<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-57529
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE MRC GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7374 43-1235123
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
23240 CHAGRIN BLVD., SUITE 400
CLEVELAND, OHIO 44122
(216) 464-2244
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
EDWARD L. SAMEK, CHAIRMAN OF THE BOARD
THE MRC GROUP, INC.
23240 CHAGRIN BLVD., SUITE 400
CLEVELAND, OHIO 44122
(216) 464-2244
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
JOHN M. GHERLEIN RUFUS C. KING
BAKER & HOSTETLER LLP TESTA, HURWITZ & THIBEAULT, LLP
3200 NATIONAL CITY CENTER HIGH STREET TOWER
1900 EAST NINTH STREET 125 HIGH STREET
CLEVELAND, OHIO 44114 BOSTON, MA 02110
(216) 621-0200 (617) 248-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please 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(c)
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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
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
JULY 31, 1998
SHARES
[MRC GROUP LOGO]
COMMON STOCK
------------------
Of the shares of Common Stock offered hereby, shares
are being sold by The MRC Group, Inc. ("MRC" or the "Company") and
shares are being sold by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares of Common Stock by the Selling Stockholders. Prior to this offering,
there has been no public market for the Common Stock. It is presently estimated
that the initial public offering price will be between $ and
$ per share. See "Underwriting" for information relating to the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "MRCG."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
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Total (2)............. $ $ $ $
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</TABLE>
(1) Before deducting expenses of the offering estimated at $ , payable
by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments, if
any. To the extent the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made through the
facilities of the Depository Trust Company in New York, New York, on or about
, 1998, against payment therefor in immediately available funds.
BT Alex. Brown
Donaldson, Lufkin & Jenrette
William Blair & Company
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[Map of the Continental United States approximately five inches tall, showing
the locations of all of the Company's client service centers. Client service
centers are noted by dots located near: Boston, MA; Cherry Hill, NJ; Florham
Park, NJ; Washington, D.C. (Vienna, VA); Raleigh, NC; Atlanta, GA; Deerfield
Beach, FL; Ft. Lauderdale, FL; Melbourne, FL; Sarasota, FL; Tampa, FL; Vero
Beach, FL; West Palm Beach, FL; Wichita, KS; Buffalo, NY; Pittsburgh, PA;
Scranton, PA; Akron, OH; Cleveland, OH (2); Cincinnati, OH; Columbus, OH;
Detroit, MI; Arlington Heights, IL; Springfield, IL; Tinley Park, IL; Ft. Wayne,
IN; Indianapolis, IN; Bowling Green, KY; Chattanooga, TN; Memphis, TN;
Nashville, TN; Dallas, TX; Houston, TX; San Antonio, TX; Kansas City, MO; St.
Louis, MO; Denver, CO; Tulsa, OK; Phoenix, AZ; Tucson, AZ; Las Vegas, NV;
Orange, CA; Pleasant Hill, CA; Riverside, CA (2); Sacramento, CA; San Diego, CA;
Portland, OR; Seattle, WA; Tacoma, WA. The Company's corporate office near
Cleveland, OH is indicated by a star.]
o CLIENT SERVICE CENTER LOCATIONS
* CORPORATE OFFICE (CLEVELAND, OHIO)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES,
AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THE COMPANY'S LOGO, THE NAME "THE MRC GROUP" AND "ACCESS+" ARE TRADEMARKS OF THE
MRC GROUP, INC. "POWERSCRIBE" IS A TRADEMARK OF ARTICULATE SYSTEMS, INC. ALL
OTHER TRADEMARKS, TRADE NAMES OR SERVICE MARKS APPEARING IN THIS PROSPECTUS ARE
THE PROPERTY OF THEIR RESPECTIVE OWNERS AND ARE NOT THE PROPERTY OF THE COMPANY.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus.
THE COMPANY
The MRC Group, Inc. is a leading national provider of electronic medical
transcription and document management services to the health care industry. The
Company currently operates more than 50 client service centers in 24 states and
employs more than 2,300 experienced medical transcriptionists, approximately 70%
of whom work from their homes. The Company serves more than 500 clients,
primarily hospitals and medical centers, as well as other non-hospital health
care providers, such as managed care providers, surgical centers, outpatient
clinics and physician groups. Within hospitals and medical centers, the Company
primarily serves the health information management departments, also known as
medical records departments. Increasingly, the Company is providing its services
to other hospital departments that seek to outsource their medical transcription
needs, including radiology, emergency medicine, pathology and cardiology
departments and outpatient surgical units.
After most patient encounters or hospital admissions, a health care
provider is required to create or update the patient's medical record. Medical
transcription and document management is the process by which clinical and
medical information is dictated by a health care provider, transcribed by a
medical transcriptionist and returned to the health care provider for
verification, signing and incorporation into the patient's medical record.
Various sources estimate that the United States health care industry spends in
excess of $6.6 billion on medical transcription services annually. The Company
believes that a substantial majority of this amount is spent by health care
providers for in-house medical transcription. Industry sources estimate that
there are more than 1,500 providers of outsourced medical transcription
services, the vast majority of which serve a small number of clients on a local
basis.
The medical transcription industry is evolving from a relatively
low-technology, locally provided business to a technology-driven, document
management business, increasingly providing services on a nationwide basis. The
Company believes that it is one of the few firms in the industry that has fully
embraced these changes and is positioned to benefit from economies of scale and
the changing industry. The Company believes a number of significant trends will
support continued growth of the medical transcription industry and growth in the
segment of the industry that is outsourced, including: demand for increased
documentation; increased outsourcing in the health care industry generally;
demand for faster, more consistent and reliable turnaround of dictated medical
reports; creation of integrated health care delivery systems; and a growing
trend toward comprehensive computerized patient records.
The Company's objective is to capitalize on the health care industry's
trend toward increased dictation of medical reports and outsourcing of medical
transcription and document management services and to enhance its position as a
leading provider of such services. The principal elements of the Company's
strategy are to (i) accelerate internal growth through superior client
retention, deeper penetration of existing clients and increased sales to new
clients; (ii) expand operating margins by further standardizing operations,
taking advantage of economies of scale and executing disciplined pricing
strategies; (iii) apply state-of-the-art technology to expand services, enhance
client satisfaction and lower costs; and (iv) identify and complete strategic
acquisitions.
The Company believes its large size, technical resources and other
capabilities differentiate it from its competitors and enable it to better
retain existing clients and attract new clients. The Company's customized
electronic medical transcription and document management services provide
clients with lower costs, improved accuracy of transcribed medical reports,
reduced report
3
<PAGE> 5
turnaround times, shortened billing cycles and reduced capital investment. The
Company develops long-term client relationships through high quality service,
technological expertise and an experienced, service-oriented management team.
The Company applies state-of-the-art technology and proprietary software
applications, protocols and procedures to create customized systems tailored to
meet specific client requirements and to enhance client satisfaction. The
Company's national network of more than 50 client service centers enables it to
respond to its clients on a local basis and use its national resources to
balance workloads among client service centers without delay or disruption in
service.
The Company's electronic medical transcription revenues tend to be
recurring as a result of the multi-year nature of its client contracts and its
high client retention rate. For the 12-month period ended June 30, 1998, the
Company retained 98% of its 50 largest clients.
The Company's principal executive offices are located at 23240 Chagrin
Boulevard, Suite 400, Cleveland, Ohio 44122, and its telephone number is (216)
464-2244.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ shares
Common Stock offered by the Selling Stockholders... shares
Common Stock to be outstanding after the
offering......................................... shares (1)
Use of proceeds.................................... Repay certain indebtedness, working
capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol...................... MRCG
</TABLE>
- ---------------
(1) Includes 24,500 shares of Common Stock issued upon exercise of warrants
after June 30, 1998. Excludes 2,175,889 shares of Common Stock issuable upon
the exercise of stock options outstanding as of June 30, 1998 at a weighted
average price of $7.16, of which options for 1,117,384 shares of Common
Stock are currently exercisable. See "Capitalization" and "Principal and
Selling Stockholders."
Unless otherwise indicated or the context otherwise requires, all
references in this Prospectus to the "Company" or "MRC" include The MRC Group,
Inc., a Delaware corporation and the issuer of the Common Stock offered hereby,
and its predecessor and subsidiaries. Unless otherwise indicated or unless the
context otherwise requires, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option; (ii) assumes the conversion
of all outstanding shares of Series IV Preferred Stock, Series V Preferred Stock
and Series VI Preferred Stock into Common Stock; and (iii) gives effect to the
Reincorporation Merger described below, including a 0.7-for-1.0 reverse stock
split. See "The Company," "Description of Capital Stock" and "Underwriting."
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------------
1995 1996 (1) 1997 (2) 1997 (2) 1998 (2)
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 49,180 $ 71,700 $ 108,117 $ 53,268 $ 60,173
Gross profit............................ 9,026 14,370 21,142 10,582 12,303
Operating income (loss) (3)............. 420 (934) (703) 1,055 2,742
Interest income (expense), net.......... (539) (382) (310) (150) (98)
Income (loss) before income taxes....... (119) (1,316) (1,013) 905 2,644
Net income (loss)....................... $ (126) $ (1,316) $ (1,013) $ 383 $ 1,517
Basic weighted average common shares
outstanding........................... 1,272 2,578 4,106 4,106 4,112
Diluted weighted average common shares
outstanding, unless antidilutive...... 12,062 12,182
Basic earnings per share................ $ (0.10) $ (0.51) $ (0.25) $ 0.09 $ 0.37
Diluted earnings per share.............. $ (0.10) $ (0.51) $ (0.25) $ 0.03 $ 0.12
PRO FORMA DATA, AS ADJUSTED: (4)
Basic weighted average common shares outstanding...............
Diluted weighted average common shares outstanding.............
Basic earnings per share.......................................
Diluted earnings per share.....................................
OTHER DATA:
EBITDA (5).............................. $ 4,327 $ 5,398 $ 9,324 $ 5,799 $ 7,027
Cash flows from operating activities.... 3,638 4,011 7,319 4,541 7,429
Cash flows from investing activities.... (2,532) (30,068) (8,496) (7,373) (3,060)
Cash flows from financing activities.... 184 27,091 (2,681) (1,242) 446
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (6) AS ADJUSTED (4)
------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 7,999 $ 7,999
Working capital......................................... 12,319 12,319
Total assets............................................ 79,030 79,030
Long-term debt, including current portion............... 7,270 7,270
Stockholders' equity.................................... 6,110 53,603
</TABLE>
See accompanying footnotes on the following page.
5
<PAGE> 7
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(in thousands, except share data)
(1) In July 1996, the Company acquired all the outstanding stock of Medical
Records Corp. The acquisition has been accounted for as a purchase, and the
results of Medical Records Corp., a wholly owned subsidiary of the Company,
were included in the accompanying Consolidated Financial Statements from the
date of the acquisition. In connection with the acquisition, the Company
assumed certain acquisition-related liabilities from Medical Records Corp.
The cost of the acquisition has been allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed.
(2) During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities. Each of the 1997 acquisitions was accounted for as a
purchase, and the results of operations are included in the accompanying
Consolidated Financial Statements from the date of acquisition. The above
results also include a full period of activity related to the acquisition
discussed in Note 1 above.
(3) The Company's results of operations have been adversely affected in 1995,
1996 and 1997 by restructuring charges associated with the closure and
consolidation of redundant and less profitable client service centers and
related costs and other non-recurring acquisition and integration costs in
1997 in connection with the acquisition of Medical Records Corp. These
corresponding expenses of $347, $644 and $2,075 are included in operating
income (loss) for the years ended December 31, 1995, 1996 and 1997,
respectively.
(4) Gives effect to the conversion of all outstanding shares of the Series IV
Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock into
7,262,094 shares of Common Stock upon completion of this offering, as
discussed in Note 6, and the issuance by the Company of shares
of Common Stock in this offering and the application of the net proceeds
therefrom as described in "Use of Proceeds."
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income (loss) plus depreciation and amortization.
Management believes EBITDA is a meaningful measurement of the Company's
ability to generate cash flows to fund future growth and operating and
investing needs. EBITDA should not be considered as an alternative measure
of net income or cash provided by operating activities (both as determined
in accordance with generally accepted accounting principles), but is
presented to provide additional information related to the Company's debt
service capability. EBITDA should not be considered in isolation or as a
substitute for other measures of financial performance or liquidity.
A reconciliation of EBITDA to net income (loss) is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1995 1996 1997 1997(2) 1998(2)
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
EBITDA.............................................. $ 4,327 $ 5,398 $ 9,324 $5,799 $ 7,027
Interest expense, net............................... (539) (382) (310) (150) (98)
Provision for income taxes.......................... (7) -- -- (522) (1,127)
Depreciation and amortization....................... (3,907) (6,332) (10,027) (4,744) (4,285)
------- ------- -------- ------- -------
Net income (loss)................................... $ (126) $(1,316) $ (1,013) $ 383 $ 1,517
======= ======= ======== ======= =======
</TABLE>
(6) Gives effect to the conversion of Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock into 7,262,094 shares of
Common Stock upon completion of this offering. See Notes 11 and 12 of Notes
to Consolidated Financial Statements.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus. Statements in this Prospectus that are not
statements of historical fact, including statements concerning the Company's
strategy and plans for the future, are forward-looking statements. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in such
forward-looking statements as a result of various factors, including the risk
factors set forth below and other matters set forth in this Prospectus
generally.
HISTORY OF LOSSES
The Company has experienced net losses of $126,000, $1.3 million and $1.0
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Although the Company was profitable in the first six months of 1998, there can
be no assurance that the Company will be able to sustain profitable operations.
DEPENDENCE ON SINGLE LINE OF BUSINESS; DEMAND FOR SERVICES
The Company's revenues are derived primarily from the provision of
electronic medical transcription and document management services to hospitals
and other health care organizations on an outsourced basis. The Company's future
success will depend on the continued market acceptance of its electronic medical
transcription services and the continued demand for outsourced medical
transcription services. A reduction in demand, whether because of technical
developments or otherwise, or an increase in competition in the market for its
electronic medical transcription services, could have a material adverse effect
on the Company's business, financial condition and results of operations.
