,000 10.36%
646 Steamboat Road, Greenwich, Connecticut 06830
NFT Ventures, Inc.(3)....................................... 4,436,205 6.06%
899 W. Center Street, Orem, Utah 84057
- ---------------
(1) See Note (1) under "Management Common Stock Ownership."
(2) The information regarding Ardsley Advisory Partners and Philip J. Hempleman
is given in reliance upon a Schedule 13G filed by such stockholders on or
about February 5, 1998 with the Commission.
(3) Includes 4,436,205 shares as to which NFT Ventures, Inc. ("NFT") has shared
voting and shared investment power. The information regarding NFT is given
in reliance upon a Schedule 13D filed by such stockholder on or about May
17, 1996 with the Commission. See "Certain Transactions."
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DESCRIPTION OF NEW CREDIT FACILITY
Concurrently with the closing of the offering of the Old Notes, the Company
entered into the New Credit Facility with certain financial institutions as
lenders (the "Lenders"), DLJ Capital Funding, Inc. as syndication agent and
Wachovia Bank, N.A. as administrative agent. Donaldson, Lufkin & Jenrette
Securities Corporation acted as arranger (the "Arranger"). All existing and
future material domestic subsidiaries of the Company have guaranteed and will
guarantee the indebtedness under the New Credit Facility. The following is a
summary of the material terms and conditions of the New Credit Facility and is
subject to the provisions of the New Credit Facility.
GENERAL
The New Credit Facility consists of a three-year $100 million revolving
credit facility (the "Revolver"). Amounts outstanding under the Revolver will be
due and payable in full on February 20, 2001. Subfacilities for letters of
credit ($10 million) and for swingline (same day) loans ($7.5 million) are also
available under the Revolver. The Revolver is available in multiple drawings
from time to time, subject to certain limitations, including the limitation of a
borrowing base based on the Company's eligible billed and unbilled receivables.
Advances under the Revolver may be used to finance working capital and other
general corporate purposes of the Company and its subsidiaries, including
acquisitions agreed to by the Lenders.
INTEREST RATES; FEES
Amounts outstanding under the Revolver will bear interest, at the Company's
option, at either LIBOR (adjusted for any reserves) plus a specified margin
(2.5% at closing) ranging from 1.0% to 2.75% (based on the ratio of the
Company's debt to its EBITDA (as such term will be defined in the New Credit
Facility (the "Leverage Ratio")) for interest periods of 1, 2, 3 or 6 months, or
the Base Rate, which will be determined by reference to, among other things, the
administrative agent's reference rate, again, plus a specified margin (1.5% at
closing) ranging from 0% to 1.75% based on the Leverage Ratio.
Interest on the amounts outstanding under the Revolver bearing interest at
the Base Rate will be payable quarterly in arrears. Interest on amounts
outstanding under the Revolver bearing interest based on LIBOR will be payable
in arrears at the end of the applicable interest period and every three months,
where the applicable interest period exceeds three months.
The Company will pay a commitment fee on the unused portion of the Revolver
which will be payable quarterly in arrears. The amount of the commitment fee
will be determined based on the Leverage Ratio and will range from 0.25% to 0.5%
per annum (0.5% at closing). The New Credit Facility also provides for payment
of fees with respect to letters of credit issued thereunder, plus additional
up-front or funding fees, as well as an additional commitment fee of 0.25% on up
to a certain amount of the unused portion of the Revolver.
MANDATORY PREPAYMENTS
The Revolver is subject to customary mandatory prepayments, including the
following: (i) 100% of the net cash proceeds of certain permitted asset sales;
(ii) 100% of the net cash proceeds from certain types of permitted debt
offerings and (iii) 50% of the net cash proceeds from certain types of permitted
equity offerings. Such mandatory prepayments do not require corresponding
commitment reductions. In addition, the Revolver is subject to mandatory
prepayments to the extent outstanding extensions of credit thereunder exceed the
borrowing base at any time.
COLLATERAL
All amounts owing under the New Credit Facility are secured by a security
interest in substantially all of the material assets of the Company and its
domestic subsidiaries (including, without limitation, a pledge of the capital
stock of such subsidiaries).
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COVENANTS
The obligations of the Lenders under the New Credit Facility are subject to
the satisfaction of certain conditions precedent, including, without limitation,
the absence of a material adverse change in the business or affairs of the
Company. The Company and each of its existing and future subsidiaries are
subject to certain affirmative and negative covenants contained in the New
Credit Facility, including without limitation, covenants that restrict, subject
to certain specified exceptions: (i) the incurrence of additional indebtedness
and other obligations and the granting of additional liens; (ii) mergers,
acquisitions, investments and acquisitions and dispositions of assets; (iii) the
incurrence of capitalized lease obligations; (iv) dividends and other equity
payments; (v) prepayments or repurchase of other indebtedness and amendments to
certain agreements governing indebtedness, including the Indenture and the
Notes; (vi) engaging in transactions with affiliates and formation of
subsidiaries; (vii) the use of proceeds; and (viii) changes of lines of
business. There are also covenants relating to compliance with ERISA and
environmental and other laws, payment of taxes, maintenance of corporate
existence and rights, maintenance of insurance and financial reporting, as well
as other customary covenants for this type of financing. Certain of these
covenants may be more restrictive than those set forth in the Indenture. In
addition, the New Credit Facility requires the Company to maintain compliance
with certain specified financial covenants, including covenants relating to
maximum Leverage Ratio, minimum interest coverage ratio, minimum net worth, and
minimum EBITDA. The New Credit Facility restricts the refinancing, prepayment or
defeasance of the Notes.
EVENTS OF DEFAULT
The New Credit Facility includes customary events of default, including
without limitation, bankruptcy, a change of control (as defined in the New
Credit Facility) of the Company, the invalidity of guarantees or security
documents under the New Credit Facility, and cross-default to other indebtedness
of the Company and its subsidiaries. The occurrence of any of such events of
default could result in acceleration of the Company's obligations under the New
Credit Facility and foreclosure on the collateral securing such obligations,
which could have a material adverse effect on holders of the Notes.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued under an Indenture
(the "Indenture") between the Company and State Street Bank and Trust Company,
as trustee (the "Trustee"), dated February 20, 1998. The terms of the New Notes
are identical in all material respects to the respective terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Old Securities and (ii)
holders of the New Notes will generally not be entitled to certain rights,
including the payment of Liquidated Damages (as defined), pursuant to the
Registration Rights Agreement. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. In the event that the Exchange Offer is
consummated, any Old Notes which remain outstanding after consummation of the
Exchange Offer and the New Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount thereof have taken certain actions or
exercised certain rights under the Indenture. The following summary of the
material provisions of the Indenture and the Registration Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Indenture and the Registration Rights Agreement, including the definitions
therein of certain terms used below. Copies of the Indenture and Registration
Rights Agreement are available as set forth below under "-- Additional
Information". The definitions of certain terms used in the following summary are
set forth below under "-- Certain Definitions." For purposes of this summary,
the term "Company" refers only to Medaphis Corporation and not to any of its
Subsidiaries.
The Old Notes are and the New Notes will be general unsecured obligations
of the Company and rank and will rank pari passu in right of payment with all
current and future unsecured senior indebtedness of the Company. The Old Notes
are and the New Notes will be guaranteed by the Subsidiary Guarantors, which
consist of all of the Company's present and future Restricted Subsidiaries,
other than Foreign Subsidiaries. See "-- Subsidiary Guarantees." The Subsidiary
Guarantees are general unsecured obligations of the Subsidiary Guarantors and
rank pari passu in right of payment with all current and future unsecured senior
indebtedness of the Subsidiary Guarantors. However, the Notes and the Subsidiary
Guarantees will be effectively subordinated to secured indebtedness of the
Company and the Subsidiary Guarantors, including borrowings under the New Credit
Facility, which is secured by a first priority lien on substantially all of the
material assets of the Company and the Subsidiary Guarantors. As of February 27,
1998, the Company and the Subsidiary Guarantors had approximately $44 million of
secured indebtedness outstanding and had approximately $45 million of additional
borrowing ability under the New Credit Facility.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture, and the Subsidiary Guarantee
of any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary
will be released in accordance with the provisions of the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $175.0 million and
will mature on February 15, 2005. Interest on the Notes will accrue at the rate
of 9 1/2% per annum and will be payable semi-annually in arrears on February 15
and August 15, commencing on August 15, 1998, to Holders of record on the
immediately preceding February 1 and August 1. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal of,
premium, if any, interest and Liquidated Damages, if any, on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the
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Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments of principal, premium, if any, interest and
Liquidated Damages, if any, with respect to Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in registered form, in denominations of $1,000
and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") by the Subsidiary Guarantors. The
Subsidiary Guarantees are general unsecured obligations of the Subsidiary
Guarantors and will rank pari passu in right of payment with all current and
future unsecured senior indebtedness of the Subsidiary Guarantors. However, the
Subsidiary Guarantees will be effectively subordinated to secured indebtedness
of the Subsidiary Guarantors, including guarantees of borrowings under the New
Credit Facility which will be secured by a first priority lien on substantially
all of the material assets of the Subsidiary Guarantors. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee will be limited in a manner
intended to avoid it being deemed to constitute a fraudulent conveyance under
applicable law. See, however, "Risk Factors -- Fraudulent Conveyance."
Except for a merger or consolidation in which a Subsidiary Guarantor is
sold and its Subsidiary Guarantee is released in compliance with the provisions
of the next paragraph, the Indenture provides that no Subsidiary Guarantor may
consolidate with or merge with or into, another corporation, Person or entity,
whether or not affiliated with such Subsidiary Guarantor, unless (i) the Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor
under its Subsidiary Guarantee and the Indenture pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) unless such merger or consolidation involves only
Restricted Subsidiaries and the surviving Person is a Subsidiary Guarantor, the
Company would be permitted by virtue of the Company's pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described below under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor, or the designation of a Subsidiary Guarantor as an
Unrestricted Subsidiary, then such Subsidiary Guarantor (in the event of a sale
or other disposition, by way of such a merger, consolidation or otherwise, of
all of the capital stock of such Subsidiary Guarantor, or designation of a
Subsidiary Guarantor as an Unrestricted Subsidiary) or the corporation acquiring
the property (in the event of a sale or other disposition of all of the assets
of such Subsidiary Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "-- Certain Covenants -- Asset Sales."
The Company conducts certain of its foreign operations through Foreign
Subsidiaries, which do not guarantee the Notes. The Company's ability to meet
its cash obligations may in part depend upon the ability of such Foreign
Subsidiaries and any future Foreign Subsidiaries to make cash distributions to
the Company. Furthermore, any right of the Company to receive the assets of any
such Foreign Subsidiary upon such Foreign Subsidiary's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in the distribution of the proceeds of those assets) effectively
will be subordinated by operation of law to the claims of such Foreign
Subsidiary's creditors (including trade creditors) and holders of its preferred
stock, except to the extent that the Company or its Restricted Subsidiaries are
recognized as creditors or preferred stockholders of such Foreign Subsidiary, in
which case the claims of the Company or its Restricted Subsidiaries would still
be subordinate to any indebtedness or preferred stock of such Foreign
Subsidiaries senior in right of payment to that held by the Company or its
Restricted Subsidiaries.
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The financial statements of the Subsidiary Guarantors have not been
presented as all subsidiaries, except for certain inconsequential foreign
subsidiaries, have provided guarantees and the Parent does not have any
significant operations or assets, separate from its investment in its
subsidiaries.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the
Company's option prior to February 15, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 or more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on of the years indicated below:
YEAR PERCENTAGE
---- ----------
2002........................................................ 104.750%
2003........................................................ 102.375
2004 and thereafter......................................... 100.000
Notwithstanding the foregoing, at any time or from time to time on or prior
to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of Notes originally issued under the Indenture at a redemption
price of 109.5% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the redemption date, with
net cash proceeds of one or more Equity Offerings; provided that at least $100.0
million in aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption; and provided, further, that such
redemption shall occur within 90 days of the date of the closing of such Equity
Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided that no
Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its address set forth
in the register of Holders of Notes. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest and
Liquidated Damages, if any, cease to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes. However, in certain circumstances the
Company may be required to offer to purchase Notes as set forth under
"-- Certain Covenants -- Change of Control" and "-- Certain Covenants -- Asset
Sales."
CERTAIN COVENANTS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 15 Business Days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or
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transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. To the extent that any applicable securities laws or
regulations conflict with the terms hereof, the Company shall comply with such
laws or regulations and shall not be deemed to have breached its obligations
under the Indenture or Notes by virtue thereof.
On or before the Change of Control Payment Date, the Company will, to the
extent lawful, (1) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the paying
agent an amount equal to the Change of Control Payment in respect of all Notes
or portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The paying agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control occurs, there can be no assurance that the Company
will have sufficient funds to, or otherwise be able to, make the Change of
Control Payment. See "Risk Factors -- Potential Failure to Make Payment Upon a
Change of Control."
The Company's obligation to make a Change of Control Offer may deter a
third party from seeking to acquire the Company in a transaction that could
constitute a Change of Control.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee in the case of any Asset Sale for
which the Company or any of its Restricted Subsidiaries receives consideration
in excess of $15.0 million) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
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Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation or other agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are converted by the Company or such Restricted Subsidiary
within 90 days following the closing of the Asset Sale into cash (to the extent
of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days of the receipt of any Net Proceeds from an Asset Sale, the
Company and its Restricted Subsidiaries may apply such Net Proceeds, at their
option, (a) to repay secured Indebtedness (and, in the case of any such
Indebtedness that was borrowed under a revolving credit line, to correspondingly
reduce commitments with respect thereto), or (b) to the acquisition of a
controlling interest in another business, the making of a capital expenditure or
the acquisition of other long-term assets, in each case, in the same or a
related or complementary line of business as the Company or any of its
Restricted Subsidiaries was engaged in on the date of the Indenture (as
determined in good faith by the Company). Pending the final application of any
such Net Proceeds, the Company may temporarily reduce the revolving credit lines
under the New Credit Facility (without any corresponding commitment reduction)
or otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds."
Not later than 30 days after any date (an "Asset Sale Offer Trigger Date")
that the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company
shall mail to each holder of Notes at such holder's registered address a notice
stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the
Company is offering to purchase the maximum principal amount of Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash equal to 100%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Asset Sale Offer Purchase
Date"), which shall be a business day, specified in such notice, that is not
earlier than 30 days or later than 60 days from the date such notice is mailed;
(ii) the amount of accrued and unpaid interest and Liquidated Damages, if any,
thereon as of the Asset Sale Offer Purchase Date; (iii) that any Note not
tendered will continue to accrue interest and Liquidated Damages, if any; (iv)
that, unless the Company defaults in the payment of the purchase price for the
Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment
pursuant to the Asset Sale Offer shall cease to accrue interest and Liquidated
Damages, if any, after the Asset Sale Offer Purchase Date; (v) the procedures,
consistent with the Indenture, to be followed by a holder of Notes in order to
accept an Asset Sale Offer or to withdraw such acceptance; and (vi) such other
information as may be required by the Indenture and applicable laws and
regulations.
On the Asset Sale Offer Purchase Date, the Company will: (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale; (ii) deposit with the paying agent the aggregate purchase
price of all Notes or portions thereof accepted for payment and any accrued and
unpaid interest and Liquidated Damages, if any, on such Notes as of the Asset
Sale Offer Purchase Date; and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Asset Sale Offer. The paying agent
will promptly mail to each holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Note plus any accrued and
unpaid interest and Liquidated Damages, if any, thereon, and the Trustee will
promptly authenticate and mail to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part will be
promptly returned to the holder of such Note. On and after an Asset Sale Offer
Purchase Date, interest and Liquidated Damages, if any, will cease to accrue on
the Notes or portions thereof accepted for payment, unless the Company defaults
in the payment of the purchase price therefor. The Company will announce the
results of the Asset Sale Offer to holders of the Notes on or as soon as
practicable after the Asset Sale Offer Purchase Date. To the extent that the
aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the Aggregate principal amount of Notes
surrendered by Holders thereof
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exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be
purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other applicable
securities laws and regulations in connection with any Asset Sale Offer. To the
extent that any applicable securities laws or regulations conflict with the
terms hereof, the Company shall comply with such laws or regulations and shall
not be deemed to have breached its obligations under the Indenture or Notes by
virtue thereof.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or in connection with any settlement or resolution of any
claims against or litigation involving the Company, but not including Qualified
Insurance Payments) or to the direct or indirect holders of the Company's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions or other payments payable in Equity
Interests (other than Disqualified Stock) of the Company or any successor under
the Indenture); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company; (iii) purchase,
redeem, defease or otherwise acquire or retire for value any Subordinated
Indebtedness prior to its Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in, and not otherwise
permitted by, clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the provisions of the first paragraph of the covenant described below under
the caption "-- Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v) (but only to the extent of the
dividends paid to the Company or its Wholly Owned Restricted Subsidiaries
pursuant to such clause (v)) and (vii) of the next succeeding paragraph),
is less than the sum of (1) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date of the Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (2) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock), plus (3) to
the extent that any Restricted Investment that was made after the date of
the Indenture is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (4) 50% of any cash
dividends received by the Company or a Wholly Owned Restricted Subsidiary
or a Subsidiary Guarantor after the date of the Indenture from an
Unrestricted Subsidiary of the Company, to the extent that such dividends
were not otherwise included in
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Consolidated Net Income of the Company for such period, plus (5) to the
extent that any Unrestricted Subsidiary is redesignated as a Restricted
Subsidiary after the date of the Indenture, the lesser of (A) the fair
market value of the Company's and its Restricted Subsidiaries' Investment
in such Subsidiary as of the date of such redesignation or (B) the fair
market value of the Company's and its Restricted Subsidiaries' Investment
in such Subsidiary as of the date on which such Subsidiary was originally
designated as an Unrestricted Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness or Equity Interests of the
Company or any Restricted Subsidiary in exchange for, or, so long as no
Default or Event of Default shall have occurred and be continuing, out
of the net cash proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of, other Equity Interests of the
Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph;
(iii) so long as no Default or Event of Default shall have occurred
and be continuing, the defeasance, redemption, repurchase or other
acquisition of Subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness;
(iv) so long as no Default or Event of Default shall have occurred
and be continuing, the retirement, repurchase or redemption of any
shares of Disqualified Stock or any Subordinated Indebtedness by
conversion into, or by exchange for, shares of Disqualified Stock, or
out of the net cash proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of other shares of Disqualified
Stock; provided that (a) such newly issued Disqualified Stock is not
subject to mandatory redemption earlier than the Stated Maturity of the
Disqualified Stock or Subordinated Indebtedness being retired,
repurchased or redeemed, (b) such Disqualified Stock is in an aggregate
liquidation preference that is equal to or less than the sum of (x) the
aggregate liquidation preference of the Disqualified Stock being retired
or the aggregate principal amount of the Subordinated Indebtedness being
repurchased or redeemed, (y) the amount of accrued and unpaid dividends
or interest, if any, and premiums owed, if any, on the Disqualified
Stock or Subordinated Indebtedness being retired, repurchased or
redeemed and (z) the amount of customary fees, expenses and costs
related to the incurrence of such Disqualified Stock and (c) such newly
issued Disqualified Stock is incurred by the same Person that initially
incurred the Disqualified Stock or Subordinated Indebtedness being
retired, repurchased or redeemed, except that the Company may incur
Disqualified Stock to refund or refinance Disqualified Stock of any
Wholly Owned Subsidiary of the Company or any Subsidiary Guarantor;
(v) the payment of any dividend or other distribution by a
Restricted Subsidiary of the Company to the holders of any class of its
Equity Interests on a pro rata basis;
(vi) so long as no Default or Event of Default shall have occurred
and be continuing, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any director, officer or
employee (or any of its Restricted Subsidiaries') pursuant to any
director, officer or employee equity subscription agreement, stock
option agreement, employment agreement or employee benefit plan or
similar plan or arrangement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $1.0 million in any one fiscal year;
(vii) repurchases of Equity Interests deemed to occur upon the
exercise of stock options or warrants upon the surrender of Equity
Interests to pay the exercise price and any applicable taxes with
respect to such stock options or warrants; and
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(viii) so long as no Default or Event of Default shall have
occurred and be continuing, Restricted Payments not otherwise permitted
hereby in an aggregate amount not to exceed $10.0 million since the date
of the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by the Subsidiary
Guarantors be transferred to any Subsidiary other than a Restricted Subsidiary.
For purposes of making such determination, all Investments made by the Company
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the greatest of
(x) the net book value of such Investments at the time of such designation and
(y) the fair market value of such Investments at the time of such designation
(as determined in good faith by the Company's Board of Directors). Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment with a fair market value in excess of $1.0 million
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $10.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not, and will not permit any of
its Subsidiaries to, issue any Disqualified Stock; provided, however, that the
Company and the Subsidiary Guarantors may incur Indebtedness (including Acquired
Indebtedness) and the Company and the Subsidiary Guarantors may issue shares of
Disqualified Stock if (A) the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.5 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom and the acquisitions in connection
therewith), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period, and (B) no Default or Event of Default shall have occurred
and be continuing at the time or as a consequence of the incurrence of such
Indebtedness or the issuance of such Disqualified Stock.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and Subsidiary Guarantors of
Indebtedness under the New Credit Facility and the issuance and creation of
letters of credit and banker's acceptances thereunder and any related
reimbursement obligation (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and its Restricted Subsidiaries thereunder) in an aggregate amount not to
exceed $100.0 million outstanding at any one time under this subsection
(i), less the lesser of $50.0 million and the aggregate amount of all Net
Proceeds of Asset Sales that have
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been applied since the date of the Indenture to reduce permanently the
commitments with respect to such Indebtedness pursuant to the covenant
described under the caption "-- Asset Sales;"
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Subsidiary Guarantors of the Subsidiary
Guarantees in an aggregate principal amount not to exceed $175.0 million;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
of the Company or such Restricted Subsidiary that was permitted by the
Indenture to be incurred at the time it was incurred;
(v) the incurrence by the Company, any of the Subsidiary Guarantors or
any Restricted Subsidiary of intercompany Indebtedness between or among the
Company, any of the Subsidiary Guarantors or any Restricted Subsidiary;
provided, however, that (i) if the Company or a Subsidiary Guarantor is the
obligor on such Indebtedness, such Indebtedness is unsecured and
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and the Subsidiary Guarantees, as the case may be, and
(ii)(A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company, a Subsidiary Guarantor or a Restricted Subsidiary and (B) any sale
or other transfer of any such Indebtedness to a Person that is not either
the Company, a Subsidiary Guarantor or a Restricted Subsidiary shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company, such Subsidiary Guarantor or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (v);
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that was permitted by the terms of the Indenture to be
incurred at the time it was incurred; provided, that the notional principal
amount of such Hedging Obligations at the time such Hedging Obligations
were incurred do not exceed the principal amount of Indebtedness to which
such Hedging Obligations relate;
(vii) the guarantee by the Company or any of the Subsidiary Guarantors
of Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred at the time it was incurred by another
provision of this covenant;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute the incurrence of Indebtedness (and Liens, if any,
securing such Indebtedness) by a Restricted Subsidiary of the Company; or
(ix) the incurrence by the Company or any of the Subsidiary Guarantors
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Subsidiary, in an aggregate principal
amount not to exceed $20.0 million at any time outstanding; or
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (x), not to exceed
$10.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described above or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company shall, in its sole
discretion, classify such item of Indebtedness in any manner that complies with
this covenant and such item of Indebtedness will be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first paragraph
hereof.
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Accrual of interest, the accretion of accreted value and the payment of interest
in the form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Liens of any kind (other than Permitted Liens) upon any
property or assets of the Company or any such Restricted Subsidiary or any
shares of stock or debt of any such Restricted Subsidiary unless (i) if such
Lien secures Indebtedness which is pari passu with the Notes, then the Notes are
secured on an equal and ratable basis with the obligations so secured until such
time as such obligation is no longer secured by a Lien or (ii) if such Lien
secures Subordinated Indebtedness, any such Lien will be subordinated to a Lien
granted to the holders of the Notes in the same collateral as that securing such
Lien to the same extent as such Subordinated Indebtedness is subordinated to the
Notes.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to (i) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries,
(iii) guarantee any Indebtedness of the Company or any other Restricted
Subsidiary or the Company or (iv) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries. However, the foregoing
restrictions will not apply to encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the New Credit Facility as in effect as of the date of the Indenture, and
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are not materially more restrictive with respect to
such dividend and other payment restrictions than those contained in the New
Credit Facility as in effect on the date of the Indenture, (c) the Indenture,
the Notes and the Subsidiary Guarantees, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or its Subsidiaries, or the property or assets of the Person or its
Subsidiaries, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred at the
time it was incurred, (f) customary non-assignment provisions in leases and
other agreements entered into in the ordinary course of business, including
licenses of intellectual property, (g) purchase money obligations for property
acquired in the ordinary course of business, (h) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are not materially more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) any agreement for the sale of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale or (j)
any Permitted Liens.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the
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District of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under all
outstanding Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "-- Incurrence
of Indebtedness and Issuance of Disqualified Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable in
any material respect to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that the following shall not be
deemed to be Affiliate Transactions: (1) transactions pursuant to the New Credit
Facility; (2) any employment agreement or other employee benefit plan or
arrangement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business, (3) transactions between or among the Company
and/or its Restricted Subsidiaries and (4) Restricted Payments and Permitted
Investments that are permitted by the provisions of the Indenture described
above under the caption "-- Restricted Payments."
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback transaction
(other than a sale and leaseback transaction with respect to any of the Excluded
Properties); provided that the Company or such Restricted Subsidiary may enter
into a sale and leaseback transaction if (i) the Company or such Restricted
Subsidiary could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Disqualified Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described above under the
caption "-- Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee if such proceeds exceed $15.0 million) of the property
that is the subject of such sale and leaseback transaction and (iii) the
transfer of assets in such sale and leaseback transaction is permitted by, and
the Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption "-- Asset Sales."
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary after the
date of the Indenture (other than a Foreign Subsidiary, unless the Company
elects to have a Foreign Subsidiary which is a Restricted Subsidiary guarantee
the Notes), then such newly acquired or created Restricted Subsidiary shall
execute a Subsidiary Guarantee and deliver an opinion of counsel, in accordance
with the terms of the Indenture.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) copies of all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) copies of all current reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Subsidiary Guarantors have agreed that, for so
long as any Old Notes remain outstanding, they will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes;
(ii) default in payment when due of the principal of or premium, if
any, on the Notes;
(iii) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "Certain
Covenants -- Change of Control," "Certain Covenants -- Asset Sales,"
"Certain Covenants -- Restricted Payments" or "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock";
(iv) failure by the Company or any of its Subsidiaries for 60 days
after receipt of notice to comply given by the Trustee or the holders of at
least 25% in principal amount of Notes then outstanding to comply with any
of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which
there is issued or by which there is be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries, other than Indebtedness owed to the Company
or a Restricted Subsidiary) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, on such
Indebtedness after the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more, and such default has not
been cured, waived or postponed pursuant to an agreement with the holders
of such Indebtedness within 30 days after written notice as provided in the
Indenture, or such acceleration shall not be rescinded or annulled within
10 days after written notice as provided in the Indenture;
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(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million to the extent
that such judgments are not covered by insurance, which judgments remain
unpaid, undischarged or unstayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; and
(viii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect in any material
respect or any Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or an Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default or rescind an acceleration
and its consequences under the Indenture, except a continuing Default or Event
of Default in the payment of interest on, or the principal of, the Notes or an
acceleration based thereon.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within
five Business Days upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or the Subsidiary Guarantors, as such, shall have any liability for any
obligations of the Company or the Subsidiary Guarantors under the Notes, any
Subsidiary Guarantee or the Indenture, as applicable, or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes and the
Subsidiary Guarantees. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes and the Subsidiary Guarantees ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due solely
from the trust referred to below, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's and the
Subsidiary Guarantors' obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a
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Default or an Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and other insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or an Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the Company
or others; and (vii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, in the case of Officer's Certificate,
stating that all conditions precedent provided for in clauses (i)-(vi) have been
complied with, and, in the case of the opinion of counsel, that the conditions
precedent provided for in clauses (ii), (iii) and (v) have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes and the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Notes), and any
existing default or compliance with any provision of the Indenture, the Notes or
the Subsidiary Guarantees may be waived with
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the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase or, or tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter or waive the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
captions "Certain Covenants -- Change of Control" and "Certain
Covenants -- Asset Sales," which may be amended with the consent of the Holders
of at least a majority in principal amount of Notes then outstanding), (iii)
reduce the rate of or change the time for payment of interest on any Note, (iv)
waive a Default or an Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under the captions "Certain
Covenants -- Change of Control" and "Certain Covenants -- Asset Sales,") or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee together may amend or supplement the Indenture, the
Notes or a Subsidiary Guarantee to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, or sale of all or substantially
all of the Company's assets, to provide for a release or assumption of a
Subsidiary Guarantee in compliance with the provisions of the Indenture, to make
any change that would provide any additional rights or benefits to the Holders
of Notes or that does not adversely affect the legal rights under the Indenture
of any such Holder, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture will provide that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Medaphis Corporation,
2700 Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, Attention:
Treasurer.
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BOOK-ENTRY, DELIVERY AND FORM
The Old Notes sold to Qualified Institutional Buyers initially were in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
were deposited with the Trustee, as custodian for The Depository Trust Company
("DTC"), and registered in the name of DTC or its nominee for credit to the
accounts of DTC's Direct and Indirect Participants (as defined below). The Old
Notes sold in offshore transactions in reliance on Regulation S, initially were
in the form of one or more temporary registered, global book-entry notes without
interest coupons (the "Regulation S Temporary Global Notes"). The Regulation S
Temporary Global Notes were deposited with the Trustee, as custodian for DTC, in
New York, New York and registered in the name of a nominee of DTC for credit to
the accounts of Indirect Participants participating in DTC through the Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). During the
40-day period commencing on the day after the original date on which the Old
Notes were issued (the "40-Day Restricted Period"), beneficial interests in the
Regulation S Temporary Global Note may be held only through Euroclear or CEDEL,
and, pursuant to DTC's procedures Indirect Participants that hold a beneficial
interest in the Regulation S Temporary Global Note will not be able to transfer
such interest to a person that takes delivery thereof in the form of an interest
in the U.S. Global Notes. Within a reasonable time after the expiration of the
40-Day Restricted Period, the Regulation S Temporary Global Notes will be
exchanged for one or more permanent global notes (the "Regulation S Permanent
Global Notes"; collectively with the Regulation S Temporary Global Notes, the
"Regulation S Global Notes") upon delivery to DTC of certification of compliance
with the transfer restrictions applicable to the Notes and pursuant to
Regulation S as provided in the Indenture. After the 40-Day Restricted Period,
(i) beneficial interests in the Regulation S Temporary Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
U.S. Global Notes and (ii) beneficial interests in the U.S. Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
Regulation S Permanent Global Notes. Upon consummation of the Exchange Offer,
the New Notes will be in the form of one or more registered global notes without
coupons (collectively, the "New Global Notes"). Upon issuance, the New Global
Notes will be deposited with the Trustee, as custodian for DTC, and registered
in the name of DTC or its nominee for credit to the account of DTC's Direct and
Indirect Participants. All registered global notes are referred to herein
collectively as "Global Notes."
Transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time. In addition, beneficial interests in the Regulation S Global Notes
and the U.S. Global Notes are subject to restrictions on transfer.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, including Euroclear and Cedel. Access to DTC's
system is also available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a Direct Participant
(collectively, the "Indirect Participants").
DTC has advised the Company that, pursuant to DTC's procedures, DTC will
maintain records of the ownership interests of Direct Participants in the Global
Notes and the transfer of ownership interests by and
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between Direct Participants. DTC will not maintain records of the ownership
interests of, or the transfer of ownership interests by and between, Indirect
Participants or other owners of beneficial interests in the Global Notes. Direct
Participants and Indirect Participants must maintain their own records of the
ownership interests of, and the transfer of ownership interests by and between,
Indirect Participants and other owners of beneficial interests in the Global
Notes.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "-- Transfers of Interests
in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company, the Subsidiary Guarantors
and the Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, if any, Liquidated Damages, if
any, and interest on Global Notes registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee as the registered holder
under the Indenture. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests in
any Global Note or (ii) any other matter relating to the actions and practices
of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the
Subsidiary Guarantors nor the Trustee will be liable for any delay by DTC or its
Direct Participants or Indirect Participants in identifying the beneficial
owners of the Notes, and the Company and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
The Global Notes trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default
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under the Notes, DTC reserves the right to exchange Global Notes (without the
direction of one or more of its Direct Participants) for legended Notes in
certificated form, and to distribute such certificated forms of Notes to its
Direct Participants. See "-- Transfers of Interests in Global Notes for
Certificated Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Direct Participants, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Subsidiary
Guarantors, or the Trustee shall have any responsibility for the performance by
DTC or its respective Direct and Indirect Participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if, with
respect to Regulation S Global Notes, the 40-Day Restricted Period has expired
and (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct and Indirect Participants and the DTC identify as being
the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear
restrictive legends unless the Certificated Note represents a beneficial
interest in the New Global Notes or the Company determines otherwise in
compliance with applicable law.
Neither the Company, the Subsidiary Guarantors nor the Trustee will be
liable for any delay by the holder of any Global Note or DTC in identifying the
beneficial owners of Notes, and the Company and the Trustee may conclusively
rely on, and will be protected in relying on, instructions from the holder of
the Global Note or DTC for all purposes.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Subsidiary Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchaser in the offering of the Old Notes,
entered into the Registration Rights Agreement, pursuant to which the Company
and the Subsidiary Guarantors agreed to file with the Commission a registration
statement with respect to the New Notes, of which this Prospectus forms a part
(the "Exchange Offer Registration Statement"). If (i) the Company and the
Subsidiary Guarantors are not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy or
(ii) any Holder of Transfer Restricted Securities notifies the Company prior to
the 20th day following consummation of the Exchange Offer that (a) it is
prohibited by law or Commission policy from participating in the Exchange Offer
or (b) that it may not resell the New Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and this Prospectus is not
appropriate or available for such resales or (c) that it is a broker-dealer and
owns Old Notes acquired directly from the Company or an affiliate of the
Company, the Company and the Subsidiary Guarantors will, subject to certain
conditions, file with the Commission a Shelf Registration Statement to cover
resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
an Old Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of this Prospectus, (iii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Act or may be sold
under Rule 144(k) under the Act.
The Registration Rights Agreement provides that (i) the Company and the
Subsidiary Guarantors will file the Exchange Offer Registration Statement with
the Commission on or prior to 60 days after the Closing Date, (ii) the Company
and the Subsidiary Guarantors will use their reasonable commercial efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its reasonable commercial
efforts to issue, on or prior to 30 Business Days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, the
Company and the Subsidiary Guarantors will use their reasonable commercial
efforts to file the Shelf Registration Statement with the Commission on or prior
to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 120 days
after such obligation arises. If (a) any such Registration Statement is not
filed with the Commission on or prior to the date specified for such filing, (b)
any of such Registration Statements is not declared effective by the Commission
on or prior to the date specified for such effectiveness (the "Effectiveness
Target Date"), (c) the Company fails to consummate the Exchange Offer within 30
Business Days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company and the Subsidiary Guarantors will pay
Liquidated Damages to each Holder of Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default,
in an amount equal to $.05 per week per $1,000 principal amount of Notes held by
such Holder. Liquidated Damages will be payable in the same manner and on the
same dates as to which interest on the Notes is payable to holders of record as
of the previous record dates for the payment of interest. The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company to the Global Note Holder by wire
transfer of immediately available funds and to Holders of Certificated
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Securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback, but excluding by way of granting or, or foreclosure upon, a Lien)
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, will be governed by the provisions of the Indenture described above under
the caption "Certain Covenants -- Change of Control" and/or the provisions
described above under the caption "Certain Covenants -- Merger, Consolidation or
Sale of Assets" and not by the provisions of the covenant described under the
caption "Certain Covenants -- Asset Sales"), whether in a single transaction or
a series of related transactions (a) that have a fair market value in excess of
$1,000,000 or (b) for Net Proceeds in excess of $1,000,000 and (ii) the issue or
sale by the Company or any of its Restricted Subsidiaries of Equity Interests of
any of the Company's Subsidiaries. Notwithstanding the foregoing, the following
items shall not be deemed to be Asset Sales: (i) a transfer of assets by the
Company to a Subsidiary Guarantor or by a Restricted Subsidiary to the Company
or to a Subsidiary Guarantor or by a Restricted Subsidiary that is not a
Subsidiary Guarantor to another Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Restricted Subsidiary to the Company or to a Subsidiary
Guarantor or an issuance of Equity Interests by a Restricted Subsidiary pro rata
to all of its holders of one or more classes of Equity Interests in a manner
that does not dilute the Equity Interests of the Company or such Subsidiary
Guarantor, as the case may be, (iii) a Restricted Payment that is permitted by
the covenant described above under the caption "-- Restricted Payments" or a
Permitted Investment, (iv) sales or exchanges of inventory in the ordinary
course of business, (v) sales or exchanges of obsolete, surplus or outdated
equipment or abandoned reengineering assets no longer used or useful in the
business of the Company and its Restricted Subsidiaries, (vi) leases and
subleases (and licenses and sublicenses) of assets that are not treated as
Capital Leases on the books and records of the Company and its Restricted
Subsidiaries, (vii) the issuance of Equity Interests of a Restricted Subsidiary
to officers, employees or directors pursuant to any employee stock purchase plan
or similar employee benefit plan or arrangement in the ordinary course of
business and (viii) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including cash in an
amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP.
"Attributable Debt" means in respect of a sale and leaseback transaction,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net base rental payments during the remaining
term of the
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lease included in such sale and leaseback transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any lender party to the
New Credit Facility or with any domestic commercial or investment bank having
capital and surplus in excess of $500 million, (iii) repurchase obligations with
a term of not more than 30 days for underlying securities of the types described
in clauses (i) and (ii) above entered into with any financial institution
meeting the qualifications specified in clause (ii) above, (iv) commercial paper
having a rating of at least P-1 or A-1 from Moody's Investors Service, Inc. or
Standard & Poor's Corporation, respectively, and in each case maturing within
six months after the date of acquisition and (v) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
(i)-(iv) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is currently exercisable or is exercisable
only upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares), or (iii) the first day on which a majority of the
members of the entire Board of Directors are not Continuing Directors. For
purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring Voting Stock of the Company will be
deemed to be a transfer of such portion of such Voting Stock as corresponds to
the portion of the equity of such entity that has been so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses or charges (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash
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expense that was paid in a prior period) of such Person and its Subsidiaries for
such period to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items (excluding any such non-cash item to the extent that it
represents a reversal of an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense) increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP, plus (vi) without duplication,
restructuring and other extraordinary and unusual charges in an amount not
greater than $93.1 million incurred during the year ended December 31, 19951997,
plus (vii) without duplication, any deferred financing charges that will be
taken in 1998 as a result of the offering of the Old Notes. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior governmental approval (unless such approval has been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
Medaphis' Current Reportcash to the referent Person or to a Wholly Owned Subsidiary thereof or to a
Subsidiary Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (unless
such approval has been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, except without duplication to the extent distributed to the Company or
one of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable for cash, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof for
cash, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any issuance of common stock by the Company
(excluding Disqualified Stock) that is registered pursuant to the Securities
Act, other than issuances on Form 8-KS-8 and issuances registered on Form S-4.
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"Excluded Properties" means the properties of the Company and its
Restricted Subsidiaries in the following locations: (i) Lawrenceville, Georgia,
(ii) Jacksonville, Florida, (iii) Grand Rapids, Michigan and (iv) Greenville,
Texas.
"Existing Indebtedness" means up to $20.0 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the New Credit Facility and the Notes) in existence on the
date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations); provided, that interest expense counted as a Fixed
Charge in one period because it was accrued in such period shall not be counted
in a second period because it was paid in such second period, and (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all dividend payments, whether or not in cash, on any series
of preferred stock of such Person or any of its Restricted Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity Interests of
the Company (other than Disqualified Stock) or payable to the Company or a
Restricted Subsidiary of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal; in each of the foregoing cases, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referrent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, and the application of the proceeds thereof, as
if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded.
"Foreign Subsidiary" means: (a) the following Wholly Owned Restricted
Subsidiary of Imonics Corporation, a Georgia corporation: Imonics GmbH, a
corporation formed in Germany; (b) the following 50%-Owned Restricted Subsidiary
of Imonics Corporation, a Georgia corporation: Bertelsmann Imonics GmbH & Co.
Kg, a corporation formed in Germany; (c) the following Wholly Owned Restricted
Subsidiary of BSG Alliance/IT, Inc., a Delaware corporation: SageComm
International Limited, a corporation formed in the U.K.; (d) the following
wholly owned Restricted Subsidiary of Health Data Science Corporation: Health
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Data Sciences, Ltd., a corporation organized under the laws of Canada; and (e)
every future Restricted Subsidiary of the Company or a Restricted Subsidiary of
the Company that is incorporated in a jurisdiction outside of the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means, with respect to any Person, a guarantee (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without limitation, by
way of a pledge of assets or through letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness of any
other Person.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, for borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or bankers' acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, and, to the extent not
otherwise included, all Indebtedness of others secured by a Lien on any asset of
such Person (whether or not such Indebtedness is assumed by such Person) and, to
the extent not otherwise included, the Guarantee by such Person of any
Indebtedness of any other Person if such obligation would be a contingent
obligation that is required to be described in the footnotes to the financial
statements of such Person prepared in accordance with GAAP. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, relocation and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities of another Person, together with all items
that are or would be classified as investments on a consolidated balance sheet
prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of
the Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Restricted Payments." Investments will exclude accounts receivable
in the ordinary course of business, extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices and endorsements of
negotiable instruments.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under
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applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any other agreement to give a
security interest in any asset).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on May
23, 1996such gain (but not
loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) and (ii)
any extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any sale or other disposition
of assets (including, without limitation, any cash received upon the sale or
other disposition of any non-cash consideration received in any sale or other
disposition of assets) or the issuance of Equity Interests of Subsidiaries or
the Company, net of the direct costs relating to such Asset Sale or issuance of
Equity Interests (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, estimated taxes paid or payable as a result
thereof, amounts required to be applied to the repayment of Indebtedness secured
by a Lien on the asset or assets that were the subject of such Asset Sale and
any reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated February
13, 1998, by and among the Company, the lenders and agents party thereto and DLJ
Capital Funding, Inc., as syndication agent, including any related notes,
guarantees, collateral documents, instruments and agreements from time to time
executed in connection therewith, and in each case as amended, amended and
restated, modified, renewed, refunded, replaced or refinanced from time to time
in whole or in part (including with the same or different agents, lenders or
borrowers).
"Non-Recourse Debt" means Indebtedness or Disqualified Stock (i) as to
which neither the Company nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), or (b) is directly or indirectly liable (as
a guarantor or otherwise); and (ii) as to which the lenders or their respective
representatives have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investments in the Company or in any
Subsidiary Guarantor or Wholly Owned Restricted Subsidiary that is engaged in
the same or a related or complementary line of business as the Company and its
Subsidiaries were engaged in on the date of the Indenture (as determined in good
faith by the Company); (b) any Investments in Cash Equivalents; (c) any
Investments by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investments (i) such Person becomes a Wholly
Owned Restricted Subsidiary of the Company or a Subsidiary Guarantor that is
engaged in the same or a related or complementary line of business as the
Company and its Restricted Subsidiaries were engaged in on the date of the
Indenture (as determined in good faith by the Company) or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company or a Subsidiary Guarantor and
that is engaged in the same or a related or complementary line of business as
the Company and its Subsidiaries were engaged in on the date of the Indenture
(as determined in good faith by the Company); (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "Certain Covenants -- Asset Sales"; (e) any acquisition of assets solely
in exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) Hedging Obligations and Guarantees permitted to be incurred
under the covenant described under the caption "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; (g) Investments resulting from advances made to customers
in the ordinary course of business, or acquired in satisfaction of such advances
or otherwise as a
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result of a customer's bankruptcy; (h) aggregate Investments not to exceed $10.0
million by the Company or a Subsidiary Guarantor in (1) any joint venture that
is engaged in the same or a related or complementary line of business as the
Company and its Subsidiaries were engaged in on the date of the Indenture (as
determined in good faith by the Company) or (2) a Receivables Subsidiary;
provided, that the foregoing Investment in a Receivables Subsidiary is in the
form of a note that the Receivables Subsidiary is required to repay as soon as
practicable from available cash collections less amounts required to be
established as reserves pursuant to contractual agreements with entities that
are not Affiliates of the Company entered into as part of a Qualified
Receivables Transaction; (i) loans or advances, to the extent made with cash in
an aggregate principal amount not to exceed $5.0 million at any one time
outstanding, to employees of the Company or Restricted Subsidiaries to permit
such employees to purchase stock or stock options pursuant to employee benefit
plans or similar plans or agreements; and (j) other Investments in any Person
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (j) that are at
the time outstanding, not to exceed $10.0 million.
"Permitted Liens" means (i) Liens on assets of the Company securing
Indebtedness under the New Credit Facility that was permitted by the terms of
the Indenture to be incurred and Liens on assets of Restricted Subsidiaries
securing Guarantees of Indebtedness under the New Credit Facility permitted by
the Indenture to be incurred; (ii) Liens in favor of the Company or any Wholly
Owned Restricted Subsidiary or any Subsidiary Guarantor; (iii) Liens on property
of a Person existing at the time such Person is merged into or consolidated
with, the Company or any Restricted Subsidiary of the Company or becomes a
Restricted Subsidiary as the result of the acquisition of Equity Interests of
such Person; provided that such Liens were not incurred in contemplation of such
acquisition, merger or consolidation and do not extend to any assets other than
those of the Person acquired, merged into or consolidated with the Company or a
Restricted Subsidiary; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were not incurred in contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds, leases, contracts (other than contracts in respect of
borrowed money and other Indebtedness), reimbursement obligations in respect of
letters of credit or bankers acceptances or other obligations of a like nature,
in each case incurred in the ordinary course of business; (vi) Liens to secure
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations incurred pursuant to subsection (ix) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Disqualified Stock"; provided that (a) any such Lien attached to the property
concurrently with or within 90 days after the acquisition thereof or the
execution of the Capital Lease with respect thereto, (b) such Lien attaches
solely to the property so acquired in such transaction or to property subject to
such Capital Lease, and (c) the principal amount of the Indebtedness secured
thereby does not exceed 100% of the cost of such property; (vii) Liens existing
on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings diligently pursued, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens on assets of a
Receivables Subsidiary incurred in connection with a Qualified Receivables
Transaction; (x) Liens arising out of transactions permitted under the covenant
entitled "-- Sale and Leaseback Transactions"; provided that such Lien attaches
only to to the property subject to lease entered in connection with such
transaction; (xi) Liens securing Permitted Refinancing Indebtedness; provided,
that such Lien attaches only to the assets that secured the Indebtedness being
refinanced; and (xii) Liens with respect to obligations that do not exceed $10.0
million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of premiums, if any, paid and reasonable expenses
incurred in connection therewith); (ii) such Permitted
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Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable in all material respects to the Holders of Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by the Company or by a Restricted Subsidiary who is an obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, except that the Company may incur Permitted Refinancing Indebtedness
to extend, refinance, renew, replace, defease or refund, Indebtedness of any
Wholly Owned Restricted Subsidiary of the Company or any Subsidiary Guarantor.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"preferred stock" means any Equity Interests with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Qualified Insurance Payments" means payments made by a third party
insurance company pursuant to an insurance policy entered into by the Company or
any of its Restricted Subsidiaries in the ordinary course of business, directly
to, or for the benefit of, holders of Equity Interests of the Company or its
Restricted Subsidiaries, less any reimbursement payments or additional
contributions required from the Company or its Restricted Subsidiaries in
connection with such payments (other than ordinary premiums).
"Qualified Receivables Transaction" means any transaction or series of
transactions pursuant to which the Company or any of its Subsidiary Guarantors,
or any of their respective customers, may sell, convey or otherwise transfer to
a Receivables Subsidiary, or may grant a security interest in, any accounts
receivable (whether now existing or arising in the future) of the Company or any
of its Subsidiary Guarantors, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable, all contracts and
all guarantees or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are customarily
transferred or in respect of which security interests are customarily granted in
connection with asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means an Unrestricted Subsidiary of the Company
which engages in no activities other than in connection with a Qualified
Receivables Transaction and which is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary and with which neither
the Company nor any Restricted Subsidiary of the Company has any material
contract, agreement, arrangement or understanding other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that might be
obtained at the time from persons who are not Affiliates of the Company, other
than fees payable in the ordinary course of business in connection with
servicing accounts receivable and with which neither the Company nor any
Subsidiary of the Company has any obligation to maintain or preserve such
Subsidiary's financial condition or cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors of the Company giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not then an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" means (a) with respect to the Notes, any
Indebtedness of the Company which is by its terms expressly subordinated in
right of payment to the Notes and (b) with respect to any Subsidiary Guarantee,
any Indebtedness of the applicable Subsidiary Guarantor which by its term is
subordinated in right of payment to such Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). A Subsidiary of the
Company shall, at any time, be either a Restricted Subsidiary or an Unrestricted
Subsidiary, but not both.
"Subsidiary Guarantors" means, so long as the same are Subsidiaries of the
Company, (a) each of the following Restricted Subsidiaries of the Company:
Medaphis Physician Services Corporation, a Georgia corporation; Gottlieb's
Financial Services, Inc., a Georgia corporation; Medical Management Sciences,
Inc., a Maryland corporation; Medaphis Services Corporation, a Georgia
corporation; Medaphis Healthcare Information Technology Company, a Georgia
corporation; Automation Atwork, a California corporation; Consort Technologies,
Inc., a Georgia corporation; Health Data Sciences Corporation, a Delaware
corporation; BSG Corporation, a Delaware corporation; (b) the following
Restricted Subsidiaries of Medaphis Services Corporation, a Georgia corporation:
AssetCare, Inc., a Georgia corporation; National Healthcare Technologies, Inc.,
an Indiana corporation; (c) the following Restricted Subsidiaries of BSG
Corporation, a Delaware corporation: BSG Alliance/IT, Inc., a Delaware
corporation; and BSG Government Solutions, Inc., a Maryland corporation; and (d)
any other Subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the Indenture, and their respective successors and assigns until
released.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than the
Subsidiary Guarantors as of the date of the Indenture or any successor to any of
them) that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a)
has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable in any material
respect to the Company or such Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (d)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries (other
than as a result of a Permitted Lien on outstanding Equity Interests of such
Person). Any such designation by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
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caption "Incurrence of Indebtedness and Issuance of Disqualified Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Disqualified Stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the outstanding Capital
Stock of such Person that is at the time entitled to vote in the election of the
Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending 180 days after the Expiration Date (subject
to extension under certain limited circumstances described herein) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer -- Exchange Agent." See "The Exchange Offer -- Resales of New Notes."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be
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deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon on behalf of
the Company by Randolph L.M. Hutto, Executive Vice President and General Counsel
of the Company, and by Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference herein andto the financial statement
schedule of Medaphis included in Medaphis' Current Report on Form 8-K filed on
May 23, 1996 and incorporated by reference herein and the financial statement
schedule of Medaphis included in Medaphis'Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference1997, have been audited by Deloitte & Toucheso incorporated in reliance on the reports of Price
Waterhouse LLP, independent auditors as stated in their
reports thereon included in Medaphis' Current Reportaccountants, given on Form 8-K filed on May
23, 1996 and in Medaphis' Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference. Such supplemental consolidated
financial statements and financial statement schedule have been incorporated
herein in reliance upon such reports given upon the authority of that firm as
experts in accounting and auditing.