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and may in the future experience, significant
quarter-to-quarter fluctuations in its results of operations. Such fluctuations
may result in volatility in the price of the Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for the Company's services and products, the opening of new client service
centers, the timing of the commencement of services for clients, the inability
of the Company to immediately pass on increased labor costs due to inflationary
factors, the timing of introduction of new services and products by the Company
or its competitors, the market acceptance of new services and products, the size
and timing of client contracts, changes in client budgets, the size and timing
of acquisitions, the integration of acquired businesses into the Company's
operations, the number and timing of new hires, competitive conditions in the
industry and general economic conditions. Further, the Company's contracts
generally involve significant client commitments and may require time-consuming
authorization procedures within the client's organization. For these and other
reasons, the sales cycles for the Company's services and products may be lengthy
and are subject to a number of factors outside of the Company's control. Due to
the foregoing factors, it is possible that in future quarters the Company's
operating results will be below the expectations of investors or securities
analysts. Such an event could adversely affect the market price of the Company's
Common Stock.
MAINTENANCE OF REVENUE AND PROFIT GROWTH RATES
The Company's medical transcription business has experienced substantial
growth in recent periods but there can be no assurance that such rate of growth
in revenues and profits can be maintained in the future. Failure to maintain
revenue and profit growth could have a material
7
<PAGE> 9
adverse effect on the Company's business, financial condition and results of
operations and could adversely affect the market price of the Company's Common
Stock.
RAPID TECHNOLOGICAL CHANGE
The health care information services industry is characterized by rapid
technological change, evolving client needs and emerging technical standards.
The introduction of competing services or products incorporating new
technologies and the emergence of new technical standards could render some or
all of the Company's services or products less competitive or unmarketable or
could require the Company to make substantial capital investments. The Company
believes that its future success depends on its ability to enhance its current
services and products and to develop new services or products that address the
increasingly sophisticated needs of its clients. The failure of the Company to
develop and introduce service or product enhancements and new services or
products in a timely and cost-effective manner in response to changing
technologies or client requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
ABILITY TO EXPAND
To date, the Company's services have been provided primarily to the health
information management departments of hospitals. However, health care services
are increasingly being provided in health care settings other than hospitals,
such as outpatient clinics and physician offices. The Company's business,
financial condition and results of operations may be materially and adversely
affected if its efforts to expand into new health care settings and other
hospital departments are not successful.
CHANGES IN THE HEALTH CARE INDUSTRY
The health care industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of health
care providers. Federal and state legislators have from time to time proposed
programs to reform the United States health care system and other proposals may
be made in the future. In general, these programs and proposals tend to
emphasize managed care, seek to lower reimbursement rates and otherwise attempt
to control the environment in which health care providers operate. Health care
providers may react to these proposals and the uncertainty surrounding such
proposals by curtailing outsourcing arrangements or deferring decisions
regarding the use of outsourced services. Many health care providers are
consolidating to create larger health care delivery organizations. This
consolidation and the resulting centralization in decision making may reduce the
number of potential clients for the Company's services and products and increase
the bargaining power of these organizations, which could lead to reductions in
the amount paid for the Company's services or products. The impact of these
developments in the health care industry is difficult to predict and could have
a material adverse effect on the Company's business, financial condition and
results of operations.
ALTERNATIVE DATA ENTRY METHODS
As the health care industry moves toward the use of computerized patient
records, there is a risk that alternative data entry methods (other than medical
transcription) into a computerized patient record could replace the Company's
services and products. For example, dictation could be replaced with a multiple
choice form of computerized data entry accomplished directly by physicians.
Replacement of medical transcription services by alternate methods of data entry
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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<PAGE> 10
ACQUISITION RISKS
A substantial portion of the Company's growth in sales and earnings has
been generated from acquisitions. The Company expects to continue a strategy of
identifying and selectively acquiring medical transcription businesses. There
can be no assurance that the Company will be able to (i) capitalize on the
consolidation trend occurring in the medical transcription industry, (ii)
continue to identify suitable acquisition candidates, (iii) obtain financing
that may be necessary to complete and support such acquisitions, or (iv) acquire
businesses on satisfactory terms. Further, there can be no assurance that any
business acquired by the Company will be successfully or efficiently integrated
into the Company's operations or prove to be profitable. The Company could incur
substantial indebtedness in connection with its acquisition strategy. Any
failure to achieve successful integration of such acquisitions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ABILITY TO ATTRACT AND RETAIN QUALIFIED MEDICAL TRANSCRIPTIONISTS
The Company's future success depends, in part, upon its ability to attract
and retain qualified medical transcriptionists. Competition for medical
transcriptionists is strong, and no assurance can be given that the Company will
be successful in attracting and retaining the personnel necessary to conduct its
business successfully. The inability of the Company to attract, hire and retain
a sufficient number of qualified medical transcriptionists could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
COMPETITION
The medical transcription services industry is highly fragmented and
primarily consists of small regional or local companies and a limited number of
national companies, with which the Company currently competes directly. The
Company also competes against health care providers that perform medical
transcription in-house. The Company believes that its ability to compete
successfully depends upon many factors within and outside of its control,
including the Company's reputation for quality service and turnaround time
performance, its size and resources, its technical capabilities, price
competition, and the timing and market acceptance of new services, products and
enhancements developed by the Company and its competitors. In addition, a number
of companies, which may or may not currently be in the medical transcription
business, possess substantially greater financial, technical and marketing
resources than the Company. Such companies, if they were to introduce competing
services or products incorporating new technology may be able to respond more
quickly than the Company to changing client needs or emerging technical
standards, or could devote greater resources to the development, marketing and
sale of their services or products. Competition may increase due to
consolidation of medical transcription companies, and current and potential
competitors may establish cooperative relationships among themselves or with
third parties to increase their ability to address the needs of the Company's
current and prospective clients. In addition, price competition could intensify
if competitors establish access to labor resources at a substantially lower
cost. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON PROPRIETARY RIGHTS
The Company's success is partially dependent upon its proprietary software
applications, protocols and procedures. Existing trade secrets and copyright
laws afford the Company limited protection. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's software applications or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
software applications is difficult. There can be no assurance that efforts to
maintain the confidentiality of the
9
<PAGE> 11
Company's trade secrets and proprietary information will effectively prevent
disclosure of the Company's confidential information or provide meaningful
protection for the Company's confidential information, or that the Company's
trade secrets or proprietary information will not be independently developed by
the Company's competitors.
DEPENDENCE ON THIRD-PARTY LICENSED TECHNOLOGY
Some of the software used in the Company's systems and products is licensed
from third parties for indefinite terms. Should any of this software become
unavailable to the Company or should the third-party licensors fail to support
the licensed technology, the Company believes that it would be able to obtain
alternative suppliers. However, the Company is highly dependent on the software
that serves as a basis for the Company's medical transcription systems,
including medical transcription software, menu software and communication
software, and any failure to obtain support for or enhancements of such software
on a timely basis at an affordable cost, or any significant delays or
interruptions in the support of such software, could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends upon its ability to attract and retain
its key managerial personnel. The loss of services of certain of the Company's
executive officers or the inability of the Company to attract additional
management personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
maintain "key-man" life insurance policies on its management.
RISKS ASSOCIATED WITH AN AT-HOME WORKFORCE
Approximately 70% of the Company's medical transcriptionists work from
their homes. The Company has policies and procedures covering its at-home
employees. However, because of their at-home work environment, the Company is
not able to supervise and monitor at-home employees to the same extent the
Company is able to supervise and monitor employees working in the Company's
client service centers. Any failure to successfully manage its at-home workforce
or to enforce its policies and procedures with respect to, among other things,
confidentiality and confidential information, health and safety, wage and hour,
and other governmental regulations, could have a material adverse effect on the
Company's business, financial condition and results of operations. See also
"-- Confidentiality Requirements."
CONFIDENTIALITY REQUIREMENTS
The medical information transcribed by the Company is extremely
confidential. In providing its services, the Company is subject to certain
contractual, statutory, regulatory and common law requirements regarding the
confidentiality of medical information. Failure to comply with such
confidentiality requirements could result in material liability to the Company.
See also "-- Risks Associated with an At-Home Workforce."
DEPENDENCE ON TECHNOLOGICAL INFRASTRUCTURE
Although the Company has backup systems and procedures to handle technical
problems and system breakdowns, there is a risk that a significant failure or
breakdown of the Company's systems could occur as a result of such things as a
natural disaster or computer "virus." The Company's backup systems and
procedures could prove to be inadequate, which could cause an extended
disruption of service and, as a result, could cause the Company to sustain a
loss of clients or revenues, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
10
<PAGE> 12
YEAR 2000 COMPLIANCE
The Company uses a significant number of types of electronic equipment and
computer software programs and operating systems in its internal operations,
including applications used in medical transcription systems and various
administrative functions. To the extent that this equipment and these software
applications are unable to appropriately interpret the upcoming calendar year
2000, some level of modification or replacement of such equipment and software
will be necessary. The Company is in the process of identifying the equipment
and software that are not "Year 2000" compliant. There can be no assurance that
the costs necessary to update equipment and software or correct for potential
systems interruptions would not have a material adverse effect on its business,
financial condition and results of operations. In addition, the Company could be
adversely affected by the Year 2000 problem if computer systems of its clients,
suppliers or other third parties with which the Company does business fail to
address the Year 2000 problem successfully. There can be no assurance that the
Year 2000 problem, if experienced by such third parties, would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
CONTROL BY MANAGEMENT
Upon completion of this offering, approximately % of the Common Stock
will be owned or controlled by management and members of the Board of Directors.
See "Principle and Selling Stockholders." As a result of this concentration of
ownership, such persons may be able to exercise control over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, substantially all of the shares of Common
Stock that were outstanding prior to this offering will be eligible for sale in
the public market under Rule 144 beginning 90 days after the date of this
Prospectus. Approximately 10,963,000 shares are subject to lock-up agreements
for a period of 180 days from the date of this Prospectus.
Sales of substantial amounts of Common Stock in the public market following
this offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock and could impair the future
ability of the Company to raise capital through the sale of its equity
securities. The Company is unable to predict the effect, if any, that future
sales of Common Stock or the availability of Common Stock for sale may have on
the market price of the Common Stock prevailing from time to time. Certain
existing stockholders have the right to require the Company to register their
Common Stock from time to time. See "Description of Capital Stock" and "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to the offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiation among the Company and the Representatives of the Underwriters based
upon factors described under the caption "Underwriting." The stock market has
experienced, and is likely to experience in the future, significant price and
volume fluctuations that could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as changes in earnings estimates by
analysts, quarterly fluctuations in the financial results of the Company or its
competitors and general conditions in the industry, the overall economy and the
financial markets could cause the price of the Common Stock to fluctuate
substantially. There can be no assurance that an active trading market in the
Common Stock will develop subsequent to the offering or, if developed, that it
will be sustained. See "Underwriting."
11
<PAGE> 13
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of the Common Stock. Accordingly, purchasers of
the Common Stock offered hereby will incur immediate and substantial dilution in
tangible book value per share of the Common Stock of $ , assuming an
initial public offering price of $ per share of Common Stock.
Additional dilution is likely to occur upon the exercise of options granted by
the Company. See "Dilution."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation and By-Laws contain provisions that could
discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company's Common Stock. Such provisions could limit the
price that investors might be willing to pay in the future for shares of the
Company's Common Stock. For example, the Company is subject to Section 203 of
the Delaware General Corporation Law which prohibits a Delaware corporation from
engaging in a broad range of business combinations with any "interested
stockholder," unless the business combination is approved in a prescribed
manner. In addition, the Board of Directors is authorized to issue, without
stockholder approval, up to 300,000 shares of Preferred Stock, $.01 par value,
of the Company (the "Undesignated Preferred Stock") with voting, conversion and
other rights and preferences that may be superior to the Common Stock and that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Undesignated Preferred Stock or of rights to purchase
Undesignated Preferred Stock could be used to discourage an unsolicited
acquisition proposal. See "Description of Capital Stock -- Preferred Stock,"
" -- Certain Provisions of Certificate of Incorporation and By-Laws" and "--
Certain Provisions of Delaware Law."
NEED FOR QUALIFIED INDEPENDENT UNDERWRITER
William Blair Capital Partners V, L.P., a beneficial holder of
approximately 13.1% of the Common Stock prior to this offering, is an affiliate
of William Blair & Company, L.L.C., one of the Representatives of the
Underwriters. Timothy M. Murray, a director of the Company, is a principal of
William Blair & Company, L.L.C. and Managing Director of William Blair Capital
Partners V, L.P. The Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD Conduct Rules") do not permit William Blair & Company,
L.L.C. to participate in this offering unless the initial public offering price
is no higher than that recommended by a qualified independent underwriter, as
defined in the NASD Conduct Rules. BT Alex. Brown Incorporated will serve as
qualified independent underwriter, and has assumed the responsibilities of
acting as qualified independent underwriter in pricing the Common Stock offered
hereby and conducting "due diligence" in respect thereto. See "Underwriting."
12
<PAGE> 14
THE COMPANY
The Company was formed as MEDIFAX, Inc., a Missouri corporation, in 1981.