The combined financial statements of MMS as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 included
in Medaphis' Current Report on Form 8-K filed on January 19, 1996 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in Medaphis' Current Report on Form 8-K filed on January 19,
1996 and incorporated herein by
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reference. Such combined financial statements have been incorporated herein by
reference in reliance upon such report given upon the authority of that firm as
experts in accounting and auditing.
The financial statements of The Receivables Management Division of MedQuist
Inc. as of and for the year ended December 31, 1994 included in Medaphis'
Current Report on Form 8-K filed on January 19, 1996 incorporated by reference
in this Form S-4 have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in giving said reports.auditing and accounting.
AVAILABLE INFORMATION
The balance sheets of Healthcare Recoveries, Inc. as of June 30, 1993 and
1994 andCompany is subject to the statements of operations, changes in stockholders' (deficit) and
cash flows for eachinformational requirements of the three yearsExchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the period ended June 30, 1994
included in Medaphis' Current ReportCommission. The reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60621.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a Web site (www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company's Common Stock is traded on Form 8-K filed on October 13, 1995the NASDAQ National Market under
the symbol "MEDA." Reports, proxy statements and other information concerning
the Company may be inspected at the offices of the NASDAQ National Market.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by this reference have been incorporated herein in reliance
on the report, which includes an explanatory paragraph regarding a change in the
method of accounting for income taxes, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.reference:
(i) The consolidated financial statements of BSG as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
included in Medaphis' Current Report on Form 8-K filed on April 3, 1996 have
been audited by Price Waterhouse LLP, independent accountants, as stated in
their report appearing in Medaphis' Current Report on Form 8-K filed on April 3,
1996 and incorporated herein by reference. Such consolidated financial
statements have been incorporated herein by reference in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
The combined financial statements of the Atwork Companies as of and for the
years ended December 31, 1993 and 1994 included in Medaphis' Current Report on
Form 8-K filed on April 3, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in Medaphis' Current
Report on Form 8-K filed on April 3, 1995 and incorporated herein by reference.
Such combined financial statements have been incorporated herein by reference in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of HDS as of March 31, 1995 and 1996
and for each of the three years in the period ended March 31, 1996 included in
this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in this Proxy
Statement/ Prospectus, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Medaphis Common Stock being registered under
the Registration Statement of which this Proxy Statement/Prospectus forms a part
will be passed upon for Medaphis by King & Spalding, Atlanta, Georgia. Certain
legal matters in connection with the Merger will be passed upon for HDS by
Seyfarth, Shaw, Fairweather & Geraldson, Los Angeles, California. A partner in
the firm of Seyfarth, Shaw, Fairweather & Geraldson is the beneficial owner of
4,768 shares of HDS Preferred Stock.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Medaphis' proxy solicitation
materials for its 1997 annual meeting of stockholders, any stockholder proposal
to be considered at such meeting must be received by Medaphis on or before
December 1, 1996. Any such proposal will be subject to the requirements
contained in the Medaphis Bylaws relating to stockholder proposals and the proxy
rules under the Exchange Act. See "The Merger--Comparison of Rights of Holders
of HDS Common Stock and Medaphis Common Stock."
57
66
HDS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[TO BE PROVIDED]
58
67
ANNEX A
MERGER AGREEMENT
BY AND AMONG
MEDAPHIS CORPORATION,
RAKSUB, INC.
AND
HEALTH DATA SCIENCES CORPORATION
AS OF MAY 23, 1996
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PAGE
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ARTICLE 1 THE MERGER...................................................................... A-8
Section 1.1. Surviving Corporation................................................... A-8
Section 1.2. Certificate of Incorporation............................................ A-8
Section 1.3. Bylaws.................................................................. A-8
Section 1.4. Directors............................................................... A-8
Section 1.5. Officers................................................................ A-8
Section 1.6. Effective Time.......................................................... A-8
Section 1.7. Tax-Free Reorganization................................................. A-8
ARTICLE 2 CONVERSION OF SHARES; TREATMENT OF OPTIONS...................................... A-9
Section 2.1. HDS Common Stock and Preferred Stock.................................... A-9
Section 2.2. Fractional Shares....................................................... A-9
Section 2.3. Dissenting Shares....................................................... A-9
Section 2.4. Treatment of HDS Employee Stock Options................................. A-10
Section 2.5. Exchange of HDS Capital Stock........................................... A-10
Section 2.6. Conversion Ratio, and Adjustment Event.................................. A-11
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF HDS........................................... A-11
Section 3.1. Organization............................................................ A-11
Section 3.2. Authorization........................................................... A-12
Section 3.3. Absence of Restrictions and Conflicts................................... A-12
Section 3.4. Capitalization.......................................................... A-12
Section 3.5. Financial Statements.................................................... A-13
Section 3.6. Absence of Certain Changes.............................................. A-13
Section 3.7. Legal Proceedings....................................................... A-14
Section 3.8. Compliance with Law..................................................... A-14
Section 3.9. Material Contracts...................................................... A-14
Section 3.10. HDS Client Contracts.................................................... A-15
Section 3.11. Tax Returns; Taxes...................................................... A-15
Section 3.12. Officers, Directors and Employees....................................... A-16
Section 3.13. Employee Benefit Plans.................................................. A-16
Section 3.14. Labor Relations......................................................... A-18
Section 3.15. Insurance............................................................... A-18
Section 3.16. Title to Properties and Related Matters................................. A-18
Section 3.17. Environmental Matters................................................... A-19
Section 3.18. Patents, Trademarks, Trade Names........................................ A-19
Section 3.19. HDS Computer Software and Hardware...................................... A-20
Section 3.20. Proxy Statement and Registration Statement.............................. A-21
Section 3.21. Transactions with Affiliates............................................ A-21
Section 3.22. Brokers, Finders and Investment Bankers................................. A-21
Section 3.23. Disclosure.............................................................. A-22
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF MEDAPHIS...................................... A-22
Section 4.1. Organization............................................................ A-22
Section 4.2. Authorization........................................................... A-22
Section 4.3. Absence of Restrictions and Conflicts................................... A-22
Section 4.4. Capitalization of Medaphis.............................................. A-23
Section 4.5. Capital Stock of Medaphis Subsidiaries.................................. A-23
Section 4.6. Medaphis Commission Reports............................................. A-23
Section 4.7. Financial Statements.................................................... A-23
Section 4.8. Absence of Certain Changes.............................................. A-24
Section 4.9. Legal Proceedings....................................................... A-24
Section 4.10. Compliance with Law..................................................... A-25
Section 4.11. Proxy Statement and Registration Statement.............................. A-25
A-2
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PAGE
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Section 4.12. Tax Returns; Taxes...................................................... A-25
Section 4.13. Billing and Collection Practices........................................ A-25
Section 4.14. Medaphis Employee Benefit Plans......................................... A-25
Section 4.15. Labor Relations......................................................... A-27
Section 4.16. Medaphis Computer Software and Hardware................................. A-27
Section 4.17. Title to Properties and Related Matters................................. A-28
Section 4.18. Environmental Matters................................................... A-29
Section 4.19. Brokers, Finders and Investment Bankers................................. A-29
Section 4.20. Disclosure.............................................................. A-29
ARTICLE 5 CERTAIN COVENANTS AND AGREEMENTS................................................ A-29
Section 5.1. Conduct of Business by HDS.............................................. A-29
Section 5.2. Conduct of Business by Medaphis......................................... A-30
Section 5.3. Inspection and Access to Information.................................... A-31
Section 5.4. Registration Statement.................................................. A-31
Section 5.5. HDS Stockholder Matters................................................. A-32
Section 5.6. The Nasdaq National Market Additional Shares Notification............... A-32
Section 5.7. HDS Affiliates.......................................................... A-32
Section 5.8. No Solicitation; Acquisition Proposals.................................. A-32
Section 5.9. Reasonable Efforts; Further Assurances; Cooperation..................... A-33
Section 5.10. Public Announcements.................................................... A-34
Section 5.11. Financial Statements and Commission Reports............................. A-34
Section 5.12. Supplements to Disclosure Letters....................................... A-34
Section 5.13. Pooling of Interests Accounting......................................... A-35
Section 5.14. Accountant's Review Report.............................................. A-35
Section 5.15. Special Indemnification by Medaphis..................................... A-35
Section 5.16 Employees............................................................... A-35
Section 5.17 Certain Other Benefits.................................................. A-36
ARTICLE 6 CONDITIONS...................................................................... A-36
Section 6.1. Conditions to Each Party's Obligations.................................. A-36
Section 6.2. Conditions to Obligations of Medaphis................................... A-37
Section 6.3. Conditions to Obligations of HDS........................................ A-38
ARTICLE 7 CLOSING......................................................................... A-39
ARTICLE 8 TERMINATION..................................................................... A-39
Section 8.1. Termination............................................................. A-39
Section 8.2. Specific Performance and Other Remedies................................. A-39
Section 8.3. Effect of Termination................................................... A-39
Section 8.4. Termination Fee......................................................... A-39
ARTICLE 9 MISCELLANEOUS PROVISIONS........................................................ A-40
Section 9.1. Notices................................................................. A-40
Section 9.2. Disclosure Letters and Exhibits......................................... A-41
Section 9.3. Assignment; Successors in Interest...................................... A-41
Section 9.4. Representations and Warranties.......................................... A-41
Section 9.5. Number; Gender.......................................................... A-41
Section 9.6. Captions................................................................ A-41
Section 9.7. Controlling Law; Integration; Amendment................................. A-41
Section 9.8. HDS and Medaphis Knowledge.............................................. A-41
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PAGE
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Section 9.9. Severability............................................................ A-41
Section 9.10. Counterparts............................................................ A-42
Section 9.11. Enforcement of Certain Rights........................................... A-42
Section 9.12. Waiver.................................................................. A-42
Section 9.13. Fees and Expenses....................................................... A-42
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DEFINED TERMS
TERM SECTION
- ---------------------------------------------------------------------------------- ---------
Acquisition Transaction........................................................... 5.8
Agreement......................................................................... Page
Average Closing Price............................................................. 2.2
Certificate and Certificates...................................................... 2.5(a)
Closing........................................................................... Page
Closing Date...................................................................... Page
Code.............................................................................. 1.7
Commission........................................................................ 2.4(c)
Conversion Ratio.................................................................. 2.6(a)
Delaware Certificate of Merger.................................................... Page
DGCL.............................................................................. Page
Deloitte & Touche................................................................. 3.5(a)
Deloitte & Touche Review Report................................................... 5.14
Dissenting Shares................................................................. 2.3
EEOC.............................................................................. 3.14
Effective Time.................................................................... 1.6
Employee Benefit Plan............................................................. 3.13(a)(ii)
ERISA............................................................................. 3.13(a)(ii)
Excess Parachute Payment.......................................................... 3.13(k)
Exchange Act...................................................................... 3.3
HDS............................................................................... Page
HDS Benefit Plan.................................................................. 3.13(a)
HDS Capital Stock................................................................. 2.1(a)
HDS Client Contracts.............................................................. 3.10
HDS Common Stock.................................................................. 2.1(a)
HDS Detrimental Information....................................................... 6.2(l)
HDS Disclosure Letter............................................................. Article 3
HDS ERISA Affiliate............................................................... 3.13(b)
HDS Executives.................................................................... 9.8
HDS Financial Statements.......................................................... 3.5(a)
HDS Hardware...................................................................... 3.19(a)
HDS License Agreements............................................................ 3.19(b)
HDS Licensed Software............................................................. 3.19(a)
HDS Material Adverse Effect....................................................... 3.1
HDS Material Contracts............................................................ 3.9
HDS Preferred Stock............................................................... 2.1(a)
HDS Proprietary Software.......................................................... 3.19(a)
HDS Qualified Plans............................................................... 3.13(g)
HDS Series B Stock................................................................ 2.1(a)
HDS Series C Stock................................................................ 2.1(a)
HDS Series F Stock................................................................ 2.1(a)
HDS Software...................................................................... 3.19(a)
HDS Stockholder................................................................... 2.2
HSR Act........................................................................... 3.3
Intellectual Property............................................................. 3.18
IRS............................................................................... 3.13(f)
Licensed Intellectual Property.................................................... 3.18
Medaphis.......................................................................... Page
Medaphis Balance Sheet............................................................ 4.7
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72
TERM SECTION
- ---------------------------------------------------------------------------------- ---------
Medaphis Benefit Plan............................................................. 4.14(a)
Medaphis Commission Reports....................................................... 4.6
Medaphis Common Stock............................................................. 2.1(a)
Medaphis Disclosure Letter........................................................ Article 4
Medaphis Due Diligence Review..................................................... 5.3(a)
Medaphis ERISA Affiliate.......................................................... 4.14(b)
Medaphis Executives............................................................... 9.8
Medaphis Financial Statements..................................................... 4.7
Medaphis Hardware................................................................. 4.16(a)
Medaphis License Agreements....................................................... 4.16(b)
Medaphis Licensed Software........................................................ 4.16(b)
Medaphis Material Adverse Effect.................................................. 4.1
Medaphis Premises................................................................. 4.18
Medaphis Proprietary Software..................................................... 4.16(a)
Medaphis Qualified Plans.......................................................... 4.14(e)
Medaphis Software................................................................. 4.16(b)
Medaphis Subsidiaries............................................................. 4.5
Merger............................................................................ Page
NLRB.............................................................................. 3.14
Non-Qualified Options............................................................. 2.4(a)
Option Assumption Agreement....................................................... 2.4(b)
Options........................................................................... 2.4(a)
PBGC.............................................................................. 3.13(f)
Pension Benefit Plan.............................................................. 3.13(n)
Premises.......................................................................... 3.17
Proprietary Intellectual Property................................................. 3.18
Proxy Statement................................................................... 3.20
Qualified Beneficiaries........................................................... 5.16(b)
RAKSub............................................................................ Page
Registration Statement............................................................ 3.20
SO Plans.......................................................................... 2.4(a)
Scheduled Leases.................................................................. 3.16(b)
Securities Act.................................................................... 3.3
Special Indemnified Parties....................................................... 5.15(a)
Specified Employees............................................................... 5.1(m)
Specified Stockholders............................................................ 5.1(m)
Subsidiary........................................................................ 3.1
Successor Plans................................................................... 5.16(b)
Surviving Corporation............................................................. 1.1
The knowledge of the HDS Executives............................................... 9.8
The knowledge of the Medaphis Executives.......................................... 9.8
Total HDS Shares.................................................................. 2.7(a)
1996 Balance Sheet................................................................ 3.5(a)
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73
EXHIBITS
EXHIBIT NUMBER
- -------------------------------------------------------------------------------- ----------
Delaware Certificate of Merger.................................................. 1.1
Option Assumption Agreement..................................................... 2.4
Noncompetition and Nonsolicitation Agreement.................................... 5.1(m)(A)
Employment Agreements........................................................... 5.1(m)(B)
Tax Opinion of King & Spalding.................................................. 6.1(c)
Opinion of Seyfarth, Shaw, Fairweather & Geraldson.............................. 6.2(c)
Opinion of King & Spalding...................................................... 6.3(c)
A-7
74
MERGER AGREEMENT
THIS MERGER AGREEMENT, dated as of May 23, 1996 (the "Agreement"), by and
among MEDAPHIS CORPORATION, a Delaware corporation ("Medaphis"), RAKSUB, INC., a
Delaware corporation and a wholly-owned subsidiary of Medaphis ("RAKSub"), and
HEALTH DATA SCIENCES CORPORATION, a Delaware corporation ("HDS").
WHEREAS, the respective Boards of Directors of Medaphis, RAKSub and HDS
each have approved this Agreement and the merger (the "Merger"), pursuant to
this Agreement and a certificate of merger in the form attached as Exhibit 1.1
proposed to be filed in the State of Delaware (the "Delaware Certificate of
Merger"), of RAKSub with and into HDS on the terms and conditions contained in
this Agreement and in accordance with the Delaware General Corporation Law (the
"DGCL");
WHEREAS, Medaphis, as the sole stockholder of RAKSub, has approved this
Agreement, the Merger and the transactions contemplated by this Agreement
pursuant to action taken by unanimous written consent in accordance with the
requirements of the DGCL and the Certificate of Incorporation and the Bylaws of
RAKSub;
WHEREAS, the parties to this Agreement intend that the Merger qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
ARTICLE 1.
THE MERGER
Section 1.1. Surviving Corporation. Subject to the provisions of this
Agreement and the DGCL, at the Effective Time, RAKSub shall be merged with and
into HDS, and the separate corporate existence of RAKSub shall cease. HDS shall
be the surviving corporation in the Merger (sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. The Merger shall have the effects set forth in Section 259 of
the DGCL.
Section 1.2. Certificate of Incorporation. The Certificate of
Incorporation of HDS shall be the Certificate of Incorporation of the Surviving
Corporation until amended after the Effective Time.
Section 1.3. Bylaws. The Bylaws of HDS shall be the Bylaws of the
Surviving Corporation until amended after the Effective Time.
Section 1.4. Directors. The directors of the Surviving Corporation shall
consist of the directors of HDSSub immediately prior to the Effective Time, such
directors to hold office from the Effective Time until their respective
successors are elected and qualify.
Section 1.5. Officers. The officers of the Surviving Corporation shall
consist of the officers of HDSSub immediately prior to the Effective Time, such
officers to hold office from the Effective Time until their respective
successors are elected and qualify.
Section 1.6. Effective Time. If all of the conditions set forth in Article
6 have been fulfilled or waived in accordance with the terms of this Agreement
and this Agreement has not been terminated in accordance with Article 8, the
parties shall cause the Delaware Certificate of Merger to be properly executed
and filed on the Closing Date with the Secretary of State of the State of
Delaware. The Merger shall become effective as of the time of filing of a
properly executed Delaware Certificate of Merger. The date and time when the
Merger becomes effective is referred to in this Agreement as the Effective Time.
Section 1.7. Tax-Free Reorganization. The Merger is intended to be a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and this
A-8
75
Agreement is intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code.
ARTICLE 2.
CONVERSION OF SHARES; TREATMENT OF OPTIONS
Section 2.1. HDS Common and Preferred Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of any HDS Stockholder:
(a) Subject to Section 2.2, (i) each share of common stock, par value
$0.10 per share, of HDS ("HDS Common Stock"), (ii) each share of Series B
Convertible Preferred Stock, par value $0.10 per share, of HDS ("HDS Series
B Stock"), (iii) each share of Series C Convertible Preferred Stock, par
value $0.10 per share of HDS ("HDS Series C Stock"), and (iv) each share of
Series F Convertible Preferred Stock, par value $0.10 per share of HDS
("HDS Series F Stock"), issued and outstanding immediately prior to the
Effective Time (except for Dissenting Shares and treasury shares) shall be
converted, without any further action, into the right to receive such
number of shares of voting common stock, par value $.01 per share, of
Medaphis ("Medaphis Common Stock") as is equal to the Conversion Ratio. The
HDS Series B Stock, HDS Series C Stock and HDS Series F Stock are together
referred to as the "HDS Preferred Stock"; and the HDS Common Stock and HDS
Preferred Stock are together referred to as the "HDS Capital Stock."
(b) Each share of HDS Capital Stock issued immediately prior to the
Effective Time that is then held in HDS's treasury shall be canceled and
retired and all rights in respect of such HDS Capital Stock shall cease to
exist, without any conversion thereof or payment of any consideration
therefor.
(c) Each share of common stock, par value $0.01 per share, of HDSSub
that is issued and outstanding immediately prior to the Effective Time
shall be converted into one share of common stock, par value $0.10 per
share, of the Surviving Corporation.
Section 2.2. Fractional Shares. No scrip or fractional shares of Medaphis
Common Stock shall be issued in the Merger. All fractional shares of Medaphis
Common Stock to which a holder of HDS Capital Stock (each an "HDS Stockholder")
immediately prior to the Effective Time would otherwise be entitled at the
Effective Time shall be aggregated. If a fractional share results from such
aggregation, a HDS Stockholder shall be entitled, after the later of (a) the
Effective Time or (b) the surrender of such HDS Stockholder's Certificate(s)
that represent such shares of HDS Capital Stock, to receive from Medaphis an
amount in cash in lieu of such fractional share, based on the Average Closing
Price. For purposes of this Agreement, the "Average Closing Price" shall be the
arithmetic average of the closing price per share of Medaphis Common Stock, as
reported on the Nasdaq National Market, for each of the ten consecutive trading
days ending on the trading day immediately prior to the date of the annual or
special meeting of HDS Stockholders at which the Merger and this Agreement will
be voted on by HDS Stockholders entitled so to vote.
Section 2.3. Dissenting Shares. To the extent that appraisal rights are
available under Section 262 of the DGCL, shares of HDS Capital Stock that are
issued and outstanding immediately prior to the Effective Time and that have not
been voted for adoption of the Merger and with respect to which appraisal rights
have been properly demanded in accordance with Section 262 of the DGCL
("Dissenting Shares") shall not be converted into the right to receive the
consideration provided for in Sections 2.1 and 2.2 at or after the Effective
Time unless and until the holder of such shares becomes ineligible for such
appraisal. If a holder of Dissenting Shares becomes ineligible for appraisal,
then, as of the Effective Time or the occurrence of such event, whichever later
occurs, such holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive the consideration
provided for in Sections 2.1 and 2.2. If any HDS Stockholder asserts the right
to be paid for the fair value of such HDS Capital Stock as described above, HDS
shall give Medaphis notice of such assertion and Medaphis shall have the right
to participate in all negotiations and proceedings with respect to any such
demands. HDS shall not, except with the prior written consent of Medaphis,
voluntarily make any payment with respect to, or settle or offer to settle, any
such demand for payment. Payment for Dissenting Shares shall be made as required
by the DGCL.
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76
Section 2.4. Treatment of HDS Employee Stock Options. (a) At the Effective
Time, Medaphis shall assume all of HDS's rights and obligations with respect to
the outstanding stock options held by certain employees, officers and directors
of HDS pursuant to the HDS stock option plans (the "SO Plans"), as such SO Plans
and such options are set forth in the HDS Disclosure Letter, which are
outstanding and unexercised at the Effective Time (together, the "Options"),
whether or not the Options are then exercisable. Promptly following such
assumption, Medaphis shall, subject to Section 2.4(b), substitute for the
Options non-qualified options to be granted under the Medaphis Non-Qualified
Stock Option Plan for Employees of Acquired Companies (the "Non-Qualified
Options"). The Non-Qualified Options shall have the vesting and other terms and
conditions described in the Option Assumption Agreement (as defined in Section
2.4(b)) and shall, in addition, have a term or terms mutually agreed upon by
Medaphis and HDS that will result in any Option that had been an "incentive
stock option" (as defined in the Code) being disqualified from its status as an
"incentive stock option." At and after the Effective Time, each Non-Qualified
Option and each Option for which a Non-Qualified Option is not issued in
substitution shall thereafter evidence the right to purchase the number of
shares of Medaphis Common Stock equal to the product (rounded up or down to the
nearest whole share) of (i) the number of shares of HDS Common Stock covered by
such option immediately prior to the Effective Time, multiplied by (ii) the
Conversion Ratio. The exercise price of such Non-Qualified Options for each
share of Medaphis Common Stock subject to such options shall be equal to the
quotient (rounded up or down to the nearest whole cent) obtained by dividing (i)
the per-share exercise price for shares of HDS Common Stock subject to such
option immediately prior to the Effective Time, by (ii) the Conversion Ratio.
(b) At least ten days prior to the Effective Time, Medaphis shall deliver
to each holder of an Option an Option Notice and Assumption Agreement in the
form attached as Exhibit 2.4 (the "Option Assumption Agreement") setting forth
Medaphis' assumption of the Option and substitution of the Non-Qualified Option
in accordance with the terms of Section 2.4(a). Medaphis shall not be entitled
to or required to substitute a Non-Qualified Option for an Option in accordance
with Section 2.4(a) until it has received from the holder of an Option a
properly executed and completed Option Assumption Agreement with respect to the
Option. HDS shall not grant any options to purchase shares of HDS Capital Stock
under any SO Plan or otherwise after the date of this Agreement.
(c) Medaphis agrees to cause the shares of Medaphis Common Stock issuable
upon exercise of the Non-Qualified Options (and, to the extent Non-Qualified
Options were not issued in substitution therefor, the Options) and all other
Options assumed by Medaphis or issued by Medaphis in replacement of the Options
to be registered with the Securities and Exchange Commission (the "Commission")
on a Form S-8 Registration Statement within thirty days following the Effective
Time. Medaphis further agrees to cause the shares of Medaphis Common Stock
issuable upon exercise of the Non-Qualified Options (and, to the extent Non-
Qualified Options were not issued in substitution therefor, the Options) to be
registered or exempt from the registration requirements of all applicable state
securities laws, rules and regulations.
(d) Approval by the HDS Stockholders of this Agreement shall constitute
authorization and approval of any and all of the actions described in this
Section 2.4.
Section 2.5. Exchange of HDS Capital Stock. (a) On or prior to the Closing
Date, Medaphis shall make available to each record holder who, as of the
Effective Time, was a holder of an outstanding certificate or certificates which
immediately prior to the Effective Time represented shares of HDS Capital Stock
(the "Certificate" or "Certificates"), a form of letter of transmittal and
instructions for use in effecting the surrender of the Certificates for
conversion into Medaphis Common Stock and payment for fractional shares.
Delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to Medaphis; and the form of
letter of transmittal shall so reflect. Upon surrender to Medaphis of a
Certificate, together with a properly completed and executed letter of
transmittal, the holder of such Certificate is entitled to receive in exchange
(i) one or more certificates as requested by the holder (properly issued,
executed and countersigned, as appropriate) representing that number of whole
fully paid and nonassessable shares of Medaphis Common Stock to which such HDS
Stockholder shall have become entitled pursuant to the provisions of Section
2.1(a) and (ii) as to any fractional share of Medaphis Common Stock, a check
representing the cash consideration to which such holder shall have become
entitled pursuant to Section 2.2. The Certificate so surrendered shall forthwith
be canceled. No interest will be paid or accrued
A-10
77
on any cash payable upon the surrender of the Certificates. From the Effective
Time until surrender in accordance with the provisions of this Section 2.4, each
Certificate shall represent for all purposes only the right to receive the
consideration provided in Sections 2.1 and 2.2. All payments of respective
shares of Medaphis Common Stock and cash for fractional shares that are made
upon surrender of Certificates in accordance with the terms of this Agreement
shall be deemed to have been made in full satisfaction of rights pertaining to
the shares of HDS Common Stock evidenced by such Certificates.
(b) In the case of any lost, mislaid, stolen or destroyed Certificate, the
holder of such Certificate may be required, as a condition precedent to delivery
to such holder of the consideration described in Sections 2.1 and 2.2, to
deliver to Medaphis a bond in such reasonable sum or a reasonably satisfactory
indemnity agreement as Medaphis may direct as indemnity against any claim that
may be made against Medaphis or the Surviving Corporation with respect to the
Certificate alleged to have been lost, mislaid, stolen or destroyed.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of HDS Capital Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
transfer, they shall be canceled and exchanged for the consideration described
in Sections 2.1 and 2.2.
(d) Any shares of Medaphis Common Stock or cash due former HDS Stockholders
pursuant to Sections 2.1 and 2.2 that remains unclaimed by such former HDS
Stockholder for six months after the Effective Time shall be held by Medaphis;
and any former HDS Stockholder who has not prior to that date complied with
Section 2.5(a) can thereafter look only to Medaphis for issuance of the number
of shares of Medaphis Common Stock and other consideration to which such holder
has become entitled pursuant to the provisions of Sections 2.1 and 2.2, except
that neither Medaphis nor any other party to this Agreement shall be liable to a
former HDS Stockholder for any amount required to be paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Section 2.6. Conversion Ratio and Adjustment Event. (a) The Conversion
Ratio is 6,125,000 divided by Total HDS Shares. Total HDS Shares is 7,741,843,
which represents the sum of the number of shares of HDS Preferred Stock and HDS
Common Stock that are issued and outstanding on the date of this Agreement.
(b) The Conversion Ratio shall be calculated to the nearest 1/10,000th of a
whole number.
(c) If, after the date of this Agreement and prior to the Effective Time,
Medaphis shall have declared a stock split (including a reverse split) or
combination of Medaphis Common Stock or a dividend payable in Medaphis Common
Stock, or any other distribution of Medaphis Common Stock to holders of Medaphis
Common Stock with respect to their Medaphis Common Stock (including such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar transaction),
or otherwise have changed the Medaphis Common Stock into any other securities,
then the Conversion Ratio shall be appropriately adjusted to reflect such stock
split, combination or dividend or other distribution or change of securities.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF HDS
With such exceptions as are set forth in a letter (the "HDS Disclosure
Letter") delivered by HDS to Medaphis prior to the date of this Agreement, HDS
represents and warrants to Medaphis as follows:
Section 3.1. Organization. HDS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and the
subsidiary of HDS listed as such in the HDS Disclosure Letter (the "Subsidiary")
is a corporation existing under the laws of the Province of Ontario, and HDS and
Subsidiary have all requisite corporate power and authority to own, lease and
operate their respective properties and to carry on their respective businesses
as now being conducted. HDS and Subsidiary are each qualified to transact
business, and are in good standing, as a foreign corporation in each
jurisdiction where the character of their activities requires such
qualification, except where the failure to so qualify would not have a
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material adverse effect on the assets, liabilities, results of operations,
financial condition or business of HDS and Subsidiary taken as a whole (such an
effect, a "HDS Material Adverse Effect"). HDS has made available to Medaphis
accurate and complete copies of the Certificate of Incorporation (including all
certificates of designation relating to the HDS Preferred Stock) and Bylaws, as
currently in effect, of HDS, the minute books and stock records of HDS and the
corresponding documents of Subsidiary. The HDS Disclosure Letter contains a true
and correct list of the jurisdictions in which HDS or Subsidiary is qualified to
do business as a foreign corporation.
Section 3.2. Authorization. HDS has full corporate power and authority to
execute and deliver this Agreement and to perform its obligations under this
Agreement and to consummate the Merger and the other transactions contemplated
by this Agreement. Other than the stockholder approval contemplated in Section
6.1(a), the execution and delivery of this Agreement by HDS and the performance
by HDS of its obligations under this Agreement and the consummation of the
Merger and the other transactions provided for by this Agreement have been duly
and validly authorized by all necessary corporate action on the part of HDS. The
Board of Directors of HDS has approved the execution, delivery and performance
of this Agreement and the consummation of the Merger and the other transactions
provided for in this Agreement. This Agreement has been duly executed and
delivered by HDS and constitutes the valid and binding agreement of HDS,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency and other similar laws affecting the enforceability of
creditors' rights generally, general equitable principles and the discretion of
courts in granting equitable remedies.
Section 3.3. Absence of Restrictions and Conflicts. Subject to the
stockholder approval contemplated in Section 6.1(a), the execution, delivery and
performance of this Agreement, the consummation of the Merger and the other
transactions contemplated by this Agreement and the fulfillment of and
compliance with the terms and conditions of this Agreement do not and will not,
with the passing of time or the giving of notice or both, violate, constitute a
breach of or default under, result in the loss of any material benefit under the
terms or provisions of, or permit the acceleration of any obligation under, (i)
any term or provision of the charter or bylaws of HDS or Subsidiary, (ii) any
HDS Material Contract, (iii) any judgment, decree or order of any court or
governmental authority or agency to which HDS or Subsidiary is a party or by
which HDS or Subsidiary or any of their respective properties is bound, or (iv)
any statute, law, regulation or rule applicable to HDS or Subsidiary, so as to
have, in the case of subsections (ii) through (iv) above, a HDS Material Adverse
Effect. Except for compliance with the applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), applicable
state securities laws and the filing and recordation of the Certificate of
Merger as required by the DGCL, no consent, approval, order or authorization of,
or registration, declaration or filing with, any governmental agency or public
or regulatory unit, agency, body or authority with respect to HDS or Subsidiary
is required in connection with the execution, delivery or performance of this
Agreement by HDS or the consummation of the transactions contemplated by this
Agreement by HDS, the failure to obtain which would have a HDS Material Adverse
Effect.
Section 3.4. Capitalization. The authorized capital stock of HDS consists
of 10,000,000 shares of common stock, $0.10 par value per share, and 5,000,000
shares of serial preferred stock, of which 742,000 shares of HDS Series B Stock,
1,687,500 shares of HDS Series C Stock, 830,000 shares of HDS Series E Stock and
1,818,181 shares of HDS Series F Stock have been authorized. As of the date of
this Agreement, there were 4,081,990 shares of HDS Common Stock, 742,000 shares
of HDS Series B Stock, 1,312,500 shares of HDS Series C Stock and 1,605,353
shares of HDS Series F stock issued and outstanding. Shares of the HDS Series B,
HDS Series C and HDS Series F Stock are convertible into shares of HDS Common
Stock on a one-for-one basis. Each share of HDS Capital Stock outstanding as of
the date of this Agreement is duly authorized, validly issued, fully paid and
nonassessable and free of pre-emptive rights. There are no subscriptions,
options, convertible securities, calls, puts, rights, warrants or other
agreements, claims or commitments of any nature whatsoever obligating HDS to
purchase, redeem, issue, transfer, deliver or sell, or cause to be purchased,
redeemed, issued, transferred, delivered or sold, additional shares of the
capital stock or other securities of HDS or obligating HDS to grant, extend or
enter into any such agreement
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or commitment. HDS does not own an equity interest in any corporation,
partnership or other entity, except that HDS owns beneficially and of record all
the issued and outstanding stock of the Subsidiary. Each share of capital stock
of the Subsidiary outstanding as of the date of this Agreement is duly
authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights. No prior offer, issue, redemption, call, purchase, sale,
transfer or other transaction of any nature with respect to the capital stock or
equity interests of HDS, or any corporation or organization which has been
merged into HDS, has given or may give rise to any valid claim or action by any
person which is enforceable against HDS, the Surviving Corporation or any of
their respective affiliates and, to the knowledge of the HDS Executives (as
hereinafter defined), no fact or circumstance exists which could give rise to
any such right, claim or action on behalf of any person.
Section 3.5. Financial Statements. (a) HDS has made available to MED the
audited balance sheets of HDS as of March 31, 1995 and March 31, 1996, and the
related audited statements of income, changes in stockholders' equity and cash
flows for the respective fiscal years then ended including the notes to such
financial statements, examined by and accompanied by the report of Deloitte &
Touche LLP ("Deloitte & Touche"), independent public accountants (the balance
sheet as of March 31, 1996 is referred to herein as the "1996 Balance Sheet").
All of the foregoing financial statements are collectively referred to as the
"HDS Financial Statements." The HDS Financial Statements (i) have been prepared
from, and are in accordance with, the books and records of HDS and (ii), as
applicable, present fairly the financial position, results of operations,
changes in stockholders' equity and cash flows of HDS as of the dates and for
the periods indicated, in each case in conformity with generally accepted
accounting principles, consistently applied. The HDS Disclosure Letter sets
forth a true and complete list of all loss contingencies (within the meaning of
Statement of Financial Accounting Standards No. 5) of HDS existing as of March
31, 1996 exceeding $50,000 in the case of any single loss contingency or
$100,000 in the case of all loss contingencies.
(b) On the Closing Date, HDS and Subsidiary will not have any obligation or
liability (including but not limited to indebtedness for borrowed money and
capitalized lease obligations) that under generally accepted accounting
principles is required to be recorded on a balance sheet as a long-term
liability.
Section 3.6. Absence of Certain Changes. (a) Since March 31, 1996, there
has not been (i) any material adverse change in the assets, liabilities, results
of operations, financial condition or business of HDS and Subsidiary taken as a
whole, (ii) any material damage, destruction, loss or casualty to property or
assets of HDS, whether or not covered by insurance, which property or assets are
material to the operations or business of HDS and Subsidiary taken as a whole,
(iii) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) in respect of the capital stock of HDS, any
redemption or other acquisition by HDS of any of the capital stock of HDS or any
split, combination or reclassification of shares of capital stock declared or
made by HDS or (iv) any agreement to do any of the foregoing.
(b) Since March 31, 1996, there have not been (i) any extraordinary losses
suffered, which, in the aggregate, have had an HDS Material Adverse Effect, (ii)
any material assets mortgaged, pledged or made subject to any material lien,
charge or other encumbrance, (iii) any material liability or obligation
(absolute, accrued or contingent) incurred or any material bad debt, contingency
or other reserve increase suffered, except, in each such case, in the ordinary
course of business and consistent with past practice, (iv) any material claims,
liabilities or obligations (absolute, accrued or contingent) paid, discharged or
satisfied, other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of claims, liabilities and
obligations reflected or reserved against in the HDS Financial Statements or
incurred in the ordinary course of business and consistent with past practice,
(v) any material guaranteed checks, notes or accounts receivable written off as
uncollectible, except write-offs in the ordinary course of business and
consistent with past practice, (vi) any write down (under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121") or otherwise) of the value of any
material asset or investment on HDS's books or records, except for depreciation
and amortization taken in the ordinary course of business and consistent with
past practice, (vii) any cancellation of any material debts or waiver of any
material claims or rights of substantial value, or sale, transfer or other
disposition of any material properties or assets (real, personal or mixed,
tangible or intangible) of substantial value, except, in each such case, in
transactions in the ordinary course of business and consistent with past
practice, (viii) any capital expenditure that would cause all capital
expenditures since December 31, 1995, to exceed $500,000, (ix) any change in
accounting practice
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relating to capitalized research and development, (x) any material transactions
entered into other than in the ordinary course of business, (xi) any agreements
to do any of the foregoing, or (xii) any other events, developments or
conditions of any character that have had or are reasonably likely to have a HDS
Material Adverse Effect other than events affecting businesses similar to HDS
and Subsidiary generally.
Section 3.7. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending, or, to the knowledge of the HDS
Executives, threatened against HDS or Subsidiary (or any of their officers or
directors) before any court, arbitrator or administrative or governmental body,
which, if finally determined adversely, are reasonably likely, individually or
in the aggregate, to have a HDS Material Adverse Effect. All pending suits,
actions, claims, proceedings or investigations of HDS or Subsidiary (or any of
their officers or directors) before any court, arbitrator or administrative or
governmental body are adequately provided for in the 1996 Balance Sheet if and
to the extent such a provision is required by generally accepted accounting
principles consistently applied. Neither HDS nor Subsidiary is subject to any
judgment, decree, injunction, rule or order of any court, and, to the knowledge
of the HDS Executives, neither HDS nor Subsidiary is subject to any governmental
restriction applicable to HDS, which is reasonably likely (i) to have a HDS
Material Adverse Effect or (ii) to cause a material limitation on MED's ability
to operate the business of HDS and Subsidiary taken as a whole after the
Closing.
Section 3.8. Compliance with Law. HDS and Subsidiary each has all material
authorizations, approvals, licenses and orders of and from all governmental and
regulatory officers and bodies necessary to carry on its business as it is
currently being conducted, to own or hold under lease the properties and assets
it owns or holds under lease and to perform all of its obligations under the
agreements to which it is a party, and each has been and is in compliance with
all applicable laws, regulations and administrative orders of any country, state
or municipality or of any subdivision of any thereof to which its business or
its employment of labor or its use or occupancy of properties or any part
thereof are subject, the failure to obtain or the violation of which would have
an HDS Material Adverse Effect.
Section 3.9. Material Contracts. The HDS Disclosure Letter contains a
correct and complete list of the following (other than accounts payable incurred
in the ordinary course of business) (the "HDS Material Contracts"):
(a) all bonds, debentures, notes, loans, mortgages, indentures or
guarantees to which HDS or Subsidiary is a party or by which any one of its
properties or assets (real, personal or mixed, tangible or intangible) is
bound, in any case involving an amount in excess of $10,000 individually;
(b) all leases to which HDS or Subsidiary is a party or by which any
of its properties or assets (real, personal or mixed, tangible or
intangible) is bound involving an annual rental payment in excess of
$75,000 individually;
(c) all credit or loan commitments in excess of $100,000 to HDS or
Subsidiary which are outstanding, together with a brief description of such
commitments and the name of each financial institution granting the same;
(d) all contracts or agreements which limit or restrict in a
substantial manner HDS, Subsidiary or any of the HDS Executives from
engaging in any business in any jurisdiction and all contracts or
agreements that limit or restrict others from competing with HDS or
Subsidiary in any jurisdiction, other than contracts between HDS or
Subsidiary and current or former employees of HDS or Subsidiary;
(e) all contracts or agreements requiring HDS or Subsidiary to
register its capital stock or securities under federal or state securities
law; and
(f) all existing contracts and commitments (other than those described
in subparagraphs (a), (b), (c), (d) or (e) of this Section 3.9, the HDS
Client Contracts and other agreements between HDS or Subsidiary and their
clients that are not HDS Client Contracts, and the HDS Benefit Plans) to
which HDS or Subsidiary is a party or by which its properties or assets may
be bound involving an annual commitment or annual payment by any party to
such contract or commitment of more than $75,000 individually.
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True and complete copies of all HDS Material Contracts, including all
amendments, have been made available to MED. The HDS Material Contracts are
valid and enforceable in accordance with their respective terms with respect to
HDS and, to the knowledge of the HDS Executives, valid and enforceable in
accordance with their respective terms with respect to any other party to a HDS
Material Contract, in each case to the extent material to the business and
operations of HDS and subject to applicable bankruptcy, insolvency and other
similar laws affecting the enforceability of creditors' rights generally,
general equitable principles and the discretion of courts in granting equitable
remedies. Except for events or occurrences, the consequences of which,
individually or in the aggregate, would not have a HDS Material Adverse Effect,
there is not under any of the HDS Material Contracts any existing breach,
default or event of default by HDS or Subsidiary or event that with notice or
lapse of time or both would constitute a breach, default or event of default by
HDS or Subsidiary, nor do the HDS Executives know of, and HDS has not received
notice of, or made a claim with respect to, any breach or default by any other
party to an HDS Material Contract.
Section 3.10. HDS Client Contracts. The HDS Disclosure Letter sets forth a
true and complete list of all agreements, contracts or commitments pursuant to
which HDS or Subsidiary provides goods or services to its clients which (i)
produced annual payments to HDS or Subsidiary in excess of $100,000 in the year
ending March 31, 1996, or (ii) which HDS reasonably expects to produce annual
payments to HDS or Subsidiary in excess of $1,000,000 in the year ending March
31, 1997 (the "HDS Client Contracts"). The HDS Disclosure Letter contains an
accurate description of (a) the terms and conditions of each oral HDS Client
Contract; (b) any and all disagreements, complaints, disputes or defaults known
to the HDS Executives arising under or with respect to the HDS Client Contracts
which could reasonably be expected to result in a client's termination of its
HDS Client Contract or claim for damages against HDS or Subsidiary in excess of
$300,000; and (c) all loans or advances made by HDS or Subsidiary to or on
behalf of its clients, which description includes the dates of such loans or
advances and the principal balance outstanding as of the date of the HDS
Disclosure Letter under each such loan or advance. Except for provisions in HDS
Client Contracts granting unilateral termination rights to clients of HDS upon
notice to HDS, the execution, delivery and performance of this Agreement by HDS
and the consummation of the transactions contemplated by this Agreement will
not, with the passing of time or the giving of notice or both, violate,
constitute a default under, result in the loss of any material benefit under the
terms or provisions of, or give rise to a termination right under, any HDS
Client Contract. True and complete copies of all written HDS Client Contracts,
including all amendments, have been made available to MED. The HDS Client
Contracts are valid and enforceable in accordance with their respective terms
with respect to HDS or Subsidiary, and, to the knowledge of the HDS Executives,
are valid and enforceable in accordance with their respective terms with respect
to any other party to an HDS Client Contract, in each case except as would not
have an HDS Material Adverse Effect, and subject to applicable bankruptcy,
insolvency and other similar laws affecting the enforceability of creditors'
rights generally, general equitable principles and the discretion of courts in
granting equitable remedies. Except as would not have a HDS Material Adverse
Effect, there is not under HDS Client Contracts any existing breach, default or
event of default by HDS or Subsidiary, or event that with notice or lapse of
time or both would constitute a breach, default or event of default by HDS or
Subsidiary, nor do the HDS Executives know of, and HDS has not received notice
of, or made a claim with respect to, any breach or default by any other party.
Section 3.11. Tax Returns; Taxes. Each of HDS and Subsidiary has duly
filed all federal, state, local and foreign tax returns required to be filed by
it and has duly paid or made adequate provision for the payment of all taxes
which are due and payable pursuant to such returns or pursuant to any assessment
which is due and payable with respect to taxes in such jurisdictions, whether or
not in connection with such returns. The liability for taxes reflected in the
1996 Balance Sheet is sufficient for the payment of all unpaid taxes, whether or
not disputed, that are accrued or applicable for the period ended March 31, 1996
and for all years and periods ended prior to that date or that are attributable
to differences in the time for recognition of income, deductions and other items
for financial reporting and tax purposes. All deficiencies asserted as a result
of any examinations by the Internal Revenue Service or any other taxing
authority have been paid and fully settled. There are no pending claims asserted
for taxes of HDS or Subsidiary or outstanding agreements or waivers extending
the statutory period of limitation applicable to any tax return of HDS or
Subsidiary for any period. Each of HDS and Subsidiary has made all estimated
income tax deposits and all other required tax payments
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or deposits and has complied for all prior periods in all material respects with
the tax withholding provisions of all applicable federal, state, local, foreign
and other laws. HDS has made available to Medaphis true, complete and correct
copies of its federal income tax returns for the last three taxable years and
made available all other tax returns requested by Medaphis.
Section 3.12. Officers, Directors and Employees. The HDS Disclosure Letter
contains a true and complete list of all of the officers and directors of HDS,
specifying their office and annual rate of compensation, and a true and complete
copy of the form of written employment agreement to which each full-time
employee of HDS or Subsidiary is a party and a list of the employees of HDS or
Subsidiary as of the date of this Agreement to whom HDS or Subsidiary has made
oral commitments involving material terms which are binding on HDS or Subsidiary
and that involve an amount in excess of $35,000.
Section 3.13. Employee Benefit Plans. (a) Definition of Benefit
Plans. For purposes of this Section 3.13, the term "HDS Benefit Plan" means any
plan, program, arrangement, fund, policy, practice or contract which, through
which or under which HDS or any HDS ERISA Affiliate currently provides or, with
respect to any multi-employer plans (as defined in ERISA section 4001(a)(3)) and
pension benefit plans (as defined in ERISA section 3(3)) subject to Code section
412, at any time provided, benefits or compensation to or on behalf of employees
or former employees of HDS or any HDS ERISA Affiliate, whether formal or
informal, whether or not written, including but not limited to the following:
(i) Arrangements -- any bonus, incentive compensation, stock option,
deferred compensation, commission, severance pay, golden parachute or other
compensation plan or rabbi trust;
(ii) ERISA Plans -- any "employee benefit plan" (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), including, but not limited to, any multiemployer plan (as
defined in Section 3(37) and Section 4001(a) (3) of ERISA), defined benefit
plan, profit sharing plan, money purchase pension plan, 401(k) plan,
savings or thrift plan, or any plan, fund, program, arrangement or practice
providing for medical (including post-retirement medical), hospitalization,
accident, sickness, disability, or life insurance benefits; and
(iii) Other Employee Fringe Benefits -- any stock purchase, vacation,
scholarship, sick days, day care, prepaid legal services, dependent care or
other fringe benefits plans, programs, arrangements, contracts or
practices.
(b) HDS ERISA Affiliate. For purposes of this Section 3.13, the term "HDS
ERISA Affiliate" means each trade or business (whether or not incorporated)
which together with HDS is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code.
(c) Identification of Benefits Plans. All of the HDS Benefit Plans are
listed in the HDS Disclosure Letter.
(d) Compliance With All Statutes, Orders and Rules. Each HDS Benefit Plan
maintained by HDS and each HDS ERISA Affiliate is in compliance in all material
respects with the requirements prescribed by and all statutes, orders and
governmental rules and regulations applicable to HDS Benefit Plans. All reports
and disclosures relating to HDS Benefit Plans required to be filed with or
furnished to any governmental entity, participants or beneficiaries prior to the
Closing Date have been or will be filed or furnished in a timely manner and in
accordance with applicable laws except as would not have a HDS Material Adverse
Effect.
(e) MEPPA Liability/Post-Retirement Medical Benefits. Neither HDS nor any
HDS ERISA Affiliate maintains, or has at anytime established or maintained, or
has at any time been obligated to make, or made, contributions to or under any
multiemployer plan (as defined in Section 3(37) and Section 4001(a)(3) of
ERISA). HDS does not maintain, nor has HDS at any time established or
maintained, nor has HDS at any time been obligated to make, or made,
contributions to or under any plan which provides post-retirement medical or
health benefits with respect to employees of HDS. There is no lien upon any
property of HDS or any HDS ERISA Affiliate outstanding pursuant to Section
412(n) of the Code in favor of any HDS Benefit Plan. No assets of HDS or any HDS
ERISA Affiliate have been provided as security for any HDS Benefit Plan pursuant
to Section 401(a) (29) of the Code.
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(f) Documentation. HDS has made available to Medaphis a true and complete
copy of the following documents, if applicable, with respect to each HDS Benefit
Plan identified in the HDS Disclosure Letter: (1) all documents, including any
insurance contracts and trust agreements, setting forth the terms of each HDS
Benefit Plan, or if there are no such documents evidencing a HDS Benefit Plan, a
full description of such HDS Benefit Plan, (2) the ERISA summary plan
description and any other summary of plan provisions provided to participants or
beneficiaries for each such HDS Benefit Plan, (3) the annual reports filed for
the most recent three plan years and most recent financial statements or
periodic accounting of related plan assets with respect to each HDS Benefit
Plan, (4) the most recent favorable determination letter, opinion or ruling from
the Internal Revenue Service ("IRS") for each HDS Benefit Plan, the assets of
which are held in trust, to the effect that such trust is exempt from federal
income tax, and any outstanding request for a determination letter and (5) each
opinion or ruling from the Department of Labor or the Pension Benefit Guaranty
Corporation ("PBGC") with respect to any such HDS Benefit Plan.
(g) Qualified Status. Each HDS Benefit Plan that is funded through a trust
or insurance contract has at all times satisfied in all material respects, by
its terms and in its operation, all applicable requirements for an exemption
from federal income taxation under Section 501(a) of the Code. Except for the
HDS Profit Sharing 401(k) Plan and the HDS Money Purchase Pension Plan (the "HDS
Qualified Plans"), no HDS Benefit Plan meets or was intended to meet the
requirements of Section 401(a) of the Code. Any determination letter issued by
the IRS to the effect that the HDS Qualified Plans qualify under Section 401(a)
of the Code and that the related trusts are exempt from taxation under Section
501(a) of the Code remains in effect and has not been revoked. The HDS Qualified
Plans currently comply in form in all material respects with the requirements
under Section 401(a) of the Code, other than changes required by statutes,
regulations and rulings for which amendments are not yet required. The HDS
Qualified Plans have been administered according to their terms (except for
those terms which are inconsistent with the changes in operations of a HDS
Qualified Plan required by statutes, regulations, and rulings for which changes
in plan terms are not yet required to be made, in which case the HDS Qualified
Plans have been operated in accordance with the provisions of those statutes,
regulations and rulings) and in accordance with the requirements of Section
401(a) of the Code.
The HDS Profit Sharing 401(k) Plan has been tested for compliance with, and
in all material respects has satisfied the requirements of, Section 401(k)(3)
and 401(m)(2) of the Code for each plan year ending prior to the Closing Date.
(h) Legal Actions. To the knowledge of the HDS Executives, there are no
actions, audits, suits or claims which are pending or threatened against any HDS
Benefit Plan, any fiduciary of any of the HDS Benefit Plans with respect to the
HDS Benefit Plans or against the assets of any of the HDS Benefit Plans, except
claims for benefits made in the ordinary course of the operation of such plans.