In December 1994, the Company acquired all of the outstanding stock of
SecrePhone Ltd., a Pennsylvania corporation. In July 1996, the Company acquired
all of the outstanding stock of Medical Records Corp., an Ohio corporation. In
February 1998, the Company changed its name to The MRC Group, Inc. ("MRC
Missouri") and in August 1998, in order to change its jurisdiction of
incorporation, MRC Missouri created and merged into The MRC Group, Inc., a
Delaware corporation and the issuer of the Common Stock offered hereby (the
"Reincorporation Merger"). In connection with the Reincorporation Merger, the
holders of MRC Missouri common stock received an aggregate of 4,319,986 shares
of the Company's Common Stock, giving effect to a 0.7-for-1.0 reverse stock
split, and the holders of Series IV Preferred Stock, Series V Preferred Stock
and Series VI Preferred Stock of MRC Missouri each received one share of Series
IV Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock in
the Company for each share of Series IV Preferred Stock, Series V Preferred
Stock, and Series VI Preferred Stock, respectively, of MRC Missouri. All of the
shares of Series IV Preferred Stock, Series V Preferred Stock and Series VI
Preferred Stock of the Company will convert into an aggregate 7,262,094 shares
of Common Stock upon completion of this offering. See Notes 11 and 12 of Notes
to Consolidated Financial Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common
Stock being offered by the Company hereby are estimated to be approximately
$ million (approximately $ million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$ per share and after deducting the underwriting discounts and
commissions and estimated offering expenses. The Company intends to use
approximately $6.6 million of the net proceeds to repay a bank loan and
outstanding indebtedness incurred in connection with the Company's acquisition
of Medical Records Corp. in July 1996 to former shareholders thereof (the
"Acquisition Debt"). The Company's bank loan bears interest at a rate of LIBOR
plus 1.65% per annum and matures in September 2001. The Acquisition Debt bears
interest at the rate of 8% and matures in July 2003. See "Certain Transactions."
The remaining net proceeds will be used by the Company for working capital and
general corporate purposes. The Company may also use a portion of the net
proceeds for the acquisition of businesses, products and technologies, although
no material acquisition is the subject of a letter of intent or binding
agreement and no portion of the net proceeds has been allocated for any specific
acquisition. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The payment of future dividends will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, capital requirements, contractual restrictions, the
general financial condition of the Company and general business conditions.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth as of June 30, 1998: (i) the capitalization
of the Company; (ii) the capitalization of the Company on a pro forma basis to
reflect the conversion of the outstanding Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock into Common Stock upon completion
of this offering; and (iii) the capitalization of the Company on a pro forma as
adjusted basis to reflect the conversion of outstanding Preferred Stock
discussed in (ii), the sale by the Company of shares of Common
Stock offered hereby (at an assumed initial public offering price of $ per
share) and the application of the estimated net proceeds therefrom all as if
they occurred on June 30, 1998. This table should be read in conjunction with
the historical Consolidated Financial Statements of the Company and the Notes
thereto which are included elsewhere in the Prospectus. See "Use of Proceeds,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital
Stock."
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED (2)
------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........... $ 7,999 $ 7,999 $
======= ======= =======
Current maturities of long-term obligations................. $ 2,014 $ 2,014 $ 614
======= ======= =======
Long-term obligations, less current maturities.............. $ 5,256 $ 5,256 $ 106
Mandatorily redeemable preferred stock:
Preferred stock, $.01 par value; 345,902 shares authorized
--
Series V convertible and mandatorily redeemable
preferred stock, 45,902 shares issued and outstanding
(liquidation preference $17,493,252), no shares pro
forma and pro forma as adjusted....................... 17,493 -- --
Series VI convertible and mandatorily redeemable
preferred stock, 300,000 shares issued and outstanding
(liquidation preference $30,000,000), no shares pro
forma and pro forma as adjusted....................... 30,000 -- --
------- ------- -------
Total mandatorily redeemable preferred stock....... 47,493 -- --
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par value; 10,362 shares
authorized --
Series IV convertible preferred stock, 10,362 shares
issued and outstanding, no shares pro forma and pro
forma as adjusted..................................... -- -- --
Preferred Stock, $.01 par value; 300,000 shares
authorized, none issued and outstanding................. -- -- --
Common Stock, $.01 par value; 100,000,000 shares
authorized, 4,295,486 issued and outstanding, 11,557,580
shares pro forma and shares pro forma as adjusted... 43 116
Additional paid-in capital................................ 13,623 61,043
Accumulated deficit....................................... (7,556) (7,556) (7,556)
------- ------- -------
Total stockholders' equity......................... 6,110 53,603
------- ------- -------
Total capitalization........................... $58,859 $58,859
======= ======= =======
</TABLE>
- ---------------
(1) For information regarding the conversion of all outstanding shares of
Preferred Stock, see Notes 11 and 12 of Notes to Consolidated Financial
Statements. Does not include 24,500 shares of Common Stock issued upon
exercise of warrants after June 30, 1998.
(2) Gives effect to the conversion of all outstanding shares of Preferred Stock
into 7,262,094 shares of Common Stock discussed in Notes 11 and 12 of Notes
to Consolidated Financial Statements and the issuance by the Company of
shares of Common Stock in this offering and the application of
the net proceeds therefrom as described in "Use of Proceeds."
14
<PAGE> 16
DILUTION
The net tangible book value of the Company at June 30, 1998 was
approximately $18.1 million, or $1.56 per share of Common Stock, after giving
effect to the conversion of the Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock into 7,262,094 shares of Common Stock upon
completion of the offering. Net tangible book value per share represents the
amount of total assets less total liabilities and intangible assets, divided by
the number of shares of Common Stock outstanding at June 30, 1998. After giving
effect to the sale by the Company of shares of Common Stock offered
hereby (at an assumed initial public offering price of $ per share) and
the application of the estimated net proceeds as set forth under "Use of
Proceeds," the pro forma net tangible book value of the Company at June 30, 1998
would have been $ , or $ per share of Common Stock. This
represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share
to new investors purchasing Common Stock in the offering, as illustrated by the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
------
Pro forma net tangible book value per common share prior
to the offering (1)....................................
Increase per common share attributable to new investors...
-------
Pro forma net tangible book value per common share after the
offering..................................................
------
Dilution per common share to new investors (2).............. $
======
</TABLE>
The following table summarizes certain differences between existing
stockholders (including the holders of 7,262,094 shares of Common Stock to be
issued upon conversion of the Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock upon completion of the offering) and the new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
to the Company by the existing stockholders and new investors (based on an
assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors (1).............. % $ % $
New investors....................... $
---------- ----- ------------ ----- ------
Total..................... 100.0% $ 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Excludes 24,500 shares of Common Stock issued upon the exercise of warrants
after June 30, 1998 and Common Stock issuable upon the exercise of
outstanding options to purchase 2,175,889 shares of Common Stock at a
weighted average exercise price of $7.16 per share. To the extent these
options are exercised or additional shares of Common Stock are issued in
connection with future transactions, there will be further dilution to new
investors.
(2) Dilution is determined by subtracting pro forma net tangible book value per
common share after giving effect to this offering (at an assumed initial
public offering price of $ per share) from the initial public offering
price per share. Dilution to new investors will be $ if the
Underwriters' over-allotment option is exercised in full.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company: (i) as of and for each of the five fiscal years ended December 31,
1997, which information has been derived from the audited Consolidated Financial
Statements of the Company; and (ii) as of and for the six-month periods ended
June 30, 1997 and 1998, which information has been derived from Consolidated
Financial Statements of the Company which are unaudited but which, in the
opinion of management, have been prepared on the same basis as the audited
Consolidated Financial Statements and include all adjustments necessary
(consisting of normal recurring adjustments) for a fair presentation of the
results for such periods. The selected consolidated financial data are qualified
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------ -------------------------
1993 1994 (1) 1995 (1) 1996 (2) 1997 (3) 1997 (3) 1998 (3)
-------- ---------- ---------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................ $ 21,127 $ 22,719 $ 49,180 $ 71,700 $ 108,117 $ 53,268 $ 60,173
Cost of revenues............ 17,416 18,864 40,154 57,330 86,975 42,686 47,870
-------- ---------- ---------- ---------- ---------- ----------- -----------
Gross profit................ 3,711 3,855 9,026 14,370 21,142 10,582 12,303
Selling, general and
administrative expenses... 3,511 3,076 4,352 8,328 9,743 4,783 5,276
Depreciation and
amortization.............. 2,755 1,582 3,907 6,332 10,027 4,744 4,285
Restructuring charges (4)... -- -- 347 644 2,075 -- --
-------- ---------- ---------- ---------- ---------- ----------- -----------
Operating income (loss)..... (2,555) (803) 420 (934) (703) 1,055 2,742
Interest income (expense),
net....................... (203) 146 (539) (382) (310) (150) (98)
-------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before income
taxes..................... (2,758) (657) (119) (1,316) (1,013) 905 2,644
Benefit (provision) from
income taxes.............. -- 532 (7) -- -- (522) (1,127)
-------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss)........... $ (2,758) $ (125) $ (126) $ (1,316) $ (1,013) $ 383 $ 1,517
======== ========== ========== ========== ========== =========== ===========
Basic weighted average
common shares
outstanding............... 803,466 1,105,201 1,272,048 2,578,421 4,106,364 4,106,364 4,111,588
Diluted weighted average
common shares outstanding,
unless antidilutive....... 12,062,300 12,182,270
Basic earnings per share.... $ (3.43) $ (0.11) $ (0.10) $ (0.51) $ (0.25) $ 0.09 $ 0.37
Diluted earnings per
share..................... $ (3.43) $ (0.11) $ (0.10) $ (0.51) $ (0.25) $ 0.03 $ 0.12
PRO FORMA DATA, AS ADJUSTED (5):
Basic weighted average common shares outstanding.............................
Diluted weighted average common shares outstanding...........................
Basic earnings per share.....................................................
Diluted earnings per share...................................................
OTHER DATA:
EBITDA (6).................. $ 200 $ 779 $ 4,327 $ 5,398 $ 9,324 $ 5,799 $ 7,027
Cash flows from operating
activities................ (656) 867 3,638 4,011 7,319 4,541 7,429
Cash flows from investing
activities................ (11,517) 280 (2,532) (30,068) (8,496) (7,373) (3,060)
Cash flows from financing
activities................ 13,490 244 184 27,091 (2,681) (1,242) 446
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.... $ 5,320 $ 5,141 $ 4,017 $ 8,053 $ 5,196 $ 6,973 $ 7,999
Working capital............. 7,614 4,398 6,475 12,118 10,264 9,053 12,319
Total assets................ 18,094 31,285 28,538 78,416 75,469 79,069 79,030
Long-term debt, including
current portion........... 185 8,686 7,164 11,903 9,036 10,464 7,270
Stockholders' equity........ (1,189) (420) (250) 3,620 2,607 4,003 6,110
</TABLE>
16
<PAGE> 18
See accompanying footnotes on the following page.
- ---------------
(in thousands, except share data)
(1) In December 1994, the Company acquired all the outstanding common stock of
SecrePhone Ltd. This acquisition was accounted for as a purchase, and the
results of SecrePhone Ltd. were included in the accompanying Consolidated
Financial Statements from the date of the acquisition. The cost of the
acquisition has been allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed.
(2) In July 1996, the Company acquired all the outstanding stock of Medical
Records Corp. The acquisition has been accounted for as a purchase, and the
results of Medical Records Corp., a wholly owned subsidiary of the Company,
were included in the accompanying Consolidated Financial Statements from the
date of the acquisition. In connection with the acquisition, the Company
assumed certain acquisition-related liabilities from Medical Records Corp.
The cost of the acquisition has been allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed.
(3) During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities. Each of the 1997 acquisitions was accounted for as a
purchase, and the results of operations are included in the accompanying
Consolidated Financial Statements from the date of acquisition. The above
results also include a full period of activity related to the acquisition
discussed in Note 2 above.
(4) The Company's results of operations have been adversely affected in 1995,
1996 and 1997 by restructuring charges associated with the closure and
consolidation of redundant and less profitable client service centers and
related costs and other non-recurring acquisition and integration costs in
1997 in connection with the acquisition of Medical Records Corp. These
corresponding expenses of $347, $644 and $2,075 are included in operating
income (loss) for the years ended December 31, 1995, 1996 and 1997,
respectively.
(5) Gives effect to the conversion of Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock into 7,262,094 shares of
Common Stock upon completion of this offering (see Notes 11 and 12 of Notes
to Consolidated Financial Statements) and the issuance by the Company of
shares of Common Stock in this offering and the application of
the net proceeds therefrom as described in "Use of Proceeds."
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income (loss) plus depreciation and amortization.
Management believes EBITDA is a meaningful measurement of the Company's
ability to generate cash flows to fund future growth and operating and
investing needs. EBITDA should not be considered as an alternative measure
of net income or cash provided by operating activities (both as determined
in accordance with generally accepted accounting principles), but is
presented to provide additional information related to the Company's debt
service capability. EBITDA should not be considered in isolation or as a
substitute for other measures of financial performance or liquidity.
A reconciliation of EBITDA to net income (loss) is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA....................... $ 200 $ 779 $ 4,327 $ 5,398 $ 9,324 $ 5,799 $ 7,027
Interest income (expense),
net........................ (203) 146 (539) (382) (310) (150) (98)
Benefit (provision) from
income taxes............... -- 532 (7) -- -- (522) (1,127)
Depreciation and
amortization............... (2,755) (1,582) (3,907) (6,332) (10,027) (4,744) (4,285)
------- ------- ------- ------- -------- ------- -------
Net income (loss)............ $(2,758) $ (125) $ (126) $(1,316) $ (1,013) $ 383 $ 1,517
======= ======= ======= ======= ======== ======= =======
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and the related Notes
thereto appearing elsewhere in this Prospectus.
OVERVIEW
The MRC Group, Inc. is a leading national provider of electronic medical
transcription and document management services to the health care industry. The
Company currently operates more than 50 client service centers in 24 states and
employs more than 2,300 experienced medical transcriptionists, approximately 70%
of whom work from their homes. The Company serves more than 500 clients,
primarily hospitals and medical centers, as well as other non-hospital health
care providers, such as managed care providers, surgical centers, outpatient
clinics and physician practice groups. Within hospitals and medical centers, the
Company primarily serves the health information management departments, also
known as medical records departments. Increasingly, the Company is providing its
services to other hospital departments that seek to outsource their medical
transcription needs, including radiology, emergency medicine, pathology and
cardiology departments and outpatient surgical units.