(i) Funding. HDS and each HDS ERISA Affiliate has made full and timely
payment of all amounts required to be contributed under the terms of each HDS
Benefit Plan and applicable law or required to be paid as expenses under such
HDS Benefit Plan and no excise taxes in an aggregate amount in excess of $50,000
are assessable as a result of any nondeductible or other contributions made or
not made to a HDS Benefit Plan. The assets of all HDS Benefit Plans which are
required under applicable laws to be held in trust are in fact held in trust,
and the assets of each such HDS Benefit Plan equal or exceed the liabilities of
each such plan. The liabilities of each other HDS Benefit Plan are properly and
accurately reported on the financial statements and records of HDS to the extent
required by law or accounting principles except as would not have a HDS Material
Adverse Effect. The assets of each HDS Benefit Plan are reported at their then
current fair market value on the books and records of each HDS Benefit Plan.
(j) Liabilities. Neither HDS nor any HDS ERISA Affiliate is subject to any
material liability, tax or penalty whatsoever to any person whomsoever as a
result of HDS's or any HDS ERISA Affiliate's engaging in a prohibited
transaction under ERISA or the Code, and the HDS Executives have no knowledge of
any circumstances which reasonably might result in any such material liability,
tax or penalty as a result of a breach of fiduciary duty under ERISA.
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(k) Excess Parachute Payments. No payment required to be made to any
employee associated with HDS as a result of the transactions contemplated hereby
under any contract or otherwise will, if made, constitute an "excess parachute
payment" within the meaning of Section 280G of the Code.
(l) COBRA. HDS and each HDS ERISA Affiliate have complied with the
continuation coverage requirements of Section 4980B of the Code.
(m) No Acceleration of Liability Under Benefit Plans. The consummation of
the transactions contemplated hereby will not accelerate or increase any
liability under any HDS Benefit Plan because of an acceleration or increase of
any of the rights or benefits to which employees of HDS or any HDS ERISA
Affiliate may be entitled thereunder.
(n) Leased Employees. To the knowledge of the HDS Executives, HDS has made
no representations or warranties (whether written or oral, express or implied)
contractually or otherwise to any client or customer of HDS that HDS employees
rendering services to such client or customer are not "leased employees" (within
the meaning of Section 414(n) of the Code) or that such employees would not be
required to participate under any pension benefit plan (within the meaning of
Section 3(2) of ERISA) (a "Pension Benefit Plan") of such client or customer of
HDS relating either to (a) providing benefits to employees of HDS under a
Pension Benefit Plan of HDS or (b) making contributions to or reimbursing such
client or customer for any contributions made to a Pension Benefit Plan of such
client or customer on behalf of employees of HDS.
(o) Defined Benefit Plans/Money Purchase Plans. No HDS Benefit Plan has
suffered any accumulated funding deficiency within the meaning of Section 302 of
ERISA and Section 412 of the Code. Neither HDS nor any HDS ERISA Affiliate has
any outstanding liability under Section 4971 of the Code. No HDS Benefit Plan is
subject to Title IV of ERISA.
Section 3.14. Labor Relations. To the knowledge of the HDS Executives,
each of HDS and Subsidiary is in compliance with all federal and state laws
respecting employment and employment practices, terms and conditions of
employment, wages and hours, and is not engaged in any unfair labor or unlawful
employment practice. Except as would not result in a HDS Material Adverse
Effect, there is no unlawful employment practice discrimination charge involving
HDS or Subsidiary pending before the Equal Employment Opportunity Commission
("EEOC"), EEOC recognized state "referral agency" or any other governmental
agency. There is no unfair labor practice or similar charge or complaint against
HDS or Subsidiary pending before the National Labor Relations Board ("NLRB") or
any comparable Canadian governmental agency. There is no labor strike, slowdown
or stoppage actually pending or, to the knowledge of the HDS Executives,
threatened against or involving or affecting HDS or Subsidiary and no labor
union representation question exists under the National Labor Relations Act or
any comparable Canadian law respecting any employees of HDS or Subsidiary. To
the knowledge of the HDS Executives, no grievance or arbitration proceeding is
pending against HDS or Subsidiary and no written claim therefor exists. There is
no collective bargaining agreement that is binding on HDS or Subsidiary.
Section 3.15. Insurance. HDS has provided to Medaphis a true and complete
list of its current insurance coverages for HDS and Subsidiary, including names
of carriers, amounts of coverage and premiums therefor. Each of HDS and
Subsidiary believes that such corporation has been and is insured with respect
to its properties and the conduct of its business in such amounts and against
such risks as are reasonable in relation to its business and will use its
reasonable efforts to maintain such insurance at least through the Effective
Time. HDS has made available to Medaphis true and complete copies of all
insurance policies covering HDS or Subsidiary, their properties, assets,
employees or operations.
Section 3.16. Title to Properties and Related Matters. (a) Each of HDS and
Subsidiary has good and valid title to or valid leasehold interests in its
properties reflected in the 1996 Balance Sheet or acquired after March 31, 1996
(other than properties sold or otherwise disposed of in the ordinary course of
business), and all of such properties are held free and clear of all title
defects, liens, encumbrances and restrictions, except, with respect to all such
properties, (a) mortgages and liens securing debt reflected as liabilities on
the 1996 Balance Sheet and (b) (i) liens for current taxes and assessments not
in default, (ii) mechanics', carriers',
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workmen's, repairmen's, statutory or common law liens either not delinquent or
being contested in good faith, and (iii) liens, mortgages, encumbrances,
covenants, rights-of-way, building or use restrictions, easements, exceptions,
variances, reservations and other matters or limitations of any kind, if any,
which either individually or in the aggregate do not have a material adverse
effect on HDS's or Subsidiary's use of the property affected. Notwithstanding
the preceding sentence, HDS makes no representation or warranty in this Section
3.16 or otherwise regarding the validity of lessor's title to any such
properties in which HDS or Subsidiary has a leasehold interest as lessee.
Neither HDS nor Subsidiary has granted any security interests or other liens
upon or factored the accounts receivable of HDS or Subsidiary.
(b) The HDS Disclosure Letter sets forth a true and complete list of all
leases and agreements of HDS or Subsidiary granting possession of or rights to
real or personal property which provide for payments in excess of $75,000
annually (the "Scheduled Leases"). All such Scheduled Leases are in full force
and effect and constitute the valid, binding and enforceable obligations of HDS
or Subsidiary, and, to the knowledge of the HDS Executives, are valid, binding
and enforceable in accordance with their respective terms with respect to each
other party to a Scheduled Lease, subject in each case to applicable bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally, general equitable principles and the discretion of courts in granting
equitable remedies and except as would not result in a HDS Material Adverse
Effect. HDS or Subsidiary has physical possession of all real property,
equipment and other assets which are covered by Scheduled Leases. Except as
would not result in a HDS Material Adverse Effect, there are no existing
defaults of HDS or Subsidiary with respect to such Scheduled Leases or, to the
knowledge of the HDS Executives, of any of the other parties to such Scheduled
Leases (or, to the knowledge of the HDS Executives, any events or conditions
which, with notice or lapse of time, or both, would constitute a default).
Section 3.17. Environmental Matters. To the actual knowledge of the HDS
Executives, HDS is in compliance in all material respects with all statutes,
regulations and ordinances relating to the protection of human health and the
environment including, without limitation, the Clean Water Act, 33 U.S.C.
sec. 1251 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
sec. 6901 et seq., the Clean Air Act, 42 U.S.C. sec. 7401 et seq., the Toxic
Substances Control Act, 15 U.S.C. sec. 2601 et seq., the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. sec. 11001 et seq., the regulations
developed pursuant to these statutes and the corresponding state and local
statutes, ordinances and regulations. There has been no release by HDS,
Subsidiary or, to the actual knowledge of the HDS Executives, by any other
person of a hazardous substance as that term is defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
sec. 9601(14), into the environment at any property owned or leased by HDS or
Subsidiary (the "Premises") including, without limitation, any such release in
the soil or groundwater underlying the Premises. To the actual knowledge of the
HDS Executives, there is no asbestos, polychlorinated biphenyls or underground
storage tanks located on the Premises and there have been no releases of
asbestos, polychlorinated biphenyls or materials stored in underground storage
tanks, including, without limitation, petroleum or petroleum-based materials. To
the knowledge of the HDS Executives, neither HDS nor Subsidiary has received
notice of any violation of any environmental statute or regulation by HDS or
Subsidiary nor has it been advised of any claim or liability pursuant to any
environmental statute or regulation brought by any governmental agency or
private party against HDS or Subsidiary.
Section 3.18. Patents, Trademarks, Trade Names. The HDS Disclosure Letter
sets forth a true and complete list of (i) all patents, registered trademarks,
registered trade names (including all federal and state registration pertaining
thereto) and registered copyrights owned by HDS or Subsidiary and unregistered
trademarks and trade names which are material to the business of HDS and
Subsidiary taken as a whole (collectively, the "Proprietary Intellectual
Property") and (ii) all patents, trademarks, trade names, copyrights, technology
and processes used by HDS or Subsidiary in its business which are material to
its business and are used pursuant to a license or other right granted by a
third party (collectively, the "Licensed Intellectual Property", and together
with the Proprietary Intellectual Property referred to as "Intellectual
Property"), other than commercially available "shrink-wrap" software sold
through retail channels. A true and complete list of all such licenses with
respect to Licensed Intellectual Property is set forth in the HDS Disclosure
Letter. To the knowledge of the HDS Executives, each of the federal and state
registrations pertaining to the Proprietary Intellectual Property is valid and
in full force and effect and all required filings in
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association with such registrations have been properly made and all required
fees have been paid. Each of HDS and Subsidiary owns, or has the right to use
pursuant to valid and effective agreements, in accordance with their respective
terms (subject to applicable bankruptcy, insolvency and other similar laws
affecting the enforceability of creditors' rights generally, general equitable
principles and the discretion of courts in granting equitable remedies), all
Intellectual Property, and the consummation of the transactions contemplated by
this Agreement will not violate, constitute a breach of or a default under, or
result in the loss of any material benefit under, the terms or provisions of any
such agreement. To the knowledge of the HDS Executives, no written claims are
pending against HDS or Subsidiary by any person with respect to the use of any
Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement relating to the same, and to the
knowledge of the HDS Executives the current use by HDS and Subsidiary of the
Intellectual Property does not infringe on the rights of any third party. The
HDS Disclosure Letter sets forth a list of all jurisdictions in which HDS or
Subsidiary is operating under a trade name, and each jurisdiction in which any
such trade name is registered.
Section 3.19. HDS Computer Software. (a) The HDS Disclosure Letter sets
forth (i) a description of all software owned by each of HDS and Subsidiary and
used or licensed to customers in connection with the business of HDS and
Subsidiary (the "HDS Proprietary Software"); and (ii) a list of all software
(other than the HDS Proprietary Software) used in connection with the business
of HDS and Subsidiary (the "HDS Licensed Software" and together with the HDS
Proprietary Software, the "HDS Software"), except that such list does not
include HDS Licensed Software that is commercially available "shrink-wrap"
software sold through retail channels. The HDS Software consists of: (i) source
and object code embodied in magnetic media; and (ii) all development and
procedural tools necessary to maintain the HDS Proprietary Software, including
licenses to use compilers, assemblers, libraries and other such aids. To the
knowledge of the HDS Executives, HDS employs individuals who are familiar with
the business of such corporation and who are qualified to maintain the HDS
Software and to use the computer hardware used by such corporation in its
operations (the "HDS Hardware").
(b) HDS has all right, title and interest in and to all patent, trade
secret and copyright rights in the HDS Proprietary Software. HDS has developed
the HDS Proprietary Software entirely through its own efforts for its own
account. The HDS Proprietary Software is free and clear of all liens, claims and
encumbrances, except for liens, claims and encumbrances involving an aggregate
of not more than $100,000. The use of the HDS Licensed Software and the use and
distribution of the HDS Proprietary Software does not breach any terms of any
contract between HDS and Subsidiary and any third party, except for breaches of
such contracts involving not more than $100,000 in the aggregate. The HDS
Disclosure Letter sets forth a true and complete list of all license agreements
in favor of HDS or Subsidiary relating to the HDS Licensed Software that is
listed in the HDS Disclosure Letter pursuant to Section 3.19(a)(ii) (the "HDS
License Agreements"). To the knowledge of the HDS Executives, HDS has been
granted and has under the HDS License Agreements valid license rights with
respect to the HDS Licensed Software. HDS is in compliance in all material
respects with each of the material terms and conditions of each of the HDS
License Agreements. In the case of any commercially available "shrink-wrap"
software sold through retail channels (such as Lotus 1-2-3), to the knowledge of
the HDS Executives (i) HDS has not made and is not using any unauthorized copies
of any such software programs and (ii) none of the employees, agents or
representatives of any of HDS or Subsidiary have made or are using any such
unauthorized copies.
(c) Except for infringements that involve in the aggregate not more than
$500,000 or that do not have or would not have a HDS Material Adverse Effect,
the HDS Proprietary Software does not and, to the actual knowledge of the HDS
Executives, the HDS Licensed Software does not infringe any United States
patent, copyright, or trade secret or any other intellectual property right of
any third party. HDS has taken commercially reasonable actions to maintain in
confidence the source code for the HDS Proprietary Software. The HDS Disclosure
Letter sets forth a true and complete list of all source code escrow
arrangements under which a third party may have a right to obtain source code
for the HDS Proprietary Software. Source code for the HDS Proprietary Software
has never been furnished to a third party, except that source code has been
deposited with the escrow agent under the source code escrow agreements
identified on the HDS Disclosure Letter.
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(d) To the knowledge of the HDS Executives, the HDS Proprietary Software
was: (i) developed by HDS's employees working within the scope of their
employment at the time of such development; (ii) developed by agents,
consultants, contractors or others who have executed appropriate instruments of
assignment in favor of HDS as assignee that have conveyed to HDS ownership of
all of their intellectual property rights in the HDS Proprietary Software; or
(iii) acquired by HDS in connection with acquisitions in which HDS obtained
appropriate representations and warranties from the transferring party relating
to the title to such HDS Proprietary Software. To the knowledge of the HDS
Executives, neither HDS nor Subsidiary has received notice from any third party
claiming any right, title or interest in the HDS Proprietary Software.
(e) There are no agreements or arrangements in effect with respect to the
marketing, distribution, licensing or promotion of the HDS Proprietary Software
by any independent sales person, distributor, sublicensee or other remarketer or
sales organization.
(f) Neither HDS nor Subsidiary has granted rights in the HDS Proprietary
Software or HDS Licensed Software that is listed pursuant to Section 3.19(a)(ii)
to any third party, except for rights granted to customers pursuant to contracts
with customers which grants of rights are disclosed in the HDS Disclosure
Letter.
(g) To the knowledge of the HDS Executives, the HDS Software and the HDS
Hardware are adequate in all material respects, when taken together with the
other assets, resources and personnel of HDS and Subsidiary, to run the business
of HDS and Subsidiary on the date of this Agreement in substantially the same
manner as such business has operated since June 30, 1995. The HDS Disclosure
Letter contains a summary description of any problems experienced by HDS or
Subsidiary in the past twelve months with respect to the HDS Software or HDS
Hardware and the provision of services to HDS clients which have arisen outside
the ordinary course of business and resulted, or reasonably could be expected to
result, in a material disruption of the provision of services by HDS or
Subsidiary to such clients.
Section 3.20. Proxy Statement and Registration Statement. The information
with respect to HDS, its officers, directors and affiliates in the definitive
proxy statement to be furnished to the stockholders of HDS (the "Proxy
Statement") that will form a part of the Registration Statement on Form S-4
relating to the shares of Medaphis Common Stock to be issued in the Merger (the
"Registration Statement") or in the Registration Statement will not, in the case
of the Proxy Statement, on the date the Proxy Statement is first mailed to
stockholders of HDS or on the date of the stockholders' meeting referred to in
Section 5.5, or, in the case of the Registration Statement, at the time it
becomes effective and at the Effective Time, as such Proxy Statement or
Registration Statement is then amended or supplemented, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Section 3.21. Transactions with Affiliates. No holder of five percent or
more of the issued and outstanding shares of HDS Capital Stock, officer or
director of HDS or Subsidiary, or any immediate family member of any such
stockholder, officer or director or any entity in which any such person, owns
any beneficial interest (other than a publicly held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market and
less than 1% of the stock of which is beneficially owned by all such persons)
has any beneficial interest in: (i) any contract, arrangement or understanding
involving aggregate consideration of $100,000 or more with, or relating to, the
business or operations of HDS or Subsidiary; (ii) any loan, arrangement,
understanding, agreement or contract for or relating to indebtedness of HDS or
Subsidiary in the amount of $100,000 or more; or (iii) any property (real,
personal or mixed), tangible or intangible, with a value of $100,000 or more
used or currently intended to be used in the business or operations of HDS or
Subsidiary.
Section 3.22. Brokers, Finders and Investment Bankers. Neither HDS nor any
of its officers, directors or employees has employed any broker, finder or
investment banker or incurred any
liability for any investment banking fees, financial advisory fees, brokerage
fees or finders' fees in connection with the transactions contemplated by this
Agreement.
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Section 3.23. Disclosure. No representation, warranty or covenant made by
HDS in this Agreement, the HDS Disclosure Letter or the Exhibits attached to
this Agreement contains an untrue statement of a material fact or omits to state
a material fact required to be stated herein or therein or necessary to make the
statements contained herein or therein not misleading.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF MEDAPHIS
With such exceptions as are set forth in a letter (the "Medaphis Disclosure
Letter") delivered by Medaphis to HDS prior to the date of this Agreement,
Medaphis represents and warrants to HDS as follows:
Section 4.1. Organization. Each of Medaphis and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Medaphis and each of its subsidiaries is duly
qualified to transact business, and is in good standing, as a foreign
corporation in each jurisdiction where the character of its activities requires
such qualification, except where the failure to so qualify would not have a
material adverse effect on the assets, liabilities, results of operations,
financial condition or business of Medaphis and its subsidiaries taken as a
whole (such an effect, a "Medaphis Material Adverse Effect"). Medaphis has
delivered to HDS accurate and complete copies of the Articles or Certificate of
Incorporation and Bylaws, as currently in effect, of Medaphis and each of its
subsidiaries, and has made available to HDS the minute books and stock records
of Medaphis and each subsidiary. The Medaphis Disclosure Letter contains a true
and correct list of all of the jurisdictions in which Medaphis or any of its
subsidiaries is qualified to do business as a foreign corporation.
Section 4.2. Authorization. Each of Medaphis and RAKSub has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement and to consummate the Merger and the other
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Medaphis and RAKSub, the performance by each of Medaphis and RAKSub
of its respective obligations under this Agreement and the consummation of the
Merger and the other transactions provided for in this Agreement have been duly
and validly authorized by all necessary corporate action on the part of Medaphis
and RAKSub. The Boards of Directors of Medaphis and RAKSub have approved the
execution, delivery and performance of this Agreement and the consummation of
the Merger and the other transactions provided for in this Agreement. This
Agreement has been duly executed and delivered by each of Medaphis and RAKSub
and constitutes the valid and binding agreement of each of Medaphis and RAKSub,
enforceable against each of Medaphis and RAKSub in accordance with its terms,
subject to applicable bankruptcy, insolvency and other similar laws affecting
the enforceability of creditors' rights generally, general equitable principles
and the discretion of courts in granting equitable remedies.
Section 4.3. Absence of Restrictions and Conflicts. The execution,
delivery and performance of this Agreement, the consummation of the Merger and
the other transactions contemplated by this Agreement, and the fulfillment of
and compliance with the terms and conditions of this Agreement do not and will
not, with the passing of time or the giving of notice or both, violate or
conflict with, constitute a breach of or default under, result in the loss of
any material benefit under, or permit the acceleration of any obligation under
the terms or provisions of, (i) any term or provision of the Articles or
Certificate of Incorporation or Bylaws of Medaphis or any of its subsidiaries,
(ii) any material contract, agreement, bond, note, mortgage or indenture to
which Medaphis or any of its subsidiaries is a party or by which Medaphis, any
of its subsidiaries or any of their respective properties is bound (A "Medaplus
Material Contract"), (iii) any judgment, decree or order of any court or
governmental authority or agency to which Medaphis or any of its subsidiaries is
a party or by which Medaphis, any of its subsidiaries or any of their respective
properties is bound, or (iv) any statute, law, regulation or rule applicable to
Medaphis, or any of its subsidiaries, so as to have, in the case of subsections
(ii) through (iv) above, a Medaphis Material Adverse Effect. Except for
compliance with the applicable requirements of the HSR Act, the Securities Act,
the Exchange Act, applicable state securities laws and the filing and
recordation of the Certificate of Merger as required by the DGCL, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any government agency or public or regulatory unit,
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agency, body or authority with respect to Medaphis or any of its subsidiaries is
required in connection with the execution, delivery or performance of this
Agreement by Medaphis or HDSSub or the consummation of the transactions
contemplated by this Agreement by Medaphis or HDSSub , the failure to obtain
which would have a Medaphis Material Adverse Effect.
Section 4.4. Capitalization of Medaphis. The authorized capital stock of
Medaphis consists of 200,600,000 shares of capital stock consisting of
200,000,000 shares of voting common stock, $.01 par value and 600,000 shares of
non-voting common stock, $.01 par value. At May 13, 1996, there were 64,953,205
shares of Medaphis Common Stock issued and outstanding and no shares of
non-voting common stock were issued or outstanding. All shares of Medaphis
Common Stock outstanding as of the date hereof are duly authorized, validly
issued, fully paid, nonassessable and free of pre-emptive rights. The shares of
Medaphis Common Stock to be issued in the Merger will be validly issued, fully
paid, nonassessable and free of pre-emptive rights. The shares of Medaphis
Common Stock issuable upon exercise of the Non-Qualified Options (and, to the
extent Non-Qualified Options were not issued in substitution therefor, the
Options) have been duly authorized and, when issued against payment therefor,
will be validly issued, fully paid for and nonassessable and free of pre-emptive
rights. Except as set forth in this Section 4.4, there are no shares of capital
stock of Medaphis outstanding, and there are no subscriptions, options,
convertible securities, calls, puts, rights, warrants or other agreements,
claims or commitments of any nature whatsoever obligating Medaphis or any of its
subsidiaries to purchase, redeem, issue, transfer, deliver or sell, or cause to
be purchased, redeemed, issued, transferred, delivered or sold, additional
shares of the capital stock or other securities of Medaphis or obligating
Medaphis or any of its subsidiaries to grant, extend or enter into any such
agreement or commitment.
Section 4.5. Capital Stock of Medaphis Subsidiaries. The Medaphis
Disclosure Letter sets forth a true and complete list of all corporations,
partnerships and other entities in which Medaphis owns an equity interest (such
corporations, partnerships and other entities being hereinafter referred to as
the "Medaphis Subsidiaries"), the jurisdiction in which each Medaphis Subsidiary
is incorporated or organized, and all shares of capital stock or other ownership
interests authorized, issued and outstanding of each Medaphis Subsidiary. The
outstanding shares of capital stock or other equity interests of each Medaphis
Subsidiary have been duly authorized and are validly issued, fully paid and
nonassessable. All shares of capital stock or other equity interests of each
Medaphis Subsidiary owned by Medaphis or any of its subsidiaries are set forth
in the Medaphis Disclosure Letter and are owned by Medaphis, either directly or
indirectly, free and clear of all liens, encumbrances, equities or claims.
Section 4.6. Medaphis Commission Reports. Medaphis has made available to
HDS (i) Medaphis'Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, including all exhibits1997, filed with the Commission on February 2, 1998; and
items incorporated by reference, (ii) Medaphis'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, including
all exhibits and items incorporated by reference, (iii) the proxy statement
relating to Medaphis's Annual Meeting of Stockholders held on May 1, 1996 and
(iv) allThe Company's Current Reports on Form 8-K filed on January 8,
1998, January 28, 1998, February 13, 1998, February 18, 1998 and March 2,
1998.
All documents filed by Medaphisthe Company with the Commission since
March 31, 1996, including all exhibits and items incorporated by reference
(items (i) through (iv) in this sentence being referred to collectively as the
"Medaphis Commission Reports"). As of their respective dates, the Medaphis
Commission Reports did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Since December 31, 1994, Medaphis has filed all forms,
reports and documents with the Commission required to be filed by it pursuant to the Securities Act andSections
13(a), 13(c), 14 or 15(d) of the Exchange Act and the rules and regulations
promulgated under such acts, each of which complied as to form, at the time such
form, document or report was filed, in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and the applicable rules
and regulations promulgated under such acts.
Section 4.7. Financial Statements. Medaphis has delivered to HDS (i) the
audited consolidated balance sheets of Medaphis and its subsidiaries as of
December 31, 1995 and its audited consolidated statements of operations, changes
in stockholders' equity and cash flows for the fiscal years then ended,
including the notes thereto, examined by and accompanied by the report of
Deloitte & Touche, independent public accountants; and (ii) the unaudited
consolidated balance sheet of Medaphis and its subsidiaries as of
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March 31, 1996, (the "Medaphis Balance Sheet") and its unaudited consolidated
statements of operations, stockholders' equity and cash flows for the
three-month period then ended (all of the financial statements referred to in
this Section 4.7 are collectively referred to as the "Medaphis Financial
Statements"). The Medaphis Financial Statements have been prepared from, and are
in accordance with, the books and records of Medaphis and its consolidated
subsidiaries and, as applicable, present fairly the consolidated financial
position, consolidated results of operations, changes in stockholders' equity
and consolidated cash flows of Medaphis and its consolidated subsidiaries as of
the dates and for the periods indicated, in each case in conformity with
generally accepted accounting principles, consistently applied. The Medaphis
Disclosure Letter sets forth a true and complete list of all loss contingencies
(within the meaning of Statement of Financial Accounting Standards No. 5) of
Medaphis existing as of December 31, 1995, exceeding $250,000 in the case of any
single loss contingency or $1,000,000 in the case of all loss contingencies.