The significant growth in the Company's revenues has resulted from
acquisitions, increased penetration of its large base of medical institutions
and the addition of new clients. The Company became one of the country's largest
providers, based on revenues, of medical transcription services in July 1996
when it acquired Medical Records Corp., a national medical transcription service
company. The consummation of this acquisition by the Company resulted in the
consolidation into The MRC Group of two of the three largest providers of
electronic medical transcription services in the nation.
Operating results for 1996 and 1997 were adversely impacted as the Company
allocated a significant amount of resources toward the integration of the
technical, operational and administrative infrastructures of the Company and
Medical Records Corp. Additionally, the Company had restructuring charges
associated with the closure and consolidation of less profitable or redundant
client service centers and other non-recurring acquisition and integration costs
in 1996 and 1997 in connection with the acquisition of Medical Records Corp. The
Company believes that as a result of these actions, future results of operations
and liquidity will be enhanced due to lower overhead costs and capital resource
requirements. The Company believes it has substantially completed this process
and does not anticipate significant additional client service center closures
and therefore does not expect future restructuring charges impacting operating
results, liquidity and capital resource requirements.
The Company has continued to acquire additional medical transcription
companies in 1997 and 1998. In 1997, the Company acquired three medical
transcription companies with combined annual revenues of approximately $4.6
million. In 1998, the Company acquired one medical transcription company with
annual revenues of approximately $1.2 million. The four companies were acquired
for an aggregate consideration of approximately $3.3 million, excluding earn-out
provisions, and were accounted for as purchases.
In 1996, the Company began funding a portion of the development costs of
PowerScribe, a speech recognition product distributed by the Company. Although
PowerScribe is generating revenues, current revenues are insufficient to cover
overhead costs related to PowerScribe.
In 1998, the Company has increased revenues and capitalized on the
integration and restructuring of 1996 and 1997. As a result, operating margins
have improved as the Company leveraged its infrastructure of client service
centers and other predominantly fixed operational, technical and administrative
costs against the increased revenue base.
18
<PAGE> 20
SOURCES OF REVENUE
The Company's electronic medical transcription revenues tend to be
recurring as a result of the multi-year nature of its client contracts. Revenues
per individual client vary based upon individual client demands for the
Company's services. The Company charges its clients on a per-unit basis (most
commonly for each line or word transcribed). These services are provided
primarily to hospitals and medical centers and other health care providers that
outsource all or part of their medical transcription needs.
Although the Company's net revenues are derived primarily from electronic
medical transcription services provided to hospital health information
management departments (approximately 80% of revenues), the Company also
provides its services to other hospital departments. Radiology (approximately 9%
of revenues) and emergency medicine (approximately 9% of revenues) also
significantly contribute to the Company's revenues. PowerScribe, the speech
recognition software product distributed by the Company, currently generates
less than 1% of the Company's revenues.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain financial
information expressed as a percentage of net revenues. Such information has been
derived from the Consolidated Financial Statements and the Notes thereto of the
Company included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 81.6 80.0 80.4 80.1 79.6
----- ----- ----- ----- -----
Gross profit..................................... 18.4 20.0 19.6 19.9 20.4
Selling, general and administrative expenses... 8.9 11.6 9.0 9.0 8.7
Depreciation and amortization.................. 7.9 8.8 9.3 8.9 7.1
Restructuring charges.......................... 0.7 0.9 1.9 -- --
----- ----- ----- ----- -----
Operating income (loss).......................... 0.9 (1.3) (0.6) 2.0 4.6
Interest income (expense), net................. (1.1) (0.5) (0.3) (0.3) (0.2)
----- ----- ----- ----- -----
Income (loss) before income taxes................ (0.2) (1.8) (0.9) 1.7 4.4
(Provision) for income taxes................... (0.1) -- -- (1.0) (1.9)
----- ----- ----- ----- -----
Net income (loss)................................ (0.3)% (1.8)% (0.9)% 0.7% 2.5%
===== ===== ===== ===== =====
</TABLE>
Revenues derived from the Company's services and products are net of
customary client adjustments and credits, which historically have not been
significant as a percentage of revenues.
Cost of revenues include client service related costs, such as payroll,
associated taxes and benefits and telecommunications costs. Medical
transcriptionist payroll, the Company's largest single cost, is variable because
transcriptionists are paid based upon the amount of transcription they generate
(on a per unit basis). Additionally, a significant portion of the Company's
telecommunication costs is variable.
Selling, general and administrative costs include payroll, associated taxes
and benefits and other costs related to the sales and marketing, finance, human
resources and administrative functions of the Company. Depreciation expense
relates to the depreciation of fixed assets used at client service centers and
corporate locations. Amortization expense relates to the amortization of
acquired intangible assets, including the customer base and employee lists of
acquired companies, and goodwill.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net Revenues. Net revenues for the six months ended June 30, 1998 were
$60.2 million, an increase of $6.9 million, or approximately 12.9%, over net
revenues of $53.3 million for the six
19
<PAGE> 21
months ended June 30, 1997. Of the increase, $1.5 million resulted from revenues
generated from four acquisitions, three in 1997 and one in the first quarter of
1998. The remaining $5.4 million of increased net revenues resulted from
increased revenues from the existing client base (consisting of both higher
prices and increased services) and revenues from new clients.
Gross Profit. Gross profit during the six months ended June 30, 1998 was
$12.3 million, an increase of $1.7 million, or approximately 16.0%, over gross
profit of $10.6 million for the six months ended June 30, 1997. Gross profit as
a percentage of net revenues increased from approximately 19.9% in the first six
months of 1997 to approximately 20.4% in the first six months of 1998. The 0.5%
increase in gross profit as a percentage of net revenues is primarily a result
of leveraging fixed costs incurred at the Company's client service centers
against increasing client revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1998 were $5.3 million,
an increase of $500,000, or approximately 10.4%, over selling, general and
administrative expenses of $4.8 million for the six months ended June 30, 1997.
Selling, general and administrative expenses as a percentage of net revenues
decreased from approximately 9.0% in the six months ended June 30, 1997 to
approximately 8.7% in the six months ended June 30, 1998. This 0.3% decrease as
a percentage of net revenues is primarily attributable to management controlling
expenses while client revenues increased.
Depreciation and Amortization. Depreciation and amortization expenses in
the six months ended June 30, 1998 were $4.3 million, a decrease of $400,000 or
approximately 8.5%, from $4.7 million in the six months ended June 30, 1997.
This decrease is a result of certain intangible assets becoming fully amortized
in 1997.
Operating Income. Principally as a result of the above, operating income in
the six months ended June 30, 1998 was $2.7 million, an increase of $1.6
million, or approximately 145%, over operating income of $1.1 million for the
first six months of 1997. Operating income as a percentage of net revenues
increased to approximately 4.6% in the first six months of 1998 from
approximately 2.0% in the prior year period.
Income Taxes. The Company's effective tax rate was approximately 43% in the
first six months of 1998. The provision for income taxes was $1.1 million
compared to $522,000 in the first six months of 1997. The effective tax rate
exceeds the statutory rate due primarily to non-deductible goodwill
amortization.
Net Income. As a result of the above, the Company recorded net income for
the six months ended June 30, 1998 of $1.5 million, an increase of $1.1 million,
or approximately 287% over net income of $383,000 for the six months ended June
30, 1997. Net income as a percentage of net revenues increased to approximately
2.5% in the first six months of 1998 from approximately 0.7% in the prior year
period.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Revenues. Net revenues for the year ended December 31, 1997 were $108.1
million, an increase of $36.4 million, or approximately 50.8%, over net revenues
of $71.7 million for the year ended December 31, 1996. The increase was
primarily a result of an increase of $27.6 million attributable to a full year
of revenues from the acquired Medical Records Corp. clients, an increase of $2.7
million attributable to revenues from other businesses acquired in 1997, and an
increase of $6.1 million attributable to net additional revenues from existing
and new clients.
Gross Profit. Gross profit in 1997 was $21.1 million, an increase of $6.7
million, or approximately 47.1%, over gross profit of $14.4 million in 1996. The
increase in gross profit is a result of increased revenues, primarily related to
the acquisitions and internal growth outlined in net
20
<PAGE> 22
revenues above. Gross profit as a percentage of net revenues remained relatively
stable at approximately 20.0% in 1996 and approximately 19.6% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1997 were $9.7 million, an increase of $1.4 million,
or approximately 17.0%, compared to $8.3 million in 1996. The increase in
selling, general and administrative expenses was primarily related to additional
non-recurring costs of approximately $764,000. The $764,000 includes $550,000 of
research and development expenses. The balance is primarily due to test market
advertising. Selling, general and administrative expenses as a percentage of net
revenues decreased to approximately 9.0% in 1997 from approximately 11.6% in
1996. The decrease as a percentage of net revenues is a result of leveraging its
sales and marketing, finance, human resources and other administrative costs
against increasing revenues.
Depreciation and Amortization. Depreciation and amortization expenses in
1997 were $10.0 million, an increase of $3.7 million or approximately 58.4%,
from $6.3 million in 1996. This increase was a result of a $1.6 million increase
in depreciation of fixed assets and a $2.1 million increase in amortization of
intangible assets, primarily attributable to a full year's costs related to the
acquisition of Medical Records Corp.
Restructuring Charges. The Company incurred restructuring charges of $2.1
million in 1997 and $644,000 in 1996 related to the closure and consolidation of
less profitable or redundant client service centers in 1997 and 1996 and other
non-recurring acquisition and integration costs incurred in 1997 in connection
with the acquisition of Medical Records Corp.
Operating Loss. Principally as a result of the above, the loss from
operations in 1997 totaled $703,000, a decrease in losses of $232,000 over the
1996 level of $935,000. The loss from operations as a percentage of net revenues
decreased to approximately 0.6% in 1997 from approximately 1.3% in 1996.
Income Taxes. The Company did not provide for income taxes in 1996 and 1997
as a result of reporting net losses for these years.
Net Loss. As a result of the above, the Company recorded a net loss in 1997
of $1.0 million compared to a net loss of $1.3 million in 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Revenues. Net revenues for the year ended December 31, 1996 were $71.7
million, an increase of $22.5 million, or approximately 45.8%, over net revenues
of $49.2 million for the year ended December 31, 1995. The increase was
primarily a result of additional revenues from the acquisition of Medical
Records Corp. in July 1996.
Gross Profit. Gross profit in 1996 increased by $5.4 million to $14.4
million, or approximately 59.2%, over the 1995 level of $9.0 million. The
increase in gross profit is a result of increased revenues, primarily related to
the acquisition of Medical Records Corp. Gross profit as a percentage of net
revenues increased from approximately 18.4% in 1995 to approximately 20.0% in
1996 as a result of higher gross profit margins provided by the Medical Records
Corp. client service centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased $3.9 million to $8.3 million, or
approximately 91.4%, compared to approximately $4.4 million in 1995. Selling,
general and administrative expense as a percentage of net revenues increased to
approximately 11.6% in 1996 from approximately 8.9% in 1995. The increase in
expense was primarily a result of additional overhead and assumed expenses
incurred as a result of the acquisition of Medical Records Corp.
21
<PAGE> 23
Depreciation and Amortization. Depreciation and amortization expenses in
1996 were $6.3 million, an increase of 62.1%, from $3.9 million in 1995. This
increase is primarily related to fixed assets and intangible assets acquired
related to the acquisition of Medical Records Corp.
Operating Income (Loss). Principally as a result of the above, loss from
operations in 1996 totaled $935,000, compared to income from operations of
$420,000 in 1995. As a percentage of net revenues, there was an approximate 1.3%
operating loss in 1996, compared to an approximate 0.9% operating income in
1995.
Income Taxes. The Company effectively did not provide for income taxes in
1996 and 1995 as a result of reporting net losses for these years.
Net Loss. As a result of the above, the Company recorded a net loss in 1996
of $1.3 million, compared to a net loss of $126,000 in 1995.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly results of operations of
the Company for each of the quarters in the year ended December 31, 1997 and the
six months ended June 30, 1998. This information has been prepared on the same
basis as the consolidated financial statements and, in the opinion of Company's
management, reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. The unaudited quarterly operating results are not necessarily
indicative of future results of operation. This data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
1997 1998
--------------------------------------- -------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE, 30
-------- ------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................... $26,095 $27,172 $27,259 $27,591 $29,410 $30,762
Cost of revenues................. 21,040 21,646 21,995 22,294 23,620 24,249
------- ------- ------- ------- ------- -------
Gross profit....................... 5,055 5,526 5,264 5,297 5,790 6,513
Selling, general and
administrative expenses....... 2,621 2,163 1,940 3,019 2,623 2,653
Depreciation and amortization.... 2,292 2,450 2,517 2,768 2,110 2,175
Restructuring charges............ -- -- -- 2,075 -- --
------- ------- ------- ------- ------- -------
Operating income (loss)............ 142 913 807 (2,565) 1,057 1,685
Interest income (expense), net... (78) (72) (73) (87) (63) (35)
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes............................ 64 841 734 (2,652) 994 1,650
(Provision) benefit for income
taxes......................... (107) (415) (374) 896 (431) (696)
------- ------- ------- ------- ------- -------
Net income (loss).................. $ (43) $ 426 $ 360 $(1,756) $ 563 $ 954
======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE> 24
The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of net revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
1997 1998
--------------------------------------- ------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 80.6 79.7 80.7 80.8 80.3 78.8
----- ----- ----- ----- ----- -----
Gross profit............................ 19.4 20.3 19.3 19.2 19.7 21.2
Selling, general and administrative
expenses........................... 10.1 7.9 7.1 11.0 8.9 8.6
Depreciation and amortization......... 8.8 9.0 9.2 10.0 7.2 7.1
Restructuring charges................. -- -- -- 7.5 -- --
----- ----- ----- ----- ----- -----
Operating income (loss)................. 0.5 3.4 3.0 (9.3) 3.6 5.5
Interest income (expense), net........ (0.3) (0.3) (0.3) (0.3) (0.2) (0.1)
----- ----- ----- ----- ----- -----
Income (loss) before income taxes....... 0.2 3.1 2.7 (9.6) 3.4 5.4
(Provision) benefit for income
taxes.............................. (0.4) (1.5) (1.4) 3.2 (1.5) (2.3)
----- ----- ----- ----- ----- -----
Net income (loss)....................... (0.2)% 1.6% 1.3% (6.4)% 1.9% 3.1%
===== ===== ===== ===== ===== =====
</TABLE>
Selling, general and administrative expenses for the three months ended
December 31, 1997 increased as a result of non-recurring charges of
approximately $514,000, primarily for research and development.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at June 30, 1998 was $12.3
million, and cash and short-term investments were approximately $8.0 million.
The Company's cash resources and available borrowings were satisfactory to meet
its obligations during the year ended December 31, 1997, and the six months
ended June 30, 1998. It is anticipated that the Company's cash from operations,
cash resources and available borrowings after the offering will meet the
Company's capital requirements for at least the next 18 months.
The Company's total debt at June 30, 1998, including a current portion of
$2.0 million, was $7.3 million. Such indebtedness included $4.6 million of a
term note payable to a bank, $2.0 million of seller notes from acquisitions and
$700,000 of capital lease obligations.
The bank term note is being amortized in monthly principal amounts of
$117,000 plus interest at LIBOR plus 1.65% and will mature September 2001. This
facility is collateralized by substantially all of the Company's assets. The
agreement relating to the note contains various financial covenants. All or a
portion of the outstanding loan balance may be repaid at any time and
commitments may be terminated in whole or in part at the option of the Company
without premium or penalty, at the end of the applicable 90-day interest period.
The Company intends to prepay this note with the proceeds of the offering. See
"Use of Proceeds."
In connection with the acquisition of Medical Records Corp. by the Company
in July 1996, the Company issued seven-year, 8% unsecured notes payable to
former shareholders in the aggregate principal amount of $2.0 million. The notes
require the Company to pay interest quarterly with annual principal payments of
$500,000 beginning in July 2000. As required by the terms of the notes, the
Company will repay these notes with the proceeds of the offering. See "Use of
Proceeds."
The Company also has a line of credit agreement with a bank under which it
can borrow up to $10.0 million with an interest rate of LIBOR plus 1.25%. The
line of credit is secured by substantially all of the Company's assets. This
line, which expires August 31, 1998, is currently in process of renewal. The
Company utilizes this line of credit on a periodic basis for working capital. No
amounts were outstanding at June 30, 1998.
23
<PAGE> 25
For the years ended December 31, 1995, 1996 and 1997, cash flows provided
by operating activities were $3.6, $4.0 and $7.3 million, respectively. Cash
from operating activities are generated primarily from non-cash depreciation and
amortization added back to the Company's operating results which has increased
as a result of the acquisition of Medical Records Corp. in 1996, and
depreciation on increased capital expenditures necessary to support increased
revenues.
For the years ended December 31, 1995, 1996 and 1997, cash flows used for
investing activities were $2.5, $30.1 and $8.5 million, respectively. The
increases were a result of increased capital expenditures for computer and
digital recording equipment necessary to upgrade systems to the Company's
standard platforms and support increased revenues. Additionally in 1996, $21.4
million of cash flows were used for the acquisition of Medical Records Corp.
For the years ended December 31, 1995, 1996 and 1997, cash flows provided
by (used for) financing activities were $0.2, $27.1 and $(2.7) million,
respectively. The fluctuation in cash flows from financing activities is
reflective of normal borrowing trends and the net proceeds of $29.3 million
related to the sale of Series VI Preferred Stock in 1996 used to consummate the
acquisition of Medical Records Corp. and to provide working capital.
OTHER
Inflation has not had a significant effect on the Company's historical
operations, as increased costs to the Company have generally been offset by
increased prices of services provided to its clients.
YEAR 2000
The Company is assessing its computer systems to determine their compliance
with the Year 2000. Based on this assessment, the Company has upgraded or
replaced certain of its internal information systems and is in the process of
upgrading or replacing other systems with Year 2000 compliant systems. The
Company will use internal and external resources to replace, reprogram and test
software and hardware, where necessary, to ensure Year 2000 compliance. The
Company is also communicating with its customers, suppliers and others to
coordinate the Year 2000 conversion. Given the information known at this time
about its systems, coupled with the Company's ongoing efforts to upgrade or
replace business critical systems as necessary, the total cost of the project is
not expected to have a material effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. This Statement is not expected to impact the Company's
financial statements at this time.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. The Company currently operates in two
business segments, electronic medical transcription services and PowerScribe.
PowerScribe currently generates less than 1% of the Company's revenues and does
not warrant financial statement segmentation at this time.
In November 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. The Company believes its current accounting policies are materially
compliant with this SOP.
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The Company believes
its current accounting policies are materially compliant with this SOP.
In April 1998, the AICPA issued SOP No. 98-5 Reporting on the Cost of
Start-up Activities. The Company believes its current accounting policies are
materially compliant with this SOP.
24
<PAGE> 26
BUSINESS
OVERVIEW
The MRC Group, Inc. is a leading national provider of electronic medical
transcription and document management services to the health care industry. The
Company currently operates more than 50 client service centers in 24 states and
employs more than 2,300 experienced medical transcriptionists, approximately 70%
of whom work from their homes. The Company serves more than 500 clients,
primarily hospitals and medical centers, as well as other non-hospital health
care providers, such as managed care providers, surgical centers, outpatient
clinics and physician groups. Within hospitals and medical centers, the Company
primarily serves the health information management departments, also known as
medical records departments. Increasingly, the Company is providing its services
to other hospital departments that seek to outsource their medical transcription
needs, including radiology, emergency medicine, pathology and cardiology
departments and outpatient surgical units.
The Company's objective is to capitalize on the health care industry's
trend toward increased dictation of medical reports and outsourcing of medical
transcription and document management services and to enhance its position as a
leading provider of such services. The principal elements of the Company's
strategy are to (i) accelerate internal growth through superior client
retention, deeper penetration of existing clients and increased sales to new
clients; (ii) expand operating margins by further standardizing operations,
taking advantage of economies of scale and executing disciplined pricing
strategies; (iii) apply state-of-the-art technology to expand services, enhance
client satisfaction and lower costs; and (iv) identify and complete strategic
acquisitions.
The Company believes its large size, technical resources and other
capabilities differentiate it from its competitors and enable it to better
retain existing clients and attract new clients. The Company's customized
electronic medical transcription and document management services provide
clients with lower costs, improved accuracy of transcribed medical reports,
reduced report turnaround times, shortened billing cycles and reduced capital
investment. The Company develops long-term client relationships through high
quality service, technological expertise and an experienced, service-oriented
management team. The Company applies state-of-the-art technology and proprietary
software applications, protocols and procedures to create customized systems
tailored to meet specific client requirements and to enhance client
satisfaction. The Company's national network of more than 50 client service
centers enables it to respond to its clients on a local basis and use its
national resources to balance workloads among client service centers without
delay or disruption in service.
INDUSTRY BACKGROUND
Medical transcription and document management is the process by which
clinical and medical information is dictated by a health care provider,
transcribed by a medical transcriptionist and returned to the health care
provider for verification, signing and incorporation into the patient's medical
record. These services are generally utilized by health information management,
also known as medical records departments, radiology, emergency medicine,
pathology and cardiology departments. The most commonly transcribed reports for
health information management departments are history and physical reports,
consultations, surgical reports and discharge summaries. Specialized reports for
the radiology, pathology, emergency medicine and cardiology departments are also
commonly transcribed. Various sources estimate that the United States health
care industry spends in excess of $6.6 billion on medical transcription services
annually. The Company believes that a substantial majority of this amount is
spent by health care providers for in-house medical transcription. Industry
sources estimate that there are more than 1,500 providers of outsourced medical
transcription services, the vast majority of which serve a small number of
clients on a local basis.
25
<PAGE> 27
The medical transcription industry is evolving from a relatively
low-technology, locally provided business to a technology-driven, document
management business, increasingly providing services on a nationwide basis. This
evolution over the last 20 years is a result of changes in the health care
industry and advances in technology. Through the 1970s and into the early 1980s,
most medical reports were transcribed in-house or outsourced to individual
medical transcriptionists or small companies using cassette recorders and
typewriters. Couriers shuttled tapes and reports between medical facilities and
medical transcriptionists. Turnaround time and the utilization of technology
were not critical factors. In the 1980s, the advent of personal computers, word
processing and digital recording technology, together with the many changes in
the health care industry, transformed the medical transcription industry into
one driven by technology and the demand for faster, more reliable turnaround
time, customized services and consistent quality. In the 1990s, the formation of
integrated health care delivery systems and the increased focus on the
computerized patient record have further accelerated the importance of
technology and the communication among disparate systems in the medical
transcription industry. These factors are also permitting the Company to take
advantage of economies of scale through the application of leading technology
and the acquisition of smaller firms that are generally ill-equipped to operate
in this changing environment. The Company believes that it is one of the few
firms in the industry that has fully embraced these changes and is positioned to
benefit from economies of scale and the changing industry.
The Company believes a number of significant trends will support continued
growth of the medical transcription industry, as well as growth in the segment
of the industry that is outsourced. These trends include the following:
Demand for greater documentation. Government regulations and third-party
requirements for reimbursement are increasingly requiring higher levels of
documentation. In addition, concerns by health care providers over issues
of risk management are resulting in increases in the amount of information
and data included in medical records.
Increased outsourcing in the health care industry. Health care
organizations are increasingly outsourcing non-core functions to reduce
costs and concentrate on providing medical care. Health care providers are
seeking to reallocate their resources to improve the delivery of patient
care and increase profitability. By outsourcing medical transcription,
health care providers and organizations can reduce costs, employee
headcounts and the capital investment required for state-of-the-art medical
transcription technology.
Demand for faster, more consistent and reliable turnaround of medical
reports. The Company believes many in-house medical transcription
departments are not well equipped to handle the increasing workload and
pressure for faster, more consistent and reliable turnaround of transcribed
medical reports. In order to meet these increased demands, in-house medical
transcription departments must be staffed to handle levels of peak demands,
which creates inefficiencies and increases costs. The Company believes that
as a result of its large scale of operations, strong management skills,
expertise and effective utilization of advanced technology, it can
generally provide consistently faster turnaround time more economically and
reliably than in-house medical transcription departments.
Creation of integrated delivery systems. The shift from traditional
fee-for-service to managed care is leading to the creation of integrated
health care delivery systems, which often include various combinations of
hospitals, health maintenance organizations, outpatient clinics, surgical
centers and physician practice networks. The formation of these integrated
delivery systems has been one of several important drivers of the need for
clinical and medical information to be captured electronically so that it
can be shared more easily and quickly throughout the health care
enterprise.
Growing trend toward computerized patient records. The growing
information needs of hospitals and other health care organizations are
increasing the demand for the electronic input of medical information as
the first step in the implementation of the computer-based patient
26
<PAGE> 28
record and the ability to perform data mining and outcomes analysis.
Consequently, a significant amount of data, which was previously
handwritten, such as emergency medicine department encounters and clinical
notes, must now be electronically captured, transcribed and integrated into
the computerized patient record.
BUSINESS STRATEGY
The Company's objective is to capitalize on the health care industry's
growing trend toward increased dictation of medical reports and outsourcing of
medical transcription and document management services and to enhance its market
position as a leading provider of such services. The principal elements of the
Company's strategy are to (i) accelerate internal growth through superior client
retention, deeper penetration of existing clients and increased sales to new
clients; (ii) expand operating margins by further standardizing operations,
taking advantage of economies of scale and executing disciplined pricing
strategies; (iii) apply state-of-the-art technology to expand services, enhance
client satisfaction and lower costs; and (iv) identify and complete strategic
acquisitions.
ACCELERATE INTERNAL GROWTH
The Company intends to accelerate its internal growth by aggressively
pursuing new customers and cross-selling within its existing client base. The
Company focuses on maintaining high levels of client satisfaction and believes
that client satisfaction leads to high client retention, deeper penetration of
existing clients and increased referral sales to new clients. Numerous
cross-selling opportunities exist as many of the Company's clients currently
outsource to the Company only the medical transcription for their health
information systems departments and rely on small transcription providers or
in-house medical transcription for radiology, pathology, cardiology, emergency
and other departments. The Company will continue to focus on maintaining high
levels of client satisfaction, aggressively pursue new customers, and leverage
relationships across departments within the same hospital, medical center or
other health care provider.
The Company targets as new clients larger health care providers, primarily
in markets already served by its existing client service centers in order to
leverage fixed costs. The Company believes larger health care providers offer
better cross-selling opportunities. The Company also believes it is one of the
few medical transcription companies capable of managing the complex needs of
larger clients, particularly integrated delivery networks, because of its
national network and its technical resources.
EXPAND OPERATING MARGINS
The Company believes it can continue to expand its operating margins by
further standardizing operations, taking advantage of economies of scale and
executing disciplined pricing strategies. The Company recently implemented a
standardized platform including, among other features, automated transmission
procedures ("The Model Office") at substantially all of its client service
centers. The Model Office infrastructure enables the Company to conduct its
nationwide operations more efficiently and generate economies of scale. The
Company has also implemented pricing and cost procedures that are designed to
price client contracts in a manner that takes into account all costs necessary
to provide the services for those contracts. As a result of these initiatives,
the Company's operating margin has increased to 4.6% in the six months ended
June 30, 1998 from 2.0% in the six months ended June 30, 1997.
APPLY STATE-OF-THE-ART TECHNOLOGY TO EXPAND SERVICES AND LOWER COSTS
The Company applies state-of-the-art technology and proprietary software
applications, protocols and procedures to create customized systems tailored to
meet specific client requirements and to enhance client satisfaction. The
Company intends to maintain its technological leadership by leveraging
technology and technological advances to standardize further its internal
systems, lower costs and expand the breadth and functionality of its services.