Section 4.8. Absence of Certain Changes. (a) Since December 31, 1995,
there has not been (i) any change in the assets, liabilities, results of
operations, financial condition or business of Medaphis and its subsidiaries
taken as a whole that has resulted in a Medaphis Material Adverse Effect, (ii)
any damage, destruction, loss or casualty to property or assets of Medaphis or
any of its subsidiaries, whether or not covered by insurance, which property or
assets are material to the operations or business of Medaphis and its
subsidiaries taken as a whole, (iii) any declaration, setting aside or payment
of any dividend or distribution (whether in cash, stock or property) in respect
of the capital stock of Medaphis or any redemption or other acquisition by
Medaphis of any of the capital stock of Medaphis or any of its subsidiaries
(except for the acquisition of Medaphis Common Stock in payment of the purchase
price and related taxes upon the exercise of stock options) or any split,
combination or reclassification of shares of capital stock declared or made by
Medaphis, or (iv) any agreement to do any of the foregoing.
(b) Since December 31, 1995, there have not been (i) any extraordinary
losses suffered which, in the aggregate, have had a Medaphis Material Adverse
Effect, (ii) any material assets mortgaged, pledged or made subject to any lien,
charge or other encumbrance, (iii) any material liability or obligation
(absolute, accrued or contingent) incurred or any material bad debt, contingency
or other reserve increase suffered, except, in each such case, in the ordinary
course of business and consistent with past practice, (iv) any material claims,
liabilities or obligations (absolute, accrued or contingent) paid, discharged or
satisfied, other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of claims, liabilities and
obligations reflected or reserved against in the Medaphis Financial Statements
or incurred in the ordinary course of business and consistent with past
practice, (v) any material guaranteed checks, notes or accounts receivable
written off as uncollectible, except write-offs in the ordinary course of
business and consistent with past practice, (vi) any write down (under SFAS No.
121 or otherwise) of the value of any material asset or investment on Medaphis'
books or records, except for depreciation and amortization taken in the ordinary
course of business and consistent with past practice, (vii) any cancellation of
any material debts or waiver of any material claims or rights of substantial
value, or sale, transfer or other disposition of any properties or assets (real,
personal or mixed, tangible or intangible) of substantial value, except, in each
such case, in transactions in the ordinary course of business and consistent
with past practice and which in any event do not exceed $250,000 in the
aggregate, (viii) any single capital expenditure or commitment in excess of
$1,000,000 for additions to property or equipment, or aggregate capital
expenditures and commitments in excess of $30,000,000 (on a consolidated basis)
for additions to property or equipment, (ix) any transactions entered into other
than in the ordinary course of business, (x) any agreements to do any of the
foregoing, or (xi) any other events, developments or conditions of any character
that have had or are reasonably likely to have a Medaphis Material Adverse
Effect other than events affecting businesses similar to Medaphis and its
subsidiaries generally.
Section 4.9. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending, or, to the knowledge of the Medaphis
Executives, threatened against, relating to or involving Medaphis or any of its
subsidiaries (or any of their officers or directors) before any court,
arbitrator or administrative or governmental body, which, if finally determined
adversely, are reasonably likely, individually or in the aggregate, to have a
Medaphis Material Adverse Effect. All pending suits, actions, claims,
proceedings or investigations relating to or involving Medaphis or any of its
subsidiaries (or any of their
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officers or directors) before any court, arbitrator or administrative or
governmental body are adequately provided for in the Medaphis Balance Sheet if
and to the extent such a provision is required by generally accepted accounting
principles. Neither Medaphis nor any of its subsidiaries is subject to any
judgment, decree, injunction, rule or order of any court, and, to the knowledge
of the Medaphis Executives, neither Medaphis nor any of its subsidiaries is
subject to any governmental restriction applicable to Medaphis or any such
subsidiary, which is reasonably likely (i) to have a Medaphis Material Adverse
Effect or (ii) to cause a material limitation on Medaphis' and its subsidiaries'
ability to operate the business of Medaphis and its subsidiaries after the
Closing.
Section 4.10. Compliance with Law. Each of Medaphis and its subsidiaries
has all material authorizations, approvals, licenses and orders of and from all
governmental and regulatory officers and bodies necessary to carry on its
business as it is currently being conducted, to own or hold under lease the
properties and assets it owns or holds under lease and to perform all of its
obligations under the agreements to which it is a party, and each of Medaphis
and its subsidiaries has been and is in compliance with all applicable laws,
regulations and administrative orders of any country, state, or municipality or
any subdivision of any thereof to which its business or its employment of labor
or its use or occupancy of properties or any part thereof are subject, the
failure to obtain or the violation of which would have a Medaphis Material
Adverse Effect.
Section 4.11. Proxy Statement and Registration Statement. The information
with respect to Medaphis and its subsidiaries and each of their respective
officers, directors and affiliates in the Proxy Statement or in the Registration
Statement, will not, in the case of the Proxy Statement, on the date the Proxy
Statement is first mailed to stockholders of HDS or on the date of the
stockholders' meeting referred to in Section 5.5, or, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, as such Proxy Statement or Registration Statement is then amended or
supplemented, contain any untrue statement of a material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Registration Statement and the Proxy Statement will
comply as to form with the applicable provisions of the Securities Act and the
Exchange Act.
Section 4.12. Tax Returns; Taxes. Each of Medaphis and its subsidiaries
has duly filed all federal, state, local and foreign tax returns required to be
filed by it and has duly paid or made adequate provision for the payment of all
taxes which are due and payable pursuant to such returns or pursuant to any
assessment which is due and payable with respect to taxes in such jurisdictions,
whether or not in connection with such returns. The liability for taxes
reflected on the Medaphis Balance Sheet is sufficient for the payment of all
unpaid taxes, whether or not disputed, that are accrued or applicable for the
period ended December 31, 1995 and for all years and periods ended prior to
December 31, 1995 or are attributable to differences in the time for recognition
of income, deductions and other items for financial reporting and tax purposes.
All deficiencies asserted as a result of any examinations by the Internal
Revenue Service or any other taxing authority have been paid and fully settled.
There are no pending claims asserted for taxes of Medaphis or any of its
subsidiaries or outstanding agreements or waivers extending the statutory period
of limitation applicable to any tax return of Medaphis or any of its
subsidiaries for any period. Medaphis and each of its subsidiaries have made all
estimated income tax deposits and all other required tax payments or deposits
and have complied for all prior periods in all material respects with the tax
withholding provisions of all applicable federal, state, local and other laws.
Section 4.13. Billing and Collection Practices. (a) The current practices
and procedures of Medaphis and its subsidiaries with respect to (i) billing on
behalf of clients, (ii) receiving and processing Medicare and Medicaid payments
due to clients, (iii) holding and transfer of such payments and (iv) method of
determining and collecting the fees received by Medaphis and its subsidiaries
for services provided by providers and physicians participating in the Medicare
or Medicaid programs are not in violation of the restriction on assignment as
set forth in 42 U.S.C. sec. 1395g(c), 42 U.S.C. sec. 1395u(b)(6) and 42 U.S.C.
sec. 1396(a)(32), and the regulations promulgated thereunder, or similar
provisions of any state Medicaid program, except for such violations which in
the aggregate would not have a Medaphis Material Adverse Effect.
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(b) Neither Medaphis nor any of its subsidiaries is engaged in any
activity, whether alone or in concert with one of its clients, which would
constitute a violation of any federal laws or the law of any state (including
but not limited to (i) federal antifraud and abuse or similar laws pertaining to
the Medicare, Medicaid, or any other federal health or insurance program; (ii)
state law pertaining to Medicaid or any other state health or insurance program;
(iii) state or federal laws pertaining to billings to insurance companies,
health maintenance organizations, and other managed care plans or to insurance
fraud; and (iv) Federal and state laws relating to collection agencies and the
performance of collection services) prohibiting fraudulent or abusive or
unlawful practices connected in any way with the provision of health care
services, the billing for such services provided to a beneficiary of any state,
federal or private health or insurance program or credit collection services,
except for such violations which in the aggregate would not have a Medaphis
Material Adverse Effect. Without limiting the generality of the foregoing,
neither Medaphis nor any subsidiary has, directly or indirectly, paid, offered
to pay or agreed to pay, or solicited or received, any fee, commission, sum of
money, property or other remuneration to or from any person which the Medaphis
Executives know or have reason to believe to have been illegal under (i) 42
U.S.C. sec. 1320a-7b(b) or (ii) any similar state law.
(c) Medaphis and its subsidiaries are in compliance in all material
respects with the applicable trust accounting statutes, rules and regulations of
the various states and each has sufficient funds deposited in such trust
accounts to cover all trust liabilities to clients of Medaphis and its
subsidiaries.
Section 4.14. Medaphis Employee Benefit Plans. Except as to matters of
which HDS is aware,
(a) Definition of Benefit Plans. For purposes of this Section 4.14,
the term "Medaphis Benefit Plan" means any plan, program, arrangement,
fund, policy, practice or contract which, through which or under which
Medaphis or a Medaphis ERISA Affiliate currently provides, or with respect
to any multi-employer plans (as defined in ERISA Section 4001(a)(3)) and
pension benefit plans (as defined in ERISA Section 3(3)) subject to Code
Section 412, at any time provided, benefits or compensation to or on behalf
of employees or former employees of Medaphis or a Medaphis ERISA Affiliate,
whether formal or informal, whether or not written, including but not
limited to the following:
(1) Arrangements -- any bonus, incentive compensation, stock
option, deferred compensation, commission, severance pay, golden
parachute or other compensation plan or rabbi trust;
(2) ERISA Plans -- any "employee benefit plan" (as defined in
Section 3(3) of ERISA, including, but not limited to, any multi-employer
plan (as defined in Section 3(37) and Section 4001(a)(3) of ERISA),
defined benefit plan, profit sharing plan, money purchase pension plan,
401(k) plan, savings or thrift plan, stock bonus plan, employee stock
ownership plan, or any plan, fund, program, arrangement or practice
providing for medical (including post-retirement medical),
hospitalization, accident, sickness, disability, or life insurance
benefits; and
(3) Other Employee Fringe Benefits -- any stock purchase, vacation,
scholarship, day care, prepaid legal services, dependent care or other
fringe benefit plans, programs, arrangements, contracts or practices.
(b) Medaphis ERISA Affiliate. For purposes of this Section 4.14, the
term "Medaphis ERISA Affiliate" means each trade or business (whether or
not incorporated) which together with Medaphis is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code.
(c) Identification of Benefit Plans. Except for Medaphis Benefit
Plans which have been terminated and with respect to which neither Medaphis
nor any Medaphis ERISA Affiliate has any financial, administrative or other
liability, obligation or responsibility, Medaphis does not maintain, nor
has at any time established or maintained, nor has at any time been
obligated to make, or otherwise made, contributions to or under or
otherwise participated in any Medaphis Benefit Plan.
(d) MEPPA Liability/Post-Retirement Medical Benefits. Neither
Medaphis nor any Medaphis ERISA Affiliate maintains, nor has at any time
established or maintained, nor has at any time been obligated to make, or
made, contributions to or under any multi-employer plan. Medaphis does not
maintain, nor has at any time established or maintained, nor has at any
time been obligated to make, or
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made, contributions to or under (i) any plan which provides post-retirement
medical or health benefits with respect to employees of Medaphis; (ii) any
organization described in Sections 501(c)(9) or 501(c)(20) of the Code;
(iii) any defined benefit pension plan or money purchase pension plan
subject to Title IV of ERISA; or (iv) any plan which provides retirement
benefits in excess of the limitations in Sections 401(a)(17), 401(k),
401(m), 402(g) or 415 of the Code. There is no lien upon any property of
Medaphis or any Medaphis ERISA Affiliate outstanding pursuant to Section
412(n) of the Code in favor of any Medaphis Benefit Plan. No assets of
Medaphis or any Medaphis ERISA Affiliate have been provided as security for
any Medaphis Benefit Plan pursuant to Section 401(a)(29) of the Code.
(e) Qualified Status. Each Medaphis Benefit Plan that is funded
through a trust or insurance contract has at all times satisfied in all
material respects, by its terms and in its operation, all applicable
requirements for an exemption from federal income taxation under Section
501(a) of the Code. Except for the plans identified as Qualified Plans in
the Medaphis Disclosure Letter (the "Medaphis Qualified Plans"), no
Medaphis Benefit Plan meets or was intended to meet the requirements of
Section 401(a) of the Code. Any determination letter issued by the IRS to
the effect that any of the Medaphis Qualified Plans qualifies under Section
401(a) of the Code and that the related trust is exempt from taxation under
Section 501(a) of the Code remains in effect and has not been revoked. Each
of the Medaphis Qualified Plans currently complies in form in all material
respects with the requirements under Section 401(a) of the Code, other than
changes required by statutes, regulations and rulings for which amendments
are not yet required. Each of the Medaphis Qualified Plans has been
administered according to its terms (except for those terms which are
inconsistent with the changes in operations of a Medaphis Qualified Plan
required by statutes, regulations and rulings for which changes in plan
terms are not yet required to be made, in which case such Medaphis
Qualified Plan has been operated in accordance with the provisions of those
statutes, regulations and rulings) and in accordance with the requirements
of Section 401(a) of the Code. Each of the Medaphis Qualified Plans has
been tested for compliance with, and in all material respects has satisfied
the requirements of, Sections 401(k)(3) and 401(m)(2) of the Code for each
plan year ending prior to the Effective Time.
(f) Legal Actions. There are no actions, audits, suits or claims
known to Medaphis which are pending or, to the knowledge of the Medaphis
Executives, threatened against any Medaphis Benefit Plan, any fiduciary of
any Medaphis Benefit Plans with respect to the Medaphis Benefit Plans or
against the assets of any of the Medaphis Benefit Plans, except claims for
benefits made in the ordinary course of the operation of such plans.
(g) Funding. Medaphis and each Medaphis ERISA Affiliate has made full
and timely payment of all amounts required to be contributed under the
terms of each Medaphis Benefit Plan and applicable law or required to be
paid as expenses under such Medaphis Benefit Plan, and no excise taxes in
an aggregate amount in excess of $50,000 are assessable as a result of any
nondeductible or other contributions made or not made to a Medaphis Benefit
Plan.
(h) Liabilities. Neither Medaphis nor any Medaphis ERISA Affiliate is
subject to any material liability, tax or penalty whatsoever to any person
whomsoever as a result of Medaphis' or any Medaphis ERISA Affiliate's
engaging in a prohibited transaction under ERISA or the Code, and Medaphis
has no knowledge of any circumstances which reasonably might result in any
such material liability, tax or penalty as a result of a breach of
fiduciary duty under ERISA.
Section 4.15. Labor Relations. Each of Medaphis and its subsidiaries is in
compliance in all material respects with all federal and state laws respecting
employment and employment practices, terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor or unlawful employment
practice. Except as would not result in a Medaphis Material Adverse Effect,
there is no unlawful employment practice discrimination charge involving
Medaphis or any of its subsidiaries pending before the EEOC, EEOC recognized
state "referral agency" or any other governmental agency. There is no unfair
labor practice charge or complaint against Medaphis or any of its subsidiaries
pending before the NLRB. There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the knowledge of the Medaphis Executives, threatened
against or involving or affecting Medaphis or any of its subsidiaries and no
NLRB representation question
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exists respecting any of their respective employees. To the knowledge of the
Medaphis Executives, no grievance or arbitration proceeding is pending against
Medaphis or any of its subsidiaries and no written claim for such a proceeding
exists. There is no collective bargaining agreement that is binding on Medaphis
or any of its subsidiaries.
Section 4.16. Medaphis Computer Software and Hardware. (a) The software
owned by Medaphis and its subsidiaries for license to or use in connection with
the business of Medaphis and its subsidiaries (the "Medaphis Proprietary
Software") consists of: (i) source and object code embodied in magnetic media;
and (ii) all development and procedural tools necessary to maintain the Medaphis
Proprietary Software, including licenses to use compilers, assemblers, libraries
and other aids. To the knowledge of the Medaphis Executives, Medaphis and its
subsidiaries employ individuals who are familiar with the business of Medaphis
and its subsidiaries and who are qualified to maintain the Medaphis Proprietary
Software and the related computer hardware used by Medaphis and its subsidiaries
in their operations (the "Medaphis Hardware").
(b) Medaphis and its subsidiaries have all right, title and interest in and
to all patent, trade secret and copyright rights in the Medaphis Proprietary
Software. Medaphis and its subsidiaries have developed the Medaphis Proprietary
Software entirely through their own efforts for their own accounts and the
Medaphis Proprietary Software is free and clear of all liens, claims and
encumbrances, except for liens, claims and encumbrances involving an aggregate
of not more than $100,000. The use of the software (other than the Medaphis
Proprietary Software) used by Medaphis and its subsidiaries in connection with
the business of Medaphis and its subsidiaries (the "Medaphis Licensed Software"
and together with the Medaphis Proprietary Software, the "Medaphis Software")
and the use and distribution of the Medaphis Proprietary Software does not
breach any terms of any contract between Medaphis or any of its subsidiaries and
any third party, except for breaches of such contracts involving not more than
$100,000 in the aggregate. To the knowledge of the Medaphis Executives, Medaphis
and its subsidiaries has been granted under the license agreements relating to
the Medaphis Licensed Software (the "Medaphis License Agreements") valid and
subsisting license rights with respect to all software comprising the Medaphis
Licensed Software. Medaphis is in compliance in all respects with each of the
material terms and conditions of each of the Medaphis License Agreements. In the
case of any commercially available "shrink-wrap" software programs (such as
Lotus 1-2-3), Medaphis and its subsidiaries have not made and are not using any
unauthorized copies of any such software programs and, to the knowledge of the
Medaphis Executives, none of the employees, agents or representatives of
Medaphis or any of its subsidiaries have made or are using any such unauthorized
copies.
(c) Except for infringements that involve in the aggregate not more than
$500,000 or that do not or would not have a Medaphis Material Adverse Effect,
the Medaphis Proprietary Software and, to the knowledge of the Medaphis
Executives, the Medaphis Licensed Software does not infringe any United States
patent, copyright, or trade secret or any other intellectual property right of
any third party. The source code for the Medaphis Proprietary Software has been
maintained in confidence.
(d) Neither Medaphis nor any of its subsidiaries has granted rights in the
Medaphis Software to any third party.
(e) To the knowledge of the Medaphis Executives, the Medaphis Software and
the Medaphis Hardware are adequate in all material respects with the other
assets of Medaphis to run the business of Medaphis and its subsidiaries in
substantially the same manner as such business has operated since December 31,
1994. The Medaphis Disclosure Letter contains a summary description of any
problems experienced by Medaphis and its subsidiaries in the past twelve months
with respect to the Medaphis Software or Medaphis Hardware and the provision of
services to Medaphis' and its subsidiaries clients which have arisen outside the
ordinary course of business and resulted, or reasonably could be expected to
result, in any disruption of the provision of services by Medaphis and its
subsidiaries to such clients.
Section 4.17. Title to Properties and Related Matters. Each of Medaphis
and its subsidiaries has good and valid title to or valid leasehold interest in
its properties reflected in the Medaphis Balance Sheet or acquired after the
date thereof (other than property sold or otherwise disposed of in the ordinary
course of business), and all of such properties are held free and clear of all
title defects, liens, encumbrances and restrictions, except, with respect to all
such properties, (a) mortgages and liens securing debt reflected as
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liabilities on the Medaphis Balance Sheet and (b)(i) liens for current taxes and
assessments not in default, (ii) mechanics', carriers', workmen's,
materialmen's, repairmen's, statutory or common law liens either not delinquent
or being contested in good faith, and (iii) liens, mortgages, encumbrances,
covenants, rights of way, building or use restrictions, easements, exceptions,
variances, reservations and other similar matters or limitations of any kind, if
any, which either individually or in the aggregate do not have a material
adverse effect on the use of the property affected by Medaphis or its
subsidiaries, as applicable. Notwithstanding the preceding sentence, Medaphis
and its subsidiaries make no representation or warranty in this Section 4.17 or
otherwise regarding the validity of lessor's title to any such properties in
which Medaphis or its subsidiaries have only a leasehold interest as lessee.
Section 4.18. Environmental Matters. There has been no release of a
hazardous substance, as that term is defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. sec. 9601(14), by
Medaphis or any of its subsidiaries into the environment at any property owned,
leased or used by Medaphis or any of its subsidiaries (the "Medaphis Premises")
including, without limitation, any release in the soil or ground water
underlying such Medaphis Premises, and, to the actual knowledge of the Medaphis
Executives, there has been no such release by any other party at any of the
Medaphis Premises. Neither Medaphis nor any of its subsidiaries has received
notice of any violation of any environmental statute or regulation, nor has any
such corporation been advised of any claim or liability pursuant to any
environmental statute or regulation brought by any domestic or foreign
governmental agency or private party, except such violations, claims and
liabilities which in the aggregate would not have a Medaphis Material Adverse
Effect.
Section 4.19. Brokers, Finders and Investment Bankers. Neither Medaphis
nor any subsidiary of Medaphis, or any of their respective officers, directors
or employees, has employed any broker, finder or investment banker or incurred
any liability for any investment banking fees, financial advisory fees,
brokerage fees or finders' fees in connection with the transactions contemplated
by this Agreement.
Section 4.20. Disclosure. No representation, warranty or covenant made by
Medaphis in this Agreement, the Medaphis Disclosure Letter or the Exhibits
hereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated herein or therein or necessary to make the
statements contained herein or therein not misleading.
ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
Section 5.1. Conduct of Business by HDS. From the date of this Agreement
to the Effective Time or the termination of this Agreement, HDS will and will
cause Subsidiary to, except as required in connection with the Merger and the
other transactions contemplated by this Agreement and except as otherwise
disclosed in the HDS Disclosure Letter or consented to in writing by Medaphis:
(a) Carry on its businesses in the ordinary course in substantially
the same manner as previously conducted and not engage in any new line of
business or enter into any agreement, transaction or activity or make any
commitment except those in the ordinary course of business and not
otherwise prohibited under this Section 5.1, subject to the provisions of
the proviso to the first sentence of Section 5.8;
(b) Neither change nor amend its Certificate of Incorporation or
Bylaws;
(c) Not issue, sell or grant options, warrants or rights to purchase
or subscribe to, or enter into any arrangement or contract with respect to
the issuance or sale of any of the capital stock of HDS or Subsidiary or
rights or obligations convertible into or exchangeable for any shares of
the capital stock of HDS or Subsidiary and not make any changes (by
split-up, stock dividend, combination, reorganization or otherwise) in the
capital structure of HDS or Subsidiary; except that HDS shall be permitted
to issue shares of HDS Common Stock upon exercise of Options outstanding on
the date of this Agreement that are exercised in accordance with their
terms as the same exist on the date of this Agreement;
(d) Not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
HDS and not redeem, purchase or otherwise acquire any shares
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of the capital stock or other securities of HDS or rights or obligations
convertible into or exchangeable for any shares of the capital stock or
other securities of HDS or obligations convertible into such, or any
options, warrants or other rights to purchase or subscribe to any of the
foregoing;
(e) Not acquire or enter into an agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
(f) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of HDS and Subsidiary, to
keep the officers and employees of HDS and Subsidiary available to Medaphis
and to preserve the relationships of HDS and Subsidiary with customers,
suppliers and others having business relations with HDS or Subsidiary;
(g) Not (i) create, incur or assume any short-term debt for borrowed
money, except in the ordinary course of business under existing lines of
credit, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person, except in the ordinary course of business
and consistent with past practice, (iii) make any loans or advances to any
other person, except in the ordinary course of business and consistent with
past practice, (iv) make any capital contributions to, or investments in,
any person, except in the ordinary course of business and consistent with
past practices with respect to investments, or (v) make any capital
expenditure that would cause all capital expenditures since December 31,
1995, to exceed $500,000;
(h) Not enter into, modify or extend in any manner the terms of any
employment, severance or similar agreements with officers and directors or
grant any increase in the compensation of officers, directors or employees,
whether now or in the future payable, including any increase pursuant to
any option, bonus, stock purchase, pension, profit-sharing, deferred
compensation, retirement or other plan, arrangement, contract or
commitment, other than raises or bonuses granted in the ordinary course of
business or pursuant to written agreements in existence on the date of this
Agreement;
(i) Perform in all material respects all of its obligations under all
HDS Client Contracts (except those being contested in good faith), and not
amend any existing contract of HDS in a way that would result in the loss
to HDS of a material benefit thereunder.
(j) Use its reasonable efforts to maintain in full force and effect
and in the same amounts policies of insurance comparable in amount and
scope of coverage to that now maintained by HDS;
(k) Use its reasonable efforts to continue to collect its accounts
receivable and pay its accounts payable in the ordinary course of business
and consistent with past practices;
(l) Prepare and file all federal, state, local and foreign returns for
taxes and other tax reports, filings and amendments thereto required to be
filed by it, and allow Medaphis, at its request, to review all such
returns, reports, filings and amendments at HDS's offices prior to the
filing thereof, which review shall not interfere with the timely filing of
such returns;
(m) Obtain on or prior to the Closing Date, Noncompetition and
Nonsolicitation Agreements (in the form of Exhibit 5.1(m)(A)) with the
stockholders specified in the HDS Disclosure Letter (the "Specified
Stockholders") and Employment Agreements (in the form of Exhibit 5.1(m)(B))
with the employees of HDS specified in the HDS Disclosure Letter (the
"Specified Employees"); and
(n) Not take any action the effect of which would be to cause the
Merger to be treated as a taxable transaction.
In connection with the continued operation of the business of HDS and
Subsidiary between the date of this Agreement and the Effective Time, HDS shall
confer in good faith on a regular and frequent basis with one or more
representatives of Medaphis designated in writing to report operational matters
of materiality and the general status of ongoing operations. HDS acknowledges
that Medaphis does not and will not waive any rights it may have under this
Agreement as a result of such consultations.