The Company believes that its
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technical personnel and capabilities differentiate it from most of its
competitors, enabling the Company to meet demanding client requests. The Company
has an advanced technical infrastructure that allows for the transfer of work
among client service centers and a Technical Call Center that provides for
around-the-clock technical support. These capabilities enable the Company to
manage fluctuations in demand, and provide prompt turnaround services on a
cost-effective, 24-hours-a-day, seven-days-a-week basis. In addition, the
Company has entered into strategic alliances with third parties to develop new
technologies, including one relating to PowerScribe, the Company's speech
recognition product.
IDENTIFY AND COMPLETE STRATEGIC ACQUISITIONS
The Company seeks to capitalize on the highly fragmented medical
transcription industry by acquiring businesses that will enhance its competitive
position, reputation and profitability. The Company believes that numerous
acquisition opportunities exist, with over 1,500 medical transcription companies
existing in the industry. Since January 1997, the Company has completed four
acquisitions with annualized revenues of $5.8 million and intends to identify
and selectively acquire additional businesses that it can integrate into
existing client service centers or use to establish new client service centers
in attractive markets. The Company seeks to acquire firms that have a reputation
for quality service, strong management, a solid client base, established
infrastructure and profitable operations.
OPERATIONS
OVERVIEW
The Company's operational infrastructure is designed to ensure client
satisfaction while minimizing costs. The four critical performance measures that
clients use to evaluate the performance of medical transcription services on a
daily basis are reliability, turnaround time, quality and responsiveness. To
ensure high service levels in each of these four critical measures, the Company
has developed a state-of-the-art technical platform, along with an
organizational structure which focuses and motivates its managers to maintain
close relationships with clients.
The Company's proprietary technical platform, ACCESS+, was specifically
developed to ensure reliability and facilitate prompt turnaround time and
quality reports. ACCESS+, which operates in an open architecture environment,
automates demographic input, document tracking, transmission, reporting and
storage. ACCESS+ allows the Company to control and monitor the entire medical
transcription process from dictation through the delivery of the transcribed
medical report to the client. The ACCESS+ platform has benefited from numerous
enhancements based on the Company's years of experience. The ACCESS+ software
package includes a state-of-the-art local area network, a commercially available
document management package developed specifically for medical transcription, a
customized menu system, and a variety of proprietary transmission protocols
which integrate the Company's systems with its clients' systems. The hardware
components of this system include computers and servers, high-speed modems and
laser printers.
The Company's client service centers allow the Company's client management
teams to provide sales, client services and technical services to the Company's
clients in an efficient and personalized manner. These teams share common goals
and objectives to effectively meet clients' needs.
ELECTRONIC MEDICAL TRANSCRIPTION AND DOCUMENT MANAGEMENT SERVICES PROCESS
The emergence of computerized patient records and the evolution of
computerized digital dictation systems, among other factors driving client
expectations, have increased the complexity and technological sophistication of
the medical transcription process. The entire process may take as short as one
hour or as long as 72 hours depending on the length of the dictation and the
type of report. The following diagram illustrates the eight basic steps in the
Company's electronic medical transcription and document management services
process. The text immediately following the diagram describes these steps.
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[FULL PAGE DIAGRAM DEPICTING THE EIGHT STEPS IN THE COMPANY'S
ELECTRONIC MEDICAL TRANSCRIPTION AND DOCUMENT MANAGEMENT
SERVICES PROCESS, WHICH ARE DESCRIBED IN THE TEXT BELOW.]
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Step 1. Capture of Dictated Reports and Patient Demographics. The Company
provides a state-of-the-art digital dictation system with features specifically
oriented to provide the physicians both reliability and turn-key operability.
Physicians are able to dictate 24 hours a day, seven days a week. To provide
this reliability, the Company's client service centers are equipped with fault
tolerant dictation systems and temporary electrical backup systems. The Company
also maintains a national backup dictation system that allows dictation and
transcription even if a client service center experiences a complete and
extended loss of power or telephone service. The Company also electronically
captures demographic information (such as hospital name, patient name and
physician identification), which requires an interface with the client's health
information system. Given the complexities of interface development, clients are
especially interested in outsourcing to medical transcription companies, such as
the Company, that have substantial technical expertise. The Company's Interface
Department has developed interfaces for virtually all major health information
systems. Since ACCESS+ has an open architecture, it can accept a wide variety of
client data formats and structures.
Step 2. Transmission of Voice and Demographics to Medical
Transcriptionists. After the physician has completed the dictation, the digital
voice file and the appropriate patient demographic data are transmitted using
ACCESS+. Medical transcriptionists in the Company's client service centers
access demographic data directly from the ACCESS+ network and the Company's at-
home medical transcriptionists automatically receive demographic data through a
proprietary transmission protocol. The protocol is designed to ensure that all
medical transcriptionists have up-to-date information. This is important for
both clients and medical transcriptionists since it minimizes the chance of
demographic errors. The transmission protocol also allows the Company to update
executable files automatically, thereby allowing the Company to disseminate
software enhancements and format changes quickly and efficiently to all its
medical transcriptionists.
Step 3. Creating the Transcribed Report and Populating the Medical Report's
Demographic Fields. The Company's standard operating platform allows medical
transcriptionists to create medical reports using commercially available
third-party software specifically developed or modified for medical
transcription. This software allows the Company's medical transcriptionists to
create customized glossaries that automatically expand abbreviated text and
correct common typographical errors. In addition, the medical transcriptionists
can access and automatically populate the report with critical information,
including patient demographics and report routing and distribution preferences.
The automation of this feature improves the quality of the document, minimizes
the number of errors that occur when the document is uploaded into the client's
health information system, and improves medical transcriptionists' productivity.
Step 4. Transmitting the Transcribed Report to Quality Assurance. After the
medical transcriptionist has completed transcribing reports, the reports are
transmitted to quality assurance. For at-home medical transcriptionists, this
transfer of reports is accomplished through a proprietary transmission protocol
which virtually eliminates the possibility of lost reports even if a telephone
connection is interrupted. This system also generates verification reports to
assist both the Company and its clients with document tracking and monitoring
(see Step 7).
Step 5. Quality Assurance. Before reports are transmitted to the client,
they must pass through the Company's quality assurance program. The program
provides the capability for both the content and the demographic data in the
reports to be checked for accuracy by client service center managers or quality
service personnel. New medical transcriptionists have 100% of their work checked
and more seasoned medical transcriptionists have a sampling of their reports
checked. In addition, ACCESS+ allows medical transcriptionists to flag reports
with any problems or questions and will not allow flagged reports to be sent to
the client until they have been reviewed and released by the Company's quality
assurance personnel.
Step 6. Transmission and Uploading of Report. After reports have cleared
the Company's quality assurance program, they are automatically batched and
transmitted to the client. The
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Company uses proprietary transmission protocols, which, if necessary, recover
from disconnected phone lines without the loss of information and which
facilitate the transmission and verification process. Reports are usually sent
to the client's health information management department where they are stored
electronically and can then be uploaded into the client's computerized patient
record system.
Step 7. Tracking and Verification. Clients can review the status of
particular patient data and transcribed reports at any point in time and can use
the Company's systems as an internal management tool to monitor timeliness of
physicians' dictation. ACCESS+ also allows the Company to verify the
transmission of all reports and allows the client and the Company to monitor the
Company's on-time performance.
Step 8. Report Management. ACCESS+ provides report management capabilities
for the Company and its clients. Users can search for reports based on any
fields maintained in the system database or any words contained in a report. For
example, every report during a defined time period with the word "cardiac" can
be recalled in a matter of seconds. Summary information is also available on
ACCESS+ system for clients' internal management purposes. These reports can be
printed on a prearranged schedule to meet the client's reporting needs. In
addition, users can easily edit or append reports after they have been
transcribed.
CRITICAL PERFORMANCE MEASURES
The Company's organizational structure and technical platform are tailored
to maximize efficiency within the process flow described above and ensure
consistency in meeting the four critical performance measures described below.
Reliability. In today's competitive environment, it is increasingly
important that medical transcription systems work 24 hours a day, seven days a
week. Physicians and patients cannot afford to have procedures delayed or
hospital stays extended due to late reports or system failures. The Company has
developed an infrastructure designed to ensure system reliability. Over the past
15 months, the Company has upgraded most of its file servers, enabling the local
area network to function without loss of data in the event of a disk drive
failure. Critical systems in the client service center have temporary backup
power systems available, and backup tapes are made on a daily basis. If a client
service center encounters a power, telecommunication or system failure, at-home
medical transcriptionists can continue working for the client using the
Company's national backup dictation system. In the unlikely event that a client
service center is shut down for an extended period of time, the Company can
quickly shift work to other client service centers.
The Company has approximately 100 experienced technical personnel at the
local, regional and national levels. The Company's national Technical Call
Center works in conjunction with the client service centers to ensure rapid
response and resolution of technical issues. If a technical problem arises, the
Technical Call Center is available 24 hours a day, seven days a week.
Turnaround Time. Turnaround time requirements, which typically range from
one to 48 hours, are specified in the Company's contracts and vary by client and
report type. Meeting turnaround requirements is crucial for timely patient care
because the transcribed report is often required for physicians to make
subsequent medical decisions regarding surgery, other treatment options or
discharge. Timely turnaround is also important to clients for prompt coding and
billing. To meet these turnaround requirements, the client service centers
continually monitor the pipeline of reports to be transcribed and schedule
medical transcriptionists to align these resources with demand. The ACCESS+
system allows the Company to shift work to a backup client service center during
unexpected periods of increased transcription volume.
Quality. The Company is able to maintain consistently high quality
standards through a continuous quality monitoring process, effective employment
practices and standardized procedures and software applications. The Company's
continuous quality monitoring process ensures the delivery of a quality product
to the client and provides valuable feedback to the Company's medical
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transcriptionists. Through a variety of sampling techniques, selected reports
can be electronically flagged and automatically routed to quality assurance.
Medical transcriptionists can also flag problematic reports. The flagged reports
are corrected by quality assurance personnel or a client service center manager
before transmission to the client. The results of the quality monitoring process
are reviewed regularly with each medical transcriptionist so that any issues can
be addressed promptly.
Through its employment practices, the Company hires, trains and retains
high quality, experienced medical transcriptionists. All prospective employees
must pass a series of comprehensive tests to document their medical
transcription abilities. Once hired, it is the Company's policy that all medical
transcriptionists receive extensive training on the Company's systems and that
100% of their work is reviewed for at least two weeks. The Company encourages
its medical transcriptionists to attend continuing education programs that cover
such topics as new medical terminology for drugs, instruments and procedures.
Finally, the Company uses a compensation plan and flexible work environment
geared toward retaining high quality medical transcriptionists. Medical
transcriptionists are rewarded for both accuracy and speed, as well as volume.
The Company can accommodate extremely flexible work hours, and its technical
infrastructure permits most of its medical transcriptionists to work from their
homes.
Standardized procedures and software applications help the Company's
medical transcriptionists to create high quality reports. Medical
transcriptionists are most productive and produce their highest quality work
when they can focus on a limited number of clients and gain comprehensive
knowledge of specific clients' needs. ACCESS+ allows the Company to create
virtual pools of medical transcriptionists, thereby permitting this
specialization without sacrificing the flexibility required to manage changing
client volumes. The Company also utilizes a customized spell check program with
medical terminology and a glossary that converts abbreviations into words and
phrases. Finally, the Company's electronic interfaces minimize opportunities for
transcriptionist errors by automatically populating reports with demographic
information. This electronic link is critical for achieving a successful match
when uploading transcribed reports into health information systems.
Responsiveness. The Company utilizes client management teams to address the
needs of its clients. Each team consists of a regional manager, regional sales
manager, regional technical manager and the local client service manager. Each
member of this team has the skills and resources to address different aspects of
a client's needs. The regional organization of these teams permits frequent
client visits and is conducive to building strong client relationships. Through
geographic proximity and strong relationships, the client management teams can
also address client needs and deal with problems and issues as they arise.
The Company's systems and standards also enable it to respond to client
technical issues in a timely manner. The Company's Technical Call Center is
available 24 hours a day, seven days a week. All contact with the Technical Call
Center is logged and tracked to monitor the Company's responsiveness and to help
address systemic issues preemptively.
Finally, the Company has instituted a compensation package for its
employees that is based on meeting a number of targets, including client
retention.
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TECHNOLOGY STRATEGY
The Company's technology strategy focuses on supporting the Company's
growth objectives while applying leading edge technologies to enhance client
service, reduce costs and improve medical transcriptionist productivity. The
Company has translated this strategy into a focused action plan by dividing its
technological priorities into three groupings: technical support and
maintenance, systems enhancements, and product development.
[Seven-inch square box labelled "Technical Priorities." Within the box is a
pyramid diagram, divided into three sections, depicting the technical priorities
of the Company and text contained in rectangular boxes to the right of the
pyramid elaborating on each section. The section in the base of the pyramid
reads "Technical Support & Maintenance" and the accompanying text reads "Provide
superior client service by responding to daily issues." The section in the
center of the pyramid reads "Systems Enhancements" and the accompanying text
reads "Standardize existing technical platform and operating processes (The
Model Office) - Reduce telecommunications expenses." The section in the top of
the pyramid reads "Product Development" and the accompanying text reads "Utilize
the Internet and advanced telecommunications technologies to lower costs and
improve client service - Utilize speech recognition to develop stand-alone
products and improve medical transcriptionists' productivity."]
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TECHNICAL SUPPORT AND MAINTENANCE
On a day-to-day basis, the most important component of the Company's
technology strategy is technical support and maintenance, which keep its client
service centers operational and its clients satisfied. Technical support is
available at the local, regional and national level. The Company's Technical
Call Center serves as "mission control" for receiving, assigning and monitoring
calls for technical support. Because the Company strongly believes in the
economic benefits of preventive maintenance, the Company has invested in a
national training center. This facility allows the Company to provide ongoing
training for all of its technical and nontechnical employees. Given the
technical nature of the electronic medical transcription business, the Company
believes that professional training is crucial for preventing operational
problems.
SYSTEM ENHANCEMENTS
System enhancements involve evolutionary changes to existing technology
with the goal of enhancing client service, reducing costs and improving medical
transcriptionist productivity. These changes are generally based on existing
technology and tend to be relatively quick and inexpensive to implement.
The Model Office. During the last 12 months, the Company completed the
first of two phases of The Model Office, a program focused on standardizing the
Company's operational and technical platform throughout its network of client
service centers. The rollout of this program affected virtually every employee
and every ACCESS+ client in the country and has provided a level of consistency
and automated many clerical tasks. The Company believes that developing,
implementing and supporting such a broad-based standardized technical platform
would be difficult for most of its competitors to replicate, primarily due to
intensive capital requirements and significant technical challenges. The
objective of the first phase of The Model Office was to provide superior client
service through enhanced reliability, faster turnaround time and better quality.
This objective has been achieved through a number of technological enhancements
including:
- The automation of the transmission processes, increasing reliability
and ensuring that documents arrive on time at the client;
- The standardization and documentation of transmission protocols and
procedures, eliminating or minimizing the possibility of operator
error and improving overall system reliability; and
- The automation of the distribution of databases, templates, and
executable files, improving report quality and ensuring that all
medical transcriptionists are always working with up-to-date
information. This automation also facilitates the efficient shifting
of work among the Company's client service centers, thereby allowing
the Company to leverage its national network more effectively.
The first phase of The Model Office contributed to a 9% decrease in client
service center personnel over the last three fiscal quarters. Those client
service centers which implemented The Model Office in 1997 have experienced a
significant reduction in calls for unscheduled maintenance. The Model Office has
helped to increase medical transcriptionist productivity through reduced
downtime, automatic updating of demographic information, and upgrades to higher
speed personal computers.
The second phase of The Model Office program involves the conversion of
non-radiology clients not yet on ACCESS+ to the Company's standard platform.
Because of some of the unique demands of radiology, radiology reports are
usually transcribed directly on the client's radiology information system. The
Company already experiences considerable economies of scale because clients
representing approximately 77% of revenues generated by non-radiology clients
are processed on ACCESS+. By supporting only one system, training costs are
reduced, fewer technical personnel are required and only one set of billing and
payroll procedures is needed. The Company expects to gain
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further operating efficiencies as it continues to transfer its remaining clients
onto its standard operating platform.
Telecommunication costs currently are the second largest component of the
Company's cost of revenues after labor costs. The Company believes that it has a
number of opportunities to reduce per-unit telecommunication costs. The Company
intends to restructure, where appropriate, its telecommunications to maximize
use of lower cost product offerings, such as toll-free numbers and dedicated
lines. In addition, the Company is negotiating its long-distance and local
telecommunication contracts to reduce per-unit costs. The benefit of these
savings may be offset, however, because the Company may experience increased
long-distance volume in connection with the hiring of additional medical
transcriptionists that are not local to its client service centers.
PRODUCT DEVELOPMENT
Product development focuses on the application of state-of-the-art
technology to the Company's core business or to opportunities closely related to
its core business. Investments in product development often involve alliances
with carefully selected technology partners. These third parties provide
critical technological skills and minimize the Company's up-front investments.
The Internet and Advances in Telecommunications. The Company believes that
the Internet and recent advances in telecommunications offer a variety of
opportunities to reduce costs, improve economies of scale, increase medical
transcriptionist productivity, and provide value-added services. Additionally,
by reducing telecommunication costs, these advances may allow the Company to
grow faster since the economics of servicing remote clients and of recruiting
remote medical transcriptionists should improve. The Company has completed an
analysis of the potential applications of Internet technologies and expects to
test an enhanced workflow application during the second half of 1998. The
Company also believes that the complexity and scope of these technologies, which
will increase the economies of scale in the medical transcription industry,
benefit large national transcription providers and encourage further
consolidation in the medical transcription industry.
Speech Recognition. PowerScribe is a continuous speech recognition product
combining medical lexicons, language models and customized interfaces and
workflow applications. The Company has jointly funded the development and
obtained a right to use and distribute in the United States and Canada certain
PowerScribe continuous speech recognition software applications for the medical
transcription service business for radiology, emergency medicine and one other
field to be agreed upon. PowerScribe for Radiology has been available since the
fourth quarter of 1997 and, as of July 27, 1998, the Company has licensed
PowerScribe at 17 sites, of which 12 are fully operational. An emergency
medicine module is scheduled for release by the end of 1998. The Company
believes that radiology and emergency medicine are particularly appropriate for
speech recognition applications because these practices typically have limited
lexicons or a small number of physicians who have high dictation levels,
practice in confined areas and require extraordinarily fast turnaround times.
The Company also believes, with further product development, that speech
recognition may be appropriate for other departments. The Company does not
believe that speech recognition poses a serious threat to its core business in
the foreseeable future because of technical, economic and behavioral issues. In
fact, PowerScribe could boost overall Company profitability by enhancing
productivity. More specifically, PowerScribe may be able to increase medical
transcriptionists' output by making an initial attempt at transcribing the
dictated report and then passing its work on to a medical transcriptionist.
SALES AND MARKETING
The Company's sales staff consists of 17 sales personnel, with an average
of 11 years of experience in the medical transcription or medical equipment
industry. The Company's sales and marketing force is structured to promote
internal growth by cross-selling to the Company's existing
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client base and by attracting new clients. Consistent with the Company's growth
strategy, sales personnel target their efforts on new business within existing
customers and larger potential clients in regions where client service centers
are already located.
The Company's sales personnel are responsible for ensuring that all of the
proposed new business and service requirements are properly identified and
priced in accordance with the Company's gross margin goals. The Company has
implemented a comprehensive program for ensuring that pricing decisions are made
in a manner in which costs and other relevant considerations (e.g., turnaround
time and systems requirements) are taken into account. This program incorporates
commission rates based on profit margins for sales to a particular client over a
period of time. Additionally, the Company offers incentives for entering into
new contracts with larger institutions and for penetrating additional
departments within existing clients.
Quality service and superior client relations are an important part of
executing the Company's sales and marketing strategy. Many new clients contract
with the Company in large part because of previous experience with the Company
or because of recommendations and references by the Company's existing client
base. The Company believes that references from the existing client base will
continue to be an important part of the Company's sales and marketing strategy.
The Company's sales personnel use a consultative sales and marketing
approach by establishing working relationships with the Company's prospective
clients through a series of direct meetings with the health information manager
or medical records director, chief financial officer, chief information officer
and other key individuals at the client's organization and establishing a clear
dialogue regarding the Company's and the client's shared expectations. In this
manner, the Company obtains information concerning the particular needs of the
client and educates the client as to how the Company's services can be
customized to meet those needs. The sales process typically averages from
several weeks to six months, depending on technology requirements and whether
medical transcription is being outsourced for the first time or the potential
client is changing medical transcription service providers.
As part of its marketing efforts, the Company advertises in national health
care trade publications (including those sponsored by the American Health
Information Management Association), participates in industry conventions, and
sends direct mail solicitations to potential clients.
CLIENTS
The Company's diversified client base includes more than 500 hospitals and
other health care organizations, such as outpatient clinics and physician
practice groups. Approximately 80% of the Company's revenues are derived from
the health information management departments of hospitals, including large
metropolitan hospitals and major teaching hospitals. Radiology and emergency
departments each account for approximately 9% of the Company's revenues. The
Company's clients are located throughout the United States.
The Company's ten largest clients accounted for approximately 13% of the
Company's revenue for the first six months of 1998. None of the Company's
clients accounts for more than 3% of the Company's revenue. However, 33
Columbia/HCA Healthcare hospitals, each of which has a separate contract with
the Company, accounted in the aggregate for less than 8% of the Company's
revenues for the first six months of 1998. See "Risk Factors -- Changes in the
Health Care Industry."
The typical term of the Company's contracts with its clients for medical
transcription services ranges from three to five years. Client contracts specify
the services to be performed by the Company, the price thereof, and the
particular requirements of the client, such as turnaround times and technical
services to be provided. Revenues per individual client vary based upon
individual client demands for the Company's services.
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COMPETITION
The Company competes in markets that are competitive and highly fragmented.
The industry is predominately populated by small regional or local companies,
with a limited number of national companies. There are more than 1,500 providers
of medical transcription services in the United States. The Company also
competes against approximately a dozen national and regional firms, the largest
of which is MedQuist, Inc. The Company believes that except for MedQuist, each
of its competitors has less than 50% of the Company's revenues. The market
available to the Company is limited by health care organizations that currently
maintain in-house transcription departments. See "Risk Factors -- Competition."
For new clients that currently outsource, the Company competes on the basis
of its reputation for quality and turnaround time performance, size and
resources, technical capabilities, personal client attention and relationships
and price. The Company believes that its size and its technical resources have
diminished the importance of price as a competitive factor. The basis for
competition for transcription business that is currently being performed
in-house includes additional factors, such as the ability to provide a smooth
transition toward outsourcing and the willingness of the medical transcription
service provider to hire in-house transcriptionists.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 2,935 persons,
consisting of approximately 2,325 trained, professional medical
transcriptionists (approximately 70% of whom work out of their homes and
approximately 30% of whom work at client service centers), approximately 470
managers and clerical staff at the Company's client service centers, and
approximately 140 corporate employees. None of the Company's employees is
represented by a labor union. The Company considers its relations with its
employees to be good. In addition, as a result of an acquisition, the Company
retains 55 medical transcriptionists as independent contractors at one of its
client service centers.
The Company believes that its ability to employ at-home transcriptionists
enables it to compete more effectively for the limited number of experienced,
skilled medical transcriptionists. By being able to work out of their homes, the
Company's at-home medical transcriptionists can work hours other than the
standard workday and can eliminate commuting time and costs.
GOVERNMENT REGULATIONS
The health care industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of health
care providers. Federal and state legislators have from time to time proposed
programs to reform the United States health care system and other proposals may
be made in the future. In general, these programs and proposals tend to
emphasize managed care, seek to lower reimbursement rates and otherwise attempt
to control the environment in which health care providers operate. In providing
its services, the Company is subject to certain contractual, statutory,
regulatory and common law requirements regarding the confidentiality of medical
information. The Company requires its personnel to agree to keep all medical
information confidential and monitors compliance with applicable confidentiality
requirements. Federal and state regulators are making increasing efforts to
investigate claims of false billing for government reimbursement and have
obtained substantial payments from health care providers to resolve these
claims. Because these claims often result from a lack of appropriate
documentation to support billing, these government efforts may stimulate a need
for more comprehensive transcription services. Additionally, health care
accreditation organizations and governmental authorities have begun to require
more extensive transcription of patient medical records as part of the
requirements for hospitals or other health care providers to receive and
maintain accreditation. It presently cannot be determined if any additional
health care legislation or self-regulatory proposals (whether relating to
reimbursement, accreditation, billing practices, confidentiality, the health
care industry in
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general or otherwise) will be introduced, the form that any such legislation or
proposals would take, whether such legislation or proposals would be enacted or
adopted and, if enacted or adopted, what effect, if any, such legislation or
proposals would have on the health care industry in general and the Company in
particular. See "Risk Factors -- Changes in the Health Care Industry" and
" -- Confidentiality Requirements."
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions and wages and hours. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Risk
Factors -- Risks Associated with an At-Home Workforce."
INTELLECTUAL PROPERTY
The Company considers the name "MRC" and the Company logo to be important
to the operation of its business and the marketing of its services. The Company
regards the application of its ACCESS+ software underlying its services as
proprietary, and relies primarily on a combination of contract, copyright and
trademark law, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company has no patents or
patent applications pending, and relies on existing trade secrets and copyright
laws to afford it protection against unauthorized use. The Company is not aware
that any of its software, trademarks or other proprietary rights infringe the
proprietary rights of third parties. See "Risk Factors -- Dependence on
Proprietary Rights."
PROPERTIES
The Company leases all of its client service centers and its corporate
headquarters. The client service centers range in size from 624 square feet to
6,569 square feet, and its corporate headquarters, located in Cleveland, Ohio,
consists of 11,297 square feet. See "Certain Transactions."
LEGAL PROCEEDINGS
Although the Company from time to time is involved in various legal
proceedings or claims arising in the ordinary course of its business, the
Company is not currently a party to any material pending legal proceeding nor,
to the knowledge of the Company, is any material legal proceeding currently
threatened.
38
<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of July 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward L. Samek.................. 61 Chairman of the Board, Chief Executive Officer and a
Director
Dennis R. Byerly................. 51 President and Chief Operating Officer
Steven Bell...................... 40 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Ethan H. Cohen................... 34 Senior Vice President and Chief Technology Officer
Philip M. Cohen.................. 36 Senior Vice President, Corporate Development
Robert A. Meadors................ 54 Senior Vice President, Client Service
James W. Mills................... 54 Senior Vice President, Client Service
David A. Plummer................. 37 Senior Vice President, Client Service
Martin H. Marcus................. 65 Vice Chairman of the Board of Directors and a
Director
Bruce K. Anderson................ 58 Director(1)(2)
Timothy M. Murray................ 45 Director(1)
Richard H. Stowe................. 54 Director(1)(2)
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Samek has been a director of the Company since 1994 and Chairman of the
Board and Chief Executive Officer of the Company since June 1998. From October
1995 to June 1998, Mr. Samek served as the Chief Executive Officer of the
Company. From July 1996 until June 1998, Mr. Samek also served as President of
the Company, and from July 1996 until February 1997, as a member of the Office
of the Chief Executive of the Company. From October 1995 until July 1996, Mr.
Samek also served as Chairman of the Board and President of the Company and,
from December 1994 until October 1995, as Vice Chairman of the Board and
Executive Vice President of the Company. From July 1982 through December 1994,
Mr. Samek served as Chairman of the Board, President and Chief Executive Officer
of SecrePhone Ltd., a provider of medical transcription services. SecrePhone
Ltd. was acquired by the Company in December 1994. Mr. Samek has been President
of The Medical Transcription Industry Alliance, the medical transcription trade
association, since 1996.