Section 5.2. Conduct of Business by Medaphis. From the date of this
Agreement to the Effective Time, Medaphis will, and will cause each of its
subsidiaries to, except as required in connection with the Merger and
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the other transactions contemplated by this Agreement and except as otherwise
disclosed in the Medaphis Disclosure Letter or consented to in writing by HDS:
(a) Carry on its businesses in the ordinary course in substantially
the same manner as previously conducted;
(b) Neither change nor amend its Articles or Certificate of
Incorporation or Bylaws;
(c) Other than pursuant to the exercise of employee stock options
outstanding on the date of this Agreement, not issue, sell or grant
options, warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of any of the
capital stock of Medaphis or any of its subsidiaries or rights or
obligations convertible into or exchangeable for any shares of the capital
stock of Medaphis or any of its subsidiaries and not alter the terms of any
presently outstanding options or make any changes (by split-up,
combination, reorganization or otherwise) in the capital structure of
Medaphis or any of its subsidiaries; provided, however, that Medaphis shall
have the right to issue capital stock or securities convertible into
capital stock in transactions approved by the Board of Directors of
Medaphis;
(d) Not take any action the effect of which would be to cause the
Merger to be treated as a taxable transaction; and
(e) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of Medaphis and to preserve
the relationships of Medaphis with customers, suppliers and others having
business relations with Medaphis.
Section 5.3. Inspection and Access to Information. (a) Between the date of
this Agreement and the Effective Time, each party to this Agreement will provide
each other party and its accountants, counsel and other authorized
representatives full access, during reasonable business hours and under
reasonable circumstances, to any and all of its premises, properties, contracts,
commitments, books, records and other information (including tax returns filed
and those in preparation) and will cause their respective officers to furnish to
the other party and its authorized representatives any and all financial,
technical and operating data and other information pertaining to its business,
as each other party shall from time to time reasonably request. HDS further
acknowledges and agrees that, during the period beginning on the date of this
Agreement and ending on June 20, 1996, Medaphis will be continuing its
financial, legal and business due diligence review of HDS and Subsidiary as
provided pursuant to this Section 5.3(a) (the "Medaphis Due Diligence Review").
In the event that any HDS Detrimental Information (as defined in Section 6.2(l))
shall become known to the Medaphis Executives during the Medaphis Due Diligence
Review, Medaphis agrees to provide HDS with a brief written description of such
information within five business days of the date of the obtaining of such
knowledge, but in any event no later than the close of business on June 20,
1996.
(b) All non-public information obtained by Medaphis or HDS or any of their
representatives pursuant to this Agreement or in connection with the matters
contemplated by this Agreement concerning the business, operations or affairs of
the other will be kept confidential and will not be used for any purpose other
than the consummation of the transactions contemplated by this Agreement, or be
disclosed to any other person or entity, except for disclosure to its employees,
agents and representatives who have a need to know the same, who have been
advised of the confidential nature of such information and who agree to abide by
the terms of this Section 5.3(b) and except for such disclosure as may be
required by applicable law, court order or governmental agency request. If this
Agreement is terminated, any non-public information furnished by any party to
any other party to this Agreement will be promptly returned.
Section 5.4. Registration Statement. (a) Medaphis shall prepare and file
with the Commission as soon as is reasonably practicable the Registration
Statement and shall use all reasonable efforts to have the Registration
Statement declared effective by the Commission as promptly as practicable.
Medaphis also shall take any action required to be taken under state blue sky or
securities laws in connection with the issuance of the Medaphis Common Stock
pursuant to the Merger. Medaphis and HDS will furnish each other with all
information concerning themselves, their subsidiaries, directors, officers and
stockholders or shareholders and such other matters as may be necessary or
advisable for the Registration Statement, the Proxy Statement,
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filings under the Blue Sky laws, and any other statement or application made by
or on behalf of Medaphis or HDS to any governmental body in connection with the
Merger and the other transactions contemplated by this Agreement.
(b) Medaphis will indemnify and hold harmless each of HDS's directors,
officers and other persons, if any, who control HDS (within the meaning of the
Securities Act) from and against any losses, claims, damages, liabilities or
judgments, joint or several, to which they or any of them may become subject,
insofar as such losses, claims, damages, liabilities, or judgments (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Proxy Statement or
Registration Statement, or in any amendment or supplement thereto, or in any
state application for qualification, permit, exemption or registration, or in
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each such person for any legal or other expenses reasonably
incurred by such person in connection with investigating or defending any such
action or claim; provided, however, that Medaphis shall not be liable, in any
such case, to the extent that any such loss, claim, damage, liability, or
judgment (or action in respect thereof) arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in the Proxy Statement or Registration Statement, or in any such amendment
or supplement thereto, or in any such state application, or in any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to Medaphis by or on behalf of HDS, or any officer, director or
affiliate of HDS, for use therein.
Section 5.5. HDS Stockholder Matters. HDS shall call a meeting of its
stockholders to be held as soon as practicable after the date of this Agreement
for the purpose of voting upon matters relating to this Agreement and the
transactions contemplated by this Agreement. HDS will use its reasonable efforts
to hold its stockholders' meeting as promptly as practicable and will, through
its Board of Directors, recommend (subject to the provisions of the proviso to
the first sentence of Section 5.8) to its stockholders approval of this
Agreement and the transactions contemplated by this Agreement.
Section 5.6. The Nasdaq National Market Additional Shares
Notification. Medaphis will file an additional shares notification with The
Nasdaq National Market to approve for listing, subject to official notice of its
issuance, the shares of Medaphis Common Stock to be issued in connection with
the Merger and upon the exercise of the Non-Qualified Options (and, to the
extent Non-Qualified Options were not issued in substitution therefor, the
Options). Medaphis shall exercise reasonable good faith efforts to cause the
shares of Medaphis Common Stock to be issued in the Merger to be approved for
listing on The Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time.
Section 5.7. HDS Affiliates. (a) HDS shall deliver to Medaphis a letter
identifying all persons who are, at the time the Merger is submitted to a vote
to the shareholders of HDS, "affiliates" of HDS for purposes of Rule 145 under
the Securities Act. HDS shall cause each person who is identified as an
"affiliate" in such letter to deliver to Medaphis on or prior to the Effective
Time a written statement, in form satisfactory to Medaphis and HDS, that such
person will not offer to sell, transfer or otherwise dispose of any of the
shares of Medaphis Common Stock issued to such person pursuant to the Merger,
except (i) in accordance with the applicable provisions of the Securities Act
and the rules and regulations under the Securities Act and (ii) until such time
as financial results covering at least thirty days of combined operations of
Medaphis and HDS have been published within the meaning of Section 201.01 of the
Commission's Codification of Financial Reporting Policies; except that each
affiliate shall be permitted to make sales to the extent permitted by applicable
accounting rules and regulations promulgated by the Commission. Medaphis shall
be entitled to place legends on any certificates of Medaphis Common Stock issued
to such affiliates to restrict transfer of such shares as set forth above.
(b) Medaphis shall take such action with respect to affiliates of Medaphis
as is reasonably appropriate under applicable accounting rules and regulations
promulgated by the Commission for the Merger to qualify as a "pooling of
interests" for accounting purposes.
Section 5.8. No Solicitation; Acquisition Proposals. From the date of this
Agreement until the Effective Time or until this Agreement is terminated as
provided in Article 8, HDS will not directly or
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indirectly (i) solicit or initiate (including by way of furnishing any
information) discussions with or (ii) enter into negotiations or agreements
with, or furnish any information to, any corporation, partnership, person or
other entity or group (other than Medaphis, an affiliate of Medaphis or their
authorized representatives pursuant to Section 5.3) concerning any proposal for
a merger, sale of substantial assets, sale of shares of stock or securities or
other takeover or business combination transaction (an "Acquisition
Transaction") involving HDS; and HDS will instruct its officers, directors,
advisors and other financial and legal representatives and consultants not to
take any action contrary to the foregoing provisions of this sentence; provided,
however, that the actions prohibited by the foregoing clauses (i) and (ii) shall
be subject to any action taken by the Board of Directors of HDS in the exercise
of its good faith judgment as to its fiduciary duties to the stockholders of
HDS, which judgment is based upon the advice of independent counsel that a
failure of the Board of Directors to take such action would be likely to
constitute a breach of its fiduciary duties to the stockholders of HDS. HDS will
notify Medaphis promptly in writing if HDS becomes aware that any inquiries or
proposals are received by, any information is requested from, or any
negotiations or discussions are sought to be initiated with HDS with respect to
an Acquisition Transaction and will immediately after receipt provide to
Medaphis a copy of any letter, proposal or other document in which any proposal
for an Acquisition Transaction is made or expressed. HDS will immediately cease
any existing activities, discussions or negotiations with any third parties
which may have been conducted on or priorsubsequent to the date hereof with respect to an
Acquisition Transaction and
shall direct and use reasonable efforts to cause its
officers, advisors and representatives not to engage in any such activities,
discussions or negotiations.
Section 5.9. Reasonable Efforts; Further Assurances; Cooperation. Subject
to the other provisions of this Agreement, the parties hereto shall each use
their reasonable, good faith efforts to perform their obligations herein and to
take, or cause to be taken or do, or cause to be done, all things necessary,
proper or advisable under applicable law to obtain all regulatory approvals and
satisfy all conditions to the obligations of the parties under this Agreement
and to cause the Merger and the other transactions contemplated by this
Agreement to be effected on or prior to June 30, 1996 in accordance with the
terms of this Agreement and shall cooperate fully with each other and their
respective officers, directors, employees, agents, counsel, accountants and
other designees in connection with any steps required to be taken as a part of
their respective obligations under this Agreement, including without limitation:
(a) Subject to the provisions of Section 5.9(e), HDS and Medaphis
shall promptly make their respective filings and submissions and shall
take, or cause to be taken, all actions and do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to obtain any required approval of any other federal, state or local
governmental agency or regulatory body with jurisdiction over the
transactions contemplated by this Agreement.
(b) Subject to the provisions of Section 5.9(e), if any claim, action,
suit, investigation or other proceeding by any governmental body or other
person is commenced which questions the validity or legality of the Merger
or any of the other transactions contemplated by this Agreement or seeks
damages in connection with this Agreement, the parties agree to cooperate
and use all reasonable efforts to defend against such claim, action, suit,
investigation or other proceeding and, if an injunction or other order is
issued in any such action, suit or other proceeding, to use all reasonable
efforts to have such injunction or other order lifted, and to cooperate
reasonably regarding any other impediment to the consummation of the transactions contemplatedExchange Offer shall be deemed to be
incorporated by this Agreement.
(c) Each party shall give prompt written notice to the other of (i)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of HDS or
Medaphis, as the case may be, containedreference in this AgreementProspectus and to be untrue or
inaccurate in any material respect at any timea part of this Prospectus
from the date of this
Agreement to the Effective Time or that will or may result in the failure
to satisfy any of the conditions specified in Article 6 and (ii) any
failure of HDS or Medaphis, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement.
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(d) Without the prior written consent of Medaphis, HDS will not
terminate any employee if such termination would result in the payment of
any amounts pursuant to "change in control" provisions of any employment
agreement or arrangement.
(e) With respect to filings under the HSR Act, Medaphis will
coordinate on behalf of all parties and, except as may be required by law,
shall determine in its sole judgment and discretion the timing of and,
except with respect to matters relating specifically to HDS, the substance
of all communications and filings made by the parties with any governmental
antitrust authority regarding the transactions contemplated by this
Agreement, including without limitation:
(i) the timing of the HSR filings by any party;
(ii) the extent to which it may be necessary to resolve or settle
any concerns on the part of any governmental antitrust authority
regarding the legality under any antitrust law of the Merger by entering
into negotiations, providing information, making proposals, entering
into and performing agreements or submitting to judicial or
administrative orders;
(iii) contesting the entry in a judicial or administrative
proceeding brought under any antitrust law by any governmental antitrust
authority or any other party of any permanent or preliminary injunction
or other order that would make consummation of the Merger unlawful or
would prevent or delay it;
(iv) if such an injunction or other has been issued in such a
proceeding, taking any and all steps, including, without limitation,
appeal, or the posting of bond, necessary to vacate, modify or suspend
such injunction or order so as to permit the consummation of the Merger
on the schedule contemplated by this Agreement;
(v) responding to and complying with any request for additional
information by any governmental antitrust authority; and
(vi) determining any other appropriate response or initiative to
avoid or eliminate impediments under any antitrust law that may be
asserted by and governmental antitrust authority or any other party to
the consummation of the transactions contemplated by this Agreement.
Section 5.10. Public Announcements. The timing and content of all
announcements regarding any aspect of this Agreement or the Merger to the
financial community, government agencies (except as otherwise provided by
Section 5.9(e)), employees or the general public shall be mutually agreed upon
in advance (unless Medaphis or HDS is advised by counsel that any such
announcement or other disclosure not mutually agreed upon in advance is required
to be made by law or applicable rule of The Nasdaq National Market and then only
after making a reasonable attempt to comply with the provisions of this Section
5.10).
Section 5.11. Financial Statements and Commission Reports. Prior to the
Effective Time, each party to this Agreement shall deliver to the other, as soon
as available but in no event later than 45 days after the end of each fiscal
quarter, a consolidated balance sheet as of the last day of such fiscal period
and the consolidated statements of income, stockholders' equity and cash flows
of such party and its subsidiaries for the fiscal period then ended prepared in
accordance with generally accepted accounting principles with such exceptions as
are noted on such financial statements, and in the case of Medaphis, in
accordance with the requirements of Form 10-Q (or Form 10-K as the case may be)
under the Exchange Act. Prior to the Effective Time, Medaphis shall deliver to
HDS as soon as available a copy of each form, report and other document filed by
Medaphis with the Commission after the date of this Agreement and shall
otherwise keep HDS apprised of any material developments with respect to the
business or financial condition of Medaphis.
Section 5.12. Supplements to Disclosure Letters. From time to time prior
to the Effective Time, HDS and Medaphis will each promptly supplement or amend
the respective disclosure letters which they have delivered pursuant to this
Agreement with respect to any matter arising after the date of this Agreement
which, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described in any such disclosure letter or which is
necessary to correct any information in any such disclosure letter which has
been rendered inaccurate by such matter. No supplement or amendment to any such
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disclosure letter shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Sections 6.2(a) or 6.3(a).
Section 5.13. Pooling of Interests Accounting. From and after the date of
this Agreement and until the Effective Time, neither Medaphis nor HDS nor any of
their respective subsidiaries or other affiliates shall knowingly take, or
knowingly fail to take, any action (other than actions expressly contemplated by
this Agreement) that would jeopardize the treatment of Medaphis' acquisition of
HDS as a "pooling of interests" for accounting purposes. Following the Effective
Time, Medaphis shall use its reasonable, best efforts to conduct the business of
Medaphis in a manner that would not jeopardize the characterization of the
Merger as a "pooling of interests" for accounting purposes.
Section 5.14. Accountant's Review Report. HDS agrees to exercise
reasonable efforts to cause Deloitte & Touche to deliver to Medaphis prior to
the filing of the Registration Statement a limited review report covering any
unaudited financial statements of HDS included in the Registration Statement in
form and substance reasonably acceptable to Medaphis (the " Deloitte & Touche
Review Report").
Section 5.15. Special Indemnification by Medaphis. (a) Subsequent to the
Closing, Medaphis shall to the fullest extent permitted under Delaware corporate
law, indemnify and hold harmless each present and former director, officer,
employee and agent of HDS (collectively, the "Special Indemnified Parties")
against all losses, claims, damages, liabilities or judgments, joint or several,
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to any action or omission in their capacity as an officer, director, employee or
agent of HDS before the Closing, whether asserted or claimed prior to, at or
after the Closing Date, for a period of six years after the Closing Date, in
each case to the fullest extent permitted under Delaware corporate law (and
shall pay any expenses in advance of the final disposition of such action or
proceeding to each Special Indemnified Party to the fullest extent permitted
under Delaware corporate law, upon receipt from the Special Indemnified Party to
whom expenses are advanced of an undertaking to repay such advances as required
under Delaware corporate law). In the event of any such claim, action, suit,
proceeding or investigation, Medaphis, at its expense, shall have the right to
defend such claim, action, suit, proceeding or investigation, unless there is,
as determined by counsel to Medaphis, a conflict or reasonable likelihood of a
conflict such that the representation of one or more of the Special Indemnified
Parties would be impermissible under applicable standards of professional
conduct, in which case,document. Any statement contained herein or
in the case that Medaphis elects nota document incorporated or deemed to defend such
claim, action, suit, proceeding or investigation, Medaphis shall pay the
reasonable fees and expenses of counsel selectedbe incorporated by the Special Indemnified
Parties, which counselreference herein
shall be reasonably satisfactory to Medaphis, promptly
after statements therefor are received, and Medaphis shall cooperate in the
defense of any such matter; provided, however, that, in the event that any claim
for indemnification is asserted or made within such six-year period, all rights
to indemnification in respect of such claim shall continue until the disposition
of such claim.
(b) For a period of six years after the Closing Date, Medaphis agrees that
it will not take any action to amend the Certificate of Incorporation or Bylaws
of the Surviving Corporation to limit the indemnification available to the
Special Indemnified Parties as described by Section 5.15(a).
(c) Medaphis shall maintain, or cause the Surviving Corporation to
maintain, directors' and officers' liability insurance for acts or omissions
occurring through the Closing Date with respect to the Special Indemnified
Parties having terms at least as advantageous to the Special Indemnified Parties
as the directors' and officers' liability insurance policies of HDS currently in
place, for a period of three years after the Closing Date.
(d) In the event Medaphis or any of its respective successors or assigns
(i) consolidates with or merges into any other person or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person or entity, then, and in each such case, proper provision shall be
made so that the successors and assigns of Medaphis shall assume the obligations
set forth in this Section 5.15.
Section 5.16. Employees. (a) HDS 401(k) Plan. Medaphis will maintain the
HDS 401(k) Plan in effect for employees of HDS for a period commencing on the
Closing Date and ending September 30, 1997.
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Medaphis shall allow employees of HDS and each HDS ERISA Affiliate to
participate in the HDS 401(k) Plan under the terms in effect under the HDS
401(k) Plan as of the Closing Date except for any changes to such plan that are
required by law. At the end of such period, Medaphis shall cause employees of
HDS or any HDS ERISA Affiliatedeemed to be eligible to participate in either the
Medaphis 401(k) Planmodified or other similar plan providing benefits at a level at
least as generous as the Medaphis 401(k) Plan (the "Replacement Plan") Medaphis
covenants that the servicesuperseded for purposes of each employee of HDS and each HDS ERISA Affiliate
prior to the Closing Date shall be credited as service under the Replacement
Plan for all purposes (including, without limitation, eligibility and vesting)
for those employees of HDS and each HDS ERISA Affiliate who were participants in
any 401(k) plan maintained by HDS or a HDS ERISA Affiliate as of the Closing
Date. In addition,this Prospectus to
the extent that the Replacement Plan provides for a level
of employer matching andstatement contained herein or in any other employer contributions (not including elective
contributions and other employee contributions)subsequently filed
document which are less than that
provided under the HDS 401(k) Plan prior to the Closing Date, each employee of
HDS and each HDS ERISA Affiliate as of the Closing Date shall be entitled to a
bonus as of the date of their eligibility under the Replacement Plan, such bonusalso is or is deemed to be paid onincorporated by reference herein
modifies or before December 31, 1997, equal to 75% of the difference
between (A) and (B), where (A) is the employer matching contribution made to the
HDS 401(k) Plan for the employee for the plan year ending September 30, 1997 and
(B) is the employer matching and other employer contributions that would be made
under the Replacement Plan ifsupersedes such employee contributed the same percentage of
hisstatement. Any such statement so modified or
her compensation to the Replacement Plan during a plan year.
(b) HDS Health Plan. For a period of two years after the Closing Date, in
addition to any other Medaphis group health plan offered to all Medaphis
employees (the "Successor Plans"), Medaphis shall provide all employees of HDS
and each HDS ERISA Affiliate with the opportunity to elect coverage for
themselves and their dependents under the health maintenance organization
sponsored by Blue Cross, the dental program sponsored by Prudential and the
vision care program sponsored by Blue Cross in which HDS participates as of the
Closing Date. Any Successor Plan shall meet the following requirements: (i)
service with HDS and each HDS ERISA Affiliate prior to the Closing Date shall be
credited against all eligibility and waiting period requirements under the
Successor Plans for those employees of HDS and each HDS ERISA Affiliate (and
their eligible dependents) who were eligible for coverage from HDS or a HDS
ERISA Affiliate as of the Closing Date; (ii) the Successor Plans shall not
provide for any pre-existing condition exclusion for those employees of HDS and
each HDS ERISA Affiliate (and their dependents) and all qualified beneficiaries
(as defined in Section 4980B(g)(i) of the Code) entitled to continuation
coverage under COBRA (the "Qualified Beneficiaries") who were entitled to
coverage from HDS or a HDS ERISA Affiliate as of the Closing Date; and (iii) the
deductibles in effect under the Successor Plans for the plan year in which the
Closing Date occurs shall be reduced by any amounts applied toward the
deductibles under the HDS Benefit Plans for the plan year in which the Closing
Date occurs provided such individuals submit evidence to Medaphis sufficient to
demonstrate the amount so applied against any applicable deductibles in effect
under any HDS Benefit Plan.
(c) Other Benefits. For a period of two years after the Closing Date,
Medaphis will provide all HDS employees with substantially similar benefits,
other than those benefits described in Sections 5.16(a) and (b) above, as
provided by HDS to employees of HDS and each HDS ERISA Affiliate as of the
Closing Date or will pay such employees the economic equivalent of such
benefits; provided, however, that Medaphissuperseded shall not be requireddeemed, except as so modified or superseded, to
maintain any
insurance benefit programs to the extent that such programs are unavailable from
the insurance carrier or are only available on commercially unreasonable terms.
Section 5.17. Certain Other Benefits. After the Effective Time, Medaphis
will grant to employeesconstitute a part of HDS and Subsidiary certain other benefits in the
manner and to the extent provided in the Medaphis Disclosure Letter.
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ARTICLE 6.
CONDITIONS
Section 6.1. Conditions to Each Party's Obligations. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing of each119
Copies of the following conditions:
(a) HDS Stockholder Approval. The Merger, this Agreement and the
transactions contemplated by this Agreement shall have been approved at the
meeting of HDS Stockholders duly called and held in accordance with the
DGCL by the holders of not less than eighty-five percent of the outstanding
shares of Series F Stock having the rightabove documents (excluding exhibits to vote on such matters and
holders of a majority of the outstanding shares of HDS Capital Stock
(voting together as a class) having the right to vote ondocuments, unless
such matters.
(b) Injunction. At the Effective Time there shall be no effective
injunction, writ or preliminary restraining order or any order of any
nature issued by a court or governmental agency of competent jurisdiction
to the effect that the Merger may not be consummated as provided in this
Agreement, no proceeding or lawsuit shall have been commenced by any
governmental or regulatory agency for the purpose of obtaining any such
injunction, writ or preliminary restraining order and no written notice
shall have been received from any such agency indicating an intent to
restrain, prevent, materially delay or restructure the transactions
contemplated by this Agreement.
(c) Tax Opinion. HDS and Medaphis shall each have received a written
opinion of King & Spalding concerning certain federal income tax
consequences of the Merger, substantially in the form attached as Exhibit
6.1(c).
(d) Registration Statement. The Registration Statement shall be
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose, or under the proxy rules of the Commission
pursuant to the Exchange Act and with respect to the transactions
contemplated by this Agreement, shall be pending before or threatened by
the Commission. All applicable state securities laws shall have been
complied with in connection with the issuance of Medaphis Common Stock to
be issued pursuant to the Merger, and no stop order suspending the
effectiveness of any qualification or registration of such Medaphis Common
Stock under such state securities laws shall have been issued and pending
or threatened by the authorities of any such state. The prospectus that
comprises part of the Registration Statement shall have been mailed or sent
to HDS Stockholders not less than twenty business days prior to the meeting
described in Section 6.1(a), as the term "business days" is defined for
purposes of Form S-4 under the Securities Act.
(e) Pooling. HDS and Medaphis shall have been advised in writing, as
of the Effective Time, by Deloitte & Touche that, in accordance with
generally accepted accounting principles, the Merger qualifies to be
treated as a "pooling of interests" for accounting purposes.
(f) The Nasdaq National Market Additional Shares Notification. The
Medaphis Common Stock to be issued pursuant to this Agreement shall have
been approved for listing on The Nasdaq National Market, subject only to
official notice of issuance by Medaphis.
(g) HSR Act. The applicable waiting periods shall have expired or
been terminated early under the HSR Act.
Section 6.2. Conditions to Obligations of Medaphis. The obligation of
Medaphis to effect the Merger shall be subject to the fulfillment at or prior to
the Closing of each of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of HDS set forth in Article 3 of this Agreement shall be true
and correct as of the date of this Agreement and as of the Effective Time
as though made on and as of the Effective Time.
(b) Performance of Obligations of HDS. HDS shall have performed in
all material respects all covenants and agreements required to be performed
by it under this Agreement.
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(c) Opinion of HDS Counsel. Medaphis shall have received an opinion
of Seyfarth, Shaw, Fairweather & Geraldson dated the Closing Date,
substantially in the form attached as Exhibit 6.2(c).
(d) Authorization of Merger. All corporate action necessary by HDS to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement shall have
been duly and validly taken.
(e) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Delaware Certificate of Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, authorization, order, approval,
filing or registration would not have a material adverse effect on the
business of Medaphis and HDS following the Effective Time.
(f) Certificates. HDS shall have furnished Medaphis with a
certificate of its appropriate officers as to compliance with the
conditions set forth in Sections 6.2(a), (b) and (d).
(g) Accountant's Review Report and Letter. Medaphis shall have
received: (i) the Deloitte & Touche Review Report in accordance with
Section 5.14; and (ii) a letter from Deloitte & Touche dated the effective
date of the Registration Statement under the Securities Act, with respect
to certain financial and statistical information concerning HDS included in
the Registration Statement in form and substance customary in transactions
of the nature of the Merger.
(h) Material Contracts. Medaphis shall have received consents to
assignment of all HDS Material Contracts or written waivers of the
provisions of any HDS Material Contracts requiring the consents of third
parties as set forth in the HDS Disclosure Letter.
(i) Resignation Letters. Each of the directors of HDS shall have
tendered to Medaphis resignation letters in form and substance reasonably
acceptable to Medaphis on or prior to the Closing Date, such resignations
to be effective immediately following the Closing Date.
(j) Dissenters' Rights. Holders of less than 10% of the outstanding
HDS Capital Stock shall have exercised appraisal rights pursuant to the
DGCL.
(k) Options. At least 70% of the holders of Options shall have
executed and delivered to Medaphis an Option Assumption Agreement with
respect to each Option held by such holder on the Closing Date.
(l) Due Diligence. During the course of the Medaphis Due Diligence
Review, Medaphis shall not have discovered any HDS Detrimental Information.
The term "HDS Detrimental Information" means any information concerning the
assets, liabilities, results of operations, financial condition or business
of HDS or Subsidiary, that (i) would have a HDS Material Adverse Effect,
(ii) although it existed on the date of execution of this Agreement, it was
not previously delivered by, or on behalf of, HDS to Medaphis and was notexhibits are specifically set forth in or contemplated by the HDS Disclosure Letter as
delivered on the date of this Agreement, (iii) is specific to HDS or
Subsidiary (as opposed to general information concerning the industry or
industries in which HDS or Subsidiary operate or the economy generally) and
(iv) does not relate to prospective agreements of HDS or any projections or
other similar forward-looking information relating to HDS.
Section 6.3. Conditions to Obligations of HDS. The obligation of HDS to
effect the Merger shall be subject to the fulfillment at or prior to the Closing
of each of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Medaphis set forth in Article 4 of this Agreement shall be
true and correct as of the date of this Agreement and as of the Effective
Time as though made on and as of the Effective Time.
(b) Performance of Obligations by Medaphis. Medaphis shall have
performed in all material respects all covenants and agreements required to
be performed by it under this Agreement.
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(c) Opinion of Medaphis Counsel. HDS shall have received an opinion,
dated the Closing Date, of King & Spalding, counsel to Medaphis,
substantially in the form of Exhibit 6.3(c).
(d) Authorization of Merger. All corporate action necessary by
Medaphis to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement shall have been duly and validly taken.
(e) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Delaware Certificate of Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, authorization, order, approval,
filing or registration would not have a material adverse effect on the
business of Medaphis and HDS following the Effective Time.
(f) Certificates. Medaphis shall have furnished HDS with a
certificate of its appropriate officers as to compliance with the
conditions set forth in Sections 6.3(a), (b) and (d).
(g) Accountant's Report. HDS shall have received a letter from
Deloitte & Touche dated the effective date of the Registration Statement
under the Securities Act, with respect to certain financial and statistical
information concerning Medaphis and its subsidiaries included or incorporated by reference in the Registration Statement, in form and
substance customary in transactions of the nature of the Merger.
(h) Fairness Opinion. The Board of Directors of HDS shall have
received a written opinion of Hambrecht & Quist, dated on or before the
Closing Date, to the effect that the Merger is fair to HDS and its
stockholders from a financial point of view.
ARTICLE 7.
CLOSING
The consummation of the transactions contemplated by this Agreement is
referred to as the "Closing." The "Closing Date" is the date on which the
Closing occurs. The Closing shall occur as soon following the HDS Stockholders'
meeting described in Section 5.5 as is reasonably practicable and in any event
within three business days of the satisfaction or waiver of the other conditions
set forth in Article 6; except that under no circumstance shall the Closing take
place on or after August 15, 1996. The Closing shall take place at the offices
of King & Spalding, 191 Peachtree Street, Atlanta, Georgia, or at such other
place as HDS and Medaphis may agree.
ARTICLE 8.
TERMINATION
Section 8.1. Termination. This Agreementtherein) may be
terminatedobtained without charge upon written or oral request by each person to whom this
Prospectus is delivered from the Company at any time
prior to the Closing Date, whether before or after approval by the stockholders
of HDS:
(a) by mutual agreement of the Boards of Directors of HDS and
Medaphis;
(b) by HDS, if any one or more of the conditions set forth in Sections
6.1 and 6.3 are not complied with or performed and such noncompliance or
nonperformance has not been cured or eliminated (or by its nature cannot be
cured or eliminated) by Medaphis on or before August 15, 1996;
(c) by Medaphis, if any one or more of the conditions set forth in
Sections 6.1 and 6.2 are not complied with or performed and such
noncompliance or nonperformance has not been cured or eliminated (or by its
nature cannot be cured or eliminated) by HDS on or before August 15, 1996;
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(d) if, after the meeting of the HDS Stockholders contemplated by
Section 5.5 has been held (after giving effect to any adjournments), the
condition set forth in Section 6.1(a) has not been fulfilled, by HDS or
Medaphis; and
(e) by HDS if the Average Closing Price is less than $37.
Section 8.2. Specific Performance and Other Remedies. The parties each
acknowledge that the rights of each party to consummate the transactions
contemplated by this Agreement are special, unique and of extraordinary
character, and that, if any party violates or fails or refuses to perform any
covenant or agreement made by it in this Agreement, the non-breaching party may
be without adequate remedies at law. The parties each agree, therefore, that if
either party violates or fails or refuses to perform any covenant or agreement
made by such party in this Agreement, the non-breaching party or parties may,
subject to the terms of this Agreement and in addition to any remedies at law
for damages or other relief, institute and prosecute an action in any court of
competent jurisdiction to enforce specific performance of such covenant or
agreement or seek any other equitable relief. If HDS fails to perform any of the
covenants contained in Section 5.1(m) or Section 5.7(a), Medaphis's sole remedy
is to terminate this Agreement pursuant to Section 8.1(c), because the condition
set forth in Section 6.2(b) has not been satisfied.
Section 8.3. Effect of Termination. In the event of termination of this
Agreement pursuant to this Article 8, this Agreement shall forthwith become void
and there shall be no liability on the part of any party or its respective
officers, directors or stockholders, except for obligations under Section
5.3(b), Section 5.10, Section 8.4, Section 9.13 and this Section, all of which
shall survive the termination. Notwithstanding the foregoing, nothing contained
in this Section 8.3 shall relieve any party from liability for any breach of any
covenant or agreement in this Agreement.
Section 8.4. Termination Fee. If (A)(i) Medaphis terminates this Agreement
pursuant to Section 8.1(c) as the result of the failure to satisfy the closing
condition in Section 6.1(a), (ii) HDS terminates this Agreement pursuant to
Section 8.1(b) as a result of the failure to satisfy the closing condition in
Section 6.1(a), (iii) Medaphis terminates this Agreement pursuant to Section
8.1(d), or (iv) HDS terminates this Agreement pursuant to Section 8.1(d); and
(B) on or prior to the date scheduled for the meeting of HDS Stockholders
specified in Section 5.5, any corporation, partnership, limited liability
company, other type of entity, group or person makes a proposal or offer
concerning an Acquisition Transaction involving HDS; and (C) prior to the
expiration of 182 days after the date of a termination of this Agreement of the
type described in (A), HDS engages in negotiations with or enters into a letter
of intent, agreement in principle or definitive agreement with any corporation,
partnership, limited liability company, other type of entity, group or person
(except for Medaphis or its authorized representatives) concerning an
Acquisition Transaction; and (D) such Acquisition Transaction is consummated
during or after such 182-day period, then HDS shall within five business days
after such consummation pay Medaphis a fee of $7,500,000 to reimburse and
compensate Medaphis for its expense, time and effort in connection with the
transactions contemplated by this Agreement.
Except as provided in Section 9.4, in the event of a payment pursuant to
this Section 8.4, such payment shall be in full satisfaction of all obligations
and liabilities of the paying party to the other, arising out of the termination
of this Agreement.
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ARTICLE 9.
MISCELLANEOUS PROVISIONS
Section 9.1. Notices. Each notice, communication and delivery under this
Agreement must be made in writing signed by the party making the same, must
specify the Section pursuant to which it is given or being made, and must be
delivered personally or by telecopy transmission (provided that any notice sent
by telecopy transmission must also be sent by registered or certified mail) or
sent by registered or certified mail or by any express mail service (with
postage and other fees prepaid) as follows:
To Medaphis:
Medaphis 2700 Cumberland Parkway, Suite 300,
Atlanta, Georgia 30339, Attn.: William R. Spalding
Telecopy No.:Attention: Caryn Dickerson, Vice President and Treasurer
(telephone number (770) 431-1667
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attn: Robert W. Miller, Esq.
Telecopy No.: (404) 572-5146
To HDS:
HDS
268 West Hospitality Lane #300
San Bernardino, California 92408
Attn: Ralph A. Korpman, M.D.
Telecopy No.: (909) 885-0124
with a copy to:
Seyfarth, Shaw, Fairweather & Geraldson
2029 Century Park East
Los Angeles, California 90067-3063
Attn: Edward J. Pierce
Telecopy No.: (310) 201-5219
or to such other representative or at such other address of a party as such
party may furnish to the other parties in writing.
Section 9.2. Disclosure Letters and Exhibits. The HDS Disclosure Letter
and the Medaphis Disclosure Letter and all Exhibits are incorporated into this
Agreement and are made a part of this Agreement as if set out in full in this
Agreement.
Section 9.3. Assignment; Successors in Interest. No assignment or transfer
by Medaphis, RAKSub or HDS of their respective rights and obligations under this
Agreement prior to the Closing shall be made except with the prior written
consent of the other parties. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their permitted successors and assigns,
and any reference to a party shall also be a reference to a permitted successor
or assign.
Section 9.4. Representations and Warranties. The representations and
warranties set forth in this Agreement shall not survive the Closing.
Notwithstanding anything to the contrary set forth in this Section 9.4, this
Section shall not limit or restrict HDS's or Medaphis' remedies against the
other or any other person for fraud, willful misconduct, or bad faith. The
covenants and agreements of each of Medaphis,
A-41444-5300).
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RAKSub and HDS set forth in this Agreement shall survive the Closing and shall
remain in full force and effect until performed or satisfied by the applicable
party responsible for the same in this Agreement.
Section 9.5. Number; Gender. Whenever this Agreement so requires, the
singular number shall include the plural and the plural shall include the
singular, and the gender of any pronoun shall include the other genders.
Section 9.6. Captions. The titles, captions and table of contents
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provision of this Agreement. Unless otherwise
specified to the contrary, all references to Articles and Sections are
references to Articles and Sections of this Agreement and all references to
Exhibits are references to Exhibits to this Agreement and the HDS Disclosure
Letter and the Medaphis Disclosure Letter.
Section 9.7. Controlling Law; Integration; Amendment. (a) This Agreement
shall be governed by and construed and enforced in accordance with the internal
laws of the State of Delaware without reference to Delaware's choice of law
rules and the parties agree that any legal proceeding instituted with respect to
this Agreement shall be brought in Delaware and the parties submit to personal
jurisdiction therein and agree that venue properly lies in Delaware. This
Agreement supersedes all negotiations, agreements and understandings among the
parties with respect to the subject matter of this Agreement and constitutes the
entire agreement among the parties.
(b) This Agreement may not be amended, modified or supplemented except by
written agreement of the parties.
Section 9.8. HDS and Medaphis Knowledge. As used in this Agreement, the
terms "the knowledge of the HDS Executives," "known to the HDS Executives" or
words of similar import used in this Agreement with respect to HDS shall mean
the actual knowledge of any HDS Executive, together with the knowledge a
reasonable business person would have obtained after making reasonable inquiry
and after exercising reasonable diligence with respect to the matters at hand.
The "HDS Executives" shall consist of Ralph A. Korpman, M.D., Mr. Peter Gladkin
and Ms. Janice E. Ticich. As used in this Agreement, the terms "the knowledge of
the Medaphis Executives," "known to the Medaphis Executives" or words of similar
import used in this Agreement with respect to Medaphis shall mean the actual
knowledge of any Medaphis Executive, together with the knowledge a reasonable
business person would have obtained after making reasonable inquiry and after
exercising reasonable diligence with respect to the matters at hand. The
"Medaphis Executives" shall consist of Messrs. Randolph G. Brown, Timothy J.
Kilgallon, Michael R. Cote and William R. Spalding.
Section 9.9. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction will, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction will not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by law, the parties waive any provision of law which renders any such
provision prohibited or unenforceable in any respect.
Section 9.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement or the terms hereof to produce or
account for more than one of such counterparts.
Section 9.11. Enforcement of Certain Rights. Nothing expressed or implied
in this Agreement is intended, or shall be construed, to confer upon or give any
person, firm or corporation other than the parties, and their permitted
successors or assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, or result in such person, firm or corporation being
deemed a third party beneficiary of this Agreement, other than Section 5.4 and
Section 5.15 which provide for certain benefits to the persons described in such
sections.
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Section 9.12. Waiver. At any time prior to the Effective Time, the
parties, by or pursuant to action taken by their respective Boards of Directors,
may, to the extent legally permitted: (i) extend the time for the performance of
any of the obligations or other acts of any other party; (ii) waive any
inaccuracies in the representations or warranties of any other party contained
in this Agreement or in any document or certificate delivered pursuant to this
Agreement; (iii) waive compliance or performance by any other party with any of
the covenants, agreements or obligations of such party contained in this
Agreement; and (iv) waive the satisfaction of any condition that is precedent to
the performance by the party so waiving of any of its obligations under this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party.120
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVE OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A waiver by one party of the performance of any covenant, agreement,
obligation, condition, representation or warranty shall not be construed as a
waiver of any other covenant, agreement, obligation, condition, representation
or warranty. A waiver by any party of the performance of any act shall not
constitute a waiver of the performance of any other act or an identical act
required to be performed at a later time.
Section 9.13. Fees and Expenses. Medaphis shall pay its own fees, costs
and expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement, including, but not limited to, the fees, costs
and expenses of its financial advisors, accountants and counsel. HDS shall pay
its own fees, costs and expenses incurred in connection with this Agreement and
the transactions contemplated by this Agreement, but such fees, costs and
expenses shall not exceed in the aggregate the sum of the amounts of fees
specified in the HDS Disclosure Letter and the reasonable fees, costs and
expenses of the accountants and counsel for HDS.
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OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the date first above written.
MEDAPHIS CORPORATION
[Corporate Seal]
Attest: By:
--------------------------------------------
Title:
------------------------------------------
By:
- --------------------------------------------
Title:
- --------------------------------------------
RAKSUB, INC.
[Corporate Seal]
Attest: By:
--------------------------------------------
Title:
------------------------------------------
By:
- --------------------------------------------
Title:
- --------------------------------------------
HEALTH DATA SCIENCES CORPORATION
[Corporate Seal]
Attest: By:
--------------------------------------------
Title:
------------------------------------------
By:
- --------------------------------------------
Title:
- --------------------------------------------
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ANNEX B
SECTION 262ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE DELAWARE GENERAL CORPORATION LAW
SEC.262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of
this Chapter to accept for such stock anything except (i) shares of stock
of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof; (ii) shares of
stock of any other corporation or depository receipts in respect thereof,
which shares of stock or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security or an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders; (iii) cash in
lieu of fractional shares or fractional depositary receipts described in
the foregoing clauses (i) and (ii); or (iv) any combination of the shares
of stock, depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing clauses (i), (ii)
and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a
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provision, the procedures of this Section, including those set forth in
subsections (d) and (e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Registrar in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the
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113
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publications as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either written 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an
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appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX C
[LETTERHEADCOMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF HAMBRECHT & QUIST LLC]
May , 1996
Confidential
The Board of Directors
Health Data Sciences Corporation
268 West Hospitality Lane
Suite 300
San Bernardino, California 92408
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") and the outstanding shares of preferred stock (the "Preferred Stock") of
Health Data Sciences Corporation ("HDS" or the "Company") of the consideration
to be received by such shareholders in connection with the proposed merger of
Raksub Corporation ("Raksub"), a wholly-owned subsidiary of Medaphis Corporation
("Medaphis"), with and into HDS (the "Proposed Transaction") pursuant to the
Merger Agreement to be dated as of May , 1996, among Medaphis, Raksub, and HDS
(the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that Medaphis will issue an aggregate of shares of Medaphis common stock
for all of the outstanding shares of Common Stock and Preferred Stock, as more
fully set forth in the Agreement. We also understand that the Agreement provides
that each unexpired and unexercised option to purchase common stock of HDS
outstanding immediately prior to the Effective Time (as defined in the
Agreement) shall be assumed by Medaphis. For purposes of this opinion, we have
assumed that the Proposed Transaction will qualify as a tax-free reorganization
under the United States Internal Revenue Code for the shareholders of the
Company and that the Proposed Transaction will be accounted for as a pooling of
interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of HDS in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion. In
addition, Hambrecht & Quist, together with its affiliates, owns approximately
0.5% of the outstanding HDS Common Stock (on an as-converted basis).
We are familiar with Medaphis and have provided investment banking and
other financial advisory services to Medaphis in the past, and we have received
fees for rendering these services. Specifically, we acted as financial advisor
to Medaphis in 1995 in connection with its acquisition of Healthcare Recoveries,
Inc. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded
C-1
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securities of Medaphis and receives customary compensation in connection
therewith, and also provides research coverage for Medaphis. In the ordinary
course of business, Hambrecht & Quist actively trades in the equity securities
of Medaphis for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Hambrecht & Quist may in the future provide additional investment banking or
other financial advisory services to Medaphis.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
of Medaphis for recent years and interim periods to date and certain other
relevant financial and operating data of Medaphis made available to us from
published sources and from the internal records of Medaphis;
(ii) discussed with certain members of the management of Medaphis the
business, financial condition and prospects of Medaphis;
(iii) reviewed certain financial and operating information, including
certain projects of Medaphis, relating to Medaphis and discussed such
projections with certain members of the management of Medaphis;
(iv) reviewed the consolidated financial statements of HDS for recent
years and interim periods to date and certain other relevant financial and
operating data of HDS made available to us from the internal records of
HDS;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to HDS prepared by the senior
management of HDS;
(vi) discussed the business, financial condition and prospectus of HDS
with certain members of its senior management;
(vii) compared certain financial information of HDS and Medaphis with
certain financial information and the recent reported common stock prices
and trading activity of companies engaged in businesses we consider
comparable to that of HDS and Medaphis;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement and certain ancillary agreements; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Medaphis or HDS considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have not
prepared any independent valuation or appraisal of any of the assets or
liabilities of Medaphis or HDS, nor have we conducted a physical inspection of
the properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we have
assumed they reflect the best currently available estimates and judgments of the
expected future financial performance of Medaphis and HDS, respectively. For
purposes of this opinion, we have assumed that neither Medaphis nor HDS is a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction and those activities undertaken in the ordinary course of conducting
their respective businesses. Our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated as
of the date of this letter and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
Medaphis common stock will trade subsequent to the Effective Time (as defined in
the Agreement). We were not requested to, and did not, solicit indications of
interest from any other parties in connection with a possible acquisition of, or
business combination with, HDS.
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117
It is understood that his letter is for the information of the Board of
Directors only and may not be used for any purpose without our prior written
consent; provided, however, that this letter may be reproduced in full in any
filing made by HDS or Medaphis with the Securities and Exchange Commission with
respect to the Proposed Transaction. This letter does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Common Stock and the
holders of the Preferred Stock in the Proposed Transaction is fair to such
holders from a financial point of view. We express no opinion, however, as to
the adequacy of any consideration received in the Proposed Transaction by
Medaphis or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By: /s/ DAVID G. GOLDEN
------------------------------------
David G. Golden
Managing Director
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118
INDEXANY TIME SUBSEQUENT TO FINANCIAL STATEMENTS
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARYITS DATE.
---------------------
TABLE OF CONTENTS
PAGE
NUMBER
----------
Financial Statements:
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets asDisclosure Regarding Forward-Looking
Statements.......................... iii
Summary............................... 1
Risk Factors.......................... 14
The Exchange Offer.................... 24
Certain Federal Income Tax
Consequences........................ 32
Use of March 31, 1996 and 1995......................... F-3
Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and
1994........................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31,
1996, 1995 and 1994............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and
1994........................................................................... F-6
Notes toProceeds....................... 34
Capitalization........................ 35
Selected Historical Consolidated
Financial Statements........................................ F-7Data...................... 36
Unaudited Pro Forma Consolidated
Financial Statement................. 38
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 40
The Business.......................... 47
Management............................ 67
Certain Transactions.................. 75
Principal Stockholders................ 79
Description of New Credit Facility.... 80
Description of Notes.................. 82
Plan of Distribution.................. 110
Legal Matters......................... 111
Experts............................... 111
Available Information................. 111
Incorporation of Certain Documents by
Reference........................... 111
F-1======================================================
======================================================
$175,000,000
[LOGO]
MEDAPHIS CORPORATION
SERIES B
9 1/2% SENIOR
NOTES DUE 2005
--------------------
PROSPECTUS
--------------------
, 1998
======================================================
119
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Health Data Science Corporation
San Bernardino, California:
We have audited the accompanying consolidated balance sheets of Health Data
Sciences Corporation and subsidiary (the "Company") as of March 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at March 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended March 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 23, 1996
F-2
120
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1)................................ $14,167,000 $ 3,724,000
Accounts receivable, net of allowance for doubtful accounts of
$475,000 (1996) and $75,000 (1995) (Notes 4 and 12)............ 10,377,000 6,109,000
Contractual accounts receivable (Note 1).......................... 8,001,000 26,871,000
Prepaid expenses and other current assets......................... 106,000 731,000
----------- -----------
Total current assets...................................... 32,651,000 37,435,000
SOFTWARE DEVELOPMENT COSTS, Net (Notes 1 and 12).................... 7,768,000 8,014,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
Net (Notes 1 and 3)............................................... 687,000 330,000
ACCOUNTS RECEIVABLE, Long-term (Note 4)............................. 423,000 750,000
CONTRACTUAL ACCOUNTS RECEIVABLE -- LONG-TERM (Note 1)............... 13,514,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 6)...................................... $ $ 3,000,000
Accounts payable and accrued expenses............................. 7,430,000 10,609,000
Accrued salaries, payroll taxes and pension (Note 10)............. 992,000 654,000
Deferred revenue (Note 1)......................................... 540,000 412,000
----------- -----------
Total current liabilities................................. 8,962,000 14,675,000
----------- -----------
DEFERRED INCOME TAXES (Notes 1 and 9)............................... 1,300,000 3,000,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, 12 and 13)
VOLUNTARILY/MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7)
Series E, 830,000 shares authorized; 735,567 shares issued
and outstanding................................................ 6,565,000
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Convertible preferred stock, $.10 par value, authorized, 5,000,000
shares:
Series B, issued and outstanding, 742,000 shares............... 74,000 74,000
Series C, issued and outstanding, 1,312,500 shares............. 131,000 131,000
Series F, issued and outstanding, 1,605,000 shares............. 161,000
Common stock, authorized, 10,000,000 shares, issued and
outstanding, 4,081,990 shares (1996) and 4,079,990 shares
(1995), stated at.............................................. 274,000 274,000
Additional paid-in capital........................................ 42,314,000 15,985,000
Notes receivable from directors (Note 12)......................... (180,000) (180,000)
Retained earnings................................................. 2,132,000 6,095,000
Cumulative translation adjustment (Note 1)........................ (125,000) (90,000)
----------- -----------
Total stockholders' equity................................ 44,781,000 22,289,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
See notes to consolidated financial statements.
F-3
121
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
NET SALES (Notes 1 and 12).............................. $22,727,000 $30,454,000 $26,040,000
COST OF SALES (Note 2).................................. 15,185,000 13,767,000 11,875,000
----------- ----------- -----------
GROSS MARGIN............................................ 7,542,000 16,687,000 14,165,000
----------- ----------- -----------
EXPENSES:
Research and development.............................. 1,793,000 1,754,000 1,775,000
Sales and marketing (Note 12)......................... 4,870,000 3,672,000 3,028,000
General and administrative (Note 11).................. 6,107,000 2,194,000 3,219,000
Interest.............................................. 265,000 232,000 129,000
----------- ----------- -----------
Total expenses................................ 13,035,000 7,852,000 8,151,000
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS........................... (5,493,000) 8,835,000 6,014,000
INTEREST INCOME......................................... 620,000 202,000 73,000
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES......... (4,873,000) 9,037,000 6,087,000
(BENEFIT) PROVISION FOR INCOME TAXES (Notes 1 and 9).... (1,700,000) 3,000,000
----------- ----------- -----------
NET (LOSS) INCOME....................................... $(3,173,000) $ 6,037,000 $ 6,087,000
========== ========== ==========
See notes to consolidated financial statements.
F-4
122
HEALTH DATA SCIENCES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
SERIES B STOCK SERIES C STOCK SERIES D STOCK SERIES F STOCK STOCK
---------------- ------------------- ------------------ ------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, APRIL 1, 1993.................. 742,000 $74,000 1,312,500 $131,000 583,333 $ 58,000 4,033,190
Conversion of preferred Series D to
preferred Series E stock............. (583,333) (58,000)
Accretion of redemption value..........
Common stock repurchased............... (11,600)
Common stock options exercised......... 400
Common stock issued.................... 50,000
Translation adjustment.................
Net income.............................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1994................. 742,000 74,000 1,312,300 131,000 4,071,990
Accretion of redemption value..........
Common stock repurchased............... (17,000)
Common stock issued.................... 25,000
Translation adjustment.................
Net income.............................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1995................. 742,000 $74,000 1,312,500 $131,000 -- $ -- 4,079,990
======== ======== ========== ========= ========= ========= ========== ========= ==========
Accretion of redemption
(Note 7).............................
Preferred stock issued................. 1,605,000 $161,000
Common stock issued.................... 2,000
Translation adjustments................
Net income (loss)......................
------- ------- --------- -------- -------- -------- --------- -------- ---------
BALANCE, MARCH 31, 1996................. 742,000 $74,000 1,312,500 $131,000 -- -- 1,605,000 $161,000 4,081,990
======== ======== ========== ========= ========= ========= ========== ========= ==========
NOTES RETAINED
ADDITIONAL RECEIVABLE EARNINGS CUMULATIVE TOTAL
PAID-IN FROM (ACCUMULATED TRANSLATION SHAREHOLDERS
AMOUNT CAPITAL DIRECTORS DEFICIT) ADJUSTMENT EQUITY
----------- ----------- ---------- ------------ ---------- -----------