Mr. Byerly has been President and Chief Operating Officer of the Company
since June 1998. From July 1997 until June 1998, Mr. Byerly served as Chief
Operating Officer of the Company. From 1989 until 1996, Mr. Byerly was President
and Chief Executive Officer of ARTRAC Corp., Medaphis Hospital Services Corp.,
and Medaphis Services Corp., wholly owned subsidiaries of Medaphis Corporation,
a provider of business management services to physicians and hospitals.
Mr. Bell has been Senior Vice President, Chief Financial Officer and
Secretary of the Company since July 1996 and Treasurer since September 1997.
From August 1995 through July 1996, Mr. Bell served as a financial advisor to
Laneko Engineering Co., an auto parts manufacturer. From December 1993 through
August 1995, Mr. Bell served as Chief Financial Officer of SecrePhone Ltd. From
September 1983 to December 1993, Mr. Bell was a certified public accountant with
Zelenkofske Axelrod & Co., a regional certified public accounting and consulting
firm, and was a director and shareholder of the firm from 1988 to 1993.
39
<PAGE> 41
Mr. Ethan Cohen has been Senior Vice President and Chief Technology Officer
of the Company since April 1997. From September 1991 through March 1997, Mr.
Cohen was a consultant for McKinsey & Company, a management consulting firm. At
McKinsey & Company, Mr. Cohen was promoted to the position of Senior Engagement
Manager in December 1995. Mr. Cohen is not related to Mr. Philip Cohen, Senior
Vice President, Corporate Development of the Company.
Mr. Philip Cohen has been Senior Vice President, Corporate Development of
the Company since July 1996. From October 1992 until July 1996, Mr. Cohen served
as a Vice President of Medical Records Corp. Mr. Cohen is not related to Mr.
Ethan Cohen, Senior Vice President and Chief Technology Officer of the Company.
Mr. Cohen is the son-in-law of Mr. Martin Marcus, a director of the Company.
Mr. Meadors has been Senior Vice President, Client Service of the Company,
since January 1998. From August 1997 through December 1997, Mr. Meadors served
as Executive Director, Client Services of the Company. From October 1996 to
August 1997, Mr. Meadors served as an independent consultant to health care
clients. Prior to that, Mr. Meadors was Executive Vice President/Chief Operating
Officer -- Central Health Care Services (1995-96) and Executive Vice
President/Business Development (1993-95) of Medaphis Corporation.
Mr. Mills has been Senior Vice President, Client Service of the Company,
since January 1998. From July 1996 through December 1997, Mr. Mills served as
Senior Corporate Vice President of the Company with responsibilities for the
Operations, Sales and Technical Divisions. Mr. Mills served as President of the
Northern Region of the Company (from December 1994 through July 1996), and as
Vice President of SecrePhone Ltd. (from June 1994 through December 1994). From
January 1968 through December 1993, Mr. Mills served as President, Vice
President, sales manager and sales representative of Electronic Dictation
Systems.
Mr. Plummer has been Senior Vice President, Client Service of the Company,
since January 1998. From April 1997 through December 1997, Mr. Plummer was
National Sales Manager of the Company and, from August 1994 through March 1997,
he was Regional Sales Manager of the Company with responsibilities in the
Mid-Atlantic states. From February 1992 until August 1994, Mr. Plummer was a
Regional Sales Manager of VDI Technologies, a national digital dictation vendor.
Mr. Anderson has been a director of the Company since July 1993. Since
1979, Mr. Anderson has been a partner of Welsh, Carson, Anderson & Stowe, a
general partnership, an investment firm specializing in the acquisition of
companies in the information services and health care industries. Mr. Anderson
is also Chairman, Chief Executive Officer and a director of AMDOCS Ltd, a
software and services company focused on the telephony industry, and a director
of SEER Technologies, Inc., a software development company.
Mr. Marcus has been a director of the Company since July 1996 and
Vice-Chairman since July 1998. He served as Chairman of the Board of the Company
from July 1996 until June 1998. Mr. Marcus also served as a member of the Office
of Chief Executive of the Company from July 1996 through February 1997. Mr.
Marcus was the founder and President of Medical Records Corp. from 1967 until
July 1996.
Mr. Murray has been a director of the Company since July 1996. Mr. Murray
is a principal of William Blair & Company, L.L.C., an investment banking firm
and one of the Underwriters' Representatives in this offering, with which he has
been associated since 1979. Mr. Murray has been a general partner of William
Blair Leveraged Capital Fund since 1988, and a Managing Director of William
Blair Capital Partners V, L.P. since 1995. Mr. Murray serves on the Board of
Directors of Daisytek International Corporation, a wholesale distributor of
non-paper computer and office automation supplies and accessories. See "Certain
Transactions."
Mr. Stowe has been a director of the Company since July 1993. Mr. Stowe has
been a partner of Welsh, Carson, Anderson & Stowe since 1979. Mr. Stowe serves
on the Board of Directors of The Cerplex Group, Inc., which provides repair and
parts distribution services for electronic equipment,
40
<PAGE> 42
and Health Management Services, Inc., a provider of revenue enhancement services
to health care providers and payors.
The Board of Directors of the Company currently consists of five members
divided into three classes, with each class elected to serve a staggered
three-year term. The Class I directors, whose terms will expire at the 1999
annual meeting of stockholders, are Messrs. Samek and Anderson. The Class II
directors, whose terms will expire at the 2000 annual meeting of stockholders,
are Messrs. Marcus and Stowe. The Class III director, whose term will expire at
the 2001 annual meeting of stockholders, is Mr. Murray. Executive officers serve
at the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has appointed an Audit Committee and a
Compensation Committee. Members of each committee serve at the pleasure of the
Board of Directors.
Audit Committee. The Company's Audit Committee, which consists of Messrs.
Anderson (Chairman), Murray and Stowe, makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and nonaudit fees, reviews the independent public accountants' letter of
comments and management's responses, reviews the adequacy of the Company's
internal accounting controls and reviews major accounting or reporting changes
contemplated or made.
Compensation Committee. The Compensation Committee, which consists of
Messrs. Stowe (Chairman) and Anderson, reviews employment, development,
reassignment and compensation matters involving corporate officers and other
executive level employees as may be appropriate, including, without limitation,
issues relating to salary, bonus and incentive arrangements and administers the
Company's Amended and Restated Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Edward Samek served as a member of the Compensation Committee until
July 1998. During 1997, Mr. Samek was a director, President and Chief Executive
Officer of the Company.
No member of the Compensation Committee nor any executive officer of the
Company serves as a member of a board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Certificate of Incorporation eliminates the personal liability of
directors to the Company for monetary damages for breach of fiduciary duty of
care as a director. Liability is not eliminated for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or stock purchases or
redemptions pursuant to Section 174 of the Delaware General Corporation Law, or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, the Company's By-laws provide for the indemnification of
directors and officers of the Company to the maximum extent permitted by
Delaware law as authorized by the Board of Directors of the Company, and for the
advancement of expenses incurred in connection with the defense of any action,
suit or proceeding that he was a party to by reason of the fact that he is or
was a director of the Company upon the receipt of an undertaking to repay such
amount unless it is ultimately determined that the director is entitled to
indemnification. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "Securities
41
<PAGE> 43
Act") may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Company maintains a directors' and officers' insurance policy which
insures the officers and directors of the Company from any claim arising out of
an alleged wrongful act by such persons in their respective capacities as
officers and directors of the Company.
DIRECTORS COMPENSATION
Members of the Company's Board of Directors do not receive any compensation
for serving as directors of the Company. The Company reimburses out-of-pocket
expenses incurred by all directors in connection with attending Board and
committee meetings.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company in 1997
to (i) the Company's chief executive officer and (ii) the Company's four other
most highly compensated executive officers at December 31, 1997 (collectively,
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS(#) COMPENSATION
---------------------------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Edward L. Samek............................. $200,000 $50,000 -- --
President and Chief Executive Officer(1)
Martin H. Marcus............................ $175,000 -- -- --
Chairman of the Board(1)
Herbert L. Marcus........................... $175,000 -- -- $235,000(3)
Vice Chairman of the Board(1)(2)
Philip M. Cohen............................. $165,000 $33,000 -- --
Senior Vice President, Corporate
Development
Steven Bell................................. $150,000 $30,000 -- --
Senior Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) Messrs. Samek, Martin Marcus and Herbert Marcus served as members of the
Office of the Chief Executive until February 1997.
(2) Mr. Herbert Marcus retired from the Company, effective December 31, 1997.
(3) Represents pre-paid retirement payments made to Mr. Herbert Marcus in
December 1997.
42
<PAGE> 44
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning each exercise of
options during 1997 by each of the Named Executive Officers and the fiscal
year-end value of unexercised in-the-money options:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 1997 YEAR-END(#) 1997 YEAR-END($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Edward L. Samek................ -- -- 490,711/348,250(2)
Martin H. Marcus............... -- -- -- --
Herbert L. Marcus.............. -- -- -- --
Philip M. Cohen................ -- -- 7,000/28,000
Steven Bell.................... -- -- 12,600/50,400
</TABLE>
- ---------------
(1) Represents the total gain which would be realized if all in-the-money
options held at December 31, 1997 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
per share option exercise price and the assumed initial public offering
price of $ per share. An option is in-the-money if the per market
value of the underlying shares exceeds the exercise price of the option.
(2) Includes options to purchase 754,961 shares of Common Stock granted outside
the Company's Amended and Restated 1992 Employee Stock Option Plan.
EMPLOYMENT AND SEVERANCE AGREEMENTS.
Each of Mr. Samek, Chairman of the Board and Chief Executive Officer of the
Company, Mr. Martin Marcus, a director of the Company, and Mr. Herbert Marcus,
formerly Vice Chairman of the Company, is a party to a Covenant Not to Compete
and Severance Agreement with the Company dated July 19, 1996, which sets forth
the Company's obligations upon a termination of employment. Pursuant to the
agreements, if the respective executive's employment is terminated "without
cause" (as defined in the agreements) or if such executive resigns or retires,
the Company must pay him severance compensation equal to the sum of one year's
base salary at his then current rate of compensation, plus an amount equal to
any performance bonus paid or accrued during the immediately preceding 12
months, payable in 12 equal installments. If such executive accepts other
employment or provides services to another person or entity within one year of
his termination, the Company will be entitled to a reduction in an amount equal
to the amount payable to such executive in the amount of his other earnings.
Mr. Philip Cohen, Senior Vice President, Corporate Development of the
Company, is a party to a Covenant Not to Compete and Severance Agreement with
the Company, effective as of July 19, 1996. The agreement sets forth the
Company's obligations upon termination of Mr. Cohen's employment. If Mr. Cohen's
employment is terminated "without cause" (as defined in the agreement), the
Company must pay him severance compensation equal to the sum of one year's base
salary at his then current rate of compensation, plus an amount equal to any
performance bonus paid or accrued during the immediately preceding 12 months,
payable in 12 equal installments. If Mr. Cohen accepts other employment or
otherwise provides services to another person or entity within one year of his
termination, the Company will be entitled to a reduction in any amount equal to
the amount payable to him in the amount of his other earnings.
Mr. Bell, Senior Vice President and Chief Financial Officer of the Company,
is a party to an employment agreement with the Company dated July 2, 1996. Mr.
Bell receives salary, bonus and benefits under the agreement. Pursuant to Mr.
Bell's employment agreement, if Mr. Bell dies or becomes disabled or his
employment is terminated by the Company other than for "cause" (as defined in
the agreement), the Company must pay Mr. Bell severance compensation equal to
his monthly base salary plus minimum bonus in effect on the date his employment
terminates, payable semi-monthly for a period of 12 months, and continuation of
health insurance benefits for Mr. Bell and his then-covered dependents for the
same period. The benefits payable to Mr. Bell are
43
<PAGE> 45
contingent upon Mr. Bell's compliance with the noncompetition and nondisclosure
provisions contained in his agreement and his execution of a release of the
Company and its officers of any and all liability arising out of his employment
or separation from employment (other than those obligations arising under the
employment agreement).
STOCK OPTION PLAN
The Company has outstanding options to purchase an aggregate of 2,175,889
shares of Common Stock granted to employees at option exercise prices ranging
from $6.04 to $9.19 pursuant to the Company's Amended and Restated 1992 Employee
Stock Option Plan (the "Plan"). Options under the Plan may be nonqualified or
incentive stock options. All of the outstanding options under the Plan are
nonqualified options. Under the Plan, incentive options may be granted to
full-time employees of the Company or any parent or subsidiary corporation and
nonqualified options may be granted to officers, full-time employees, directors
of and consultants to the Company or any parent or subsidiary corporation. The
exercise prices of options granted under the Plan will be set by the
Compensation Committee of the Board of Directors, but the exercise prices of
incentive stock options must be at least equal to 100% of the fair market value
of the Common Stock at the time the option is granted or 110% of the fair market
value in the case of an option granted to an individual who at the time of the
grant owns shares possessing more than 10% of the total combined voting power of
all classes of stock of the Company. No options were granted to the Named
Executive Officers in 1997. In addition to options granted under the Plan, the
Company has granted Mr. Samek options to purchase 754,961 shares of Common
Stock.
44
<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 27, 1998 (assuming the
conversion of all outstanding shares of Preferred Stock to Common Stock and the
consummation of the Reincorporation Merger) and immediately following the
offering by: (i) each person who is known by the Company to own beneficially 5%
or more of the Common Stock, (ii) each of the Company's directors and Named
Executive Officers, (iii) each Selling Stockholder, and (iv) all of the
Company's directors and executive officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR TO BE OWNED AFTER
NAME TO OFFERING(1) OFFERED(1) OFFERING(1)
---- ----------------------- ---------- -----------------------
DIRECTORS, OFFICERS AND 5% SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT
--------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Bruce K. Anderson(2)........................ 4,467,155 38.5% -- 4,467,155 28.6%
Richard H. Stowe(3)......................... 4,449,383 38.3 -- 4,449,383 28.5
Welsh, Carson, Anderson & Stowe(4).......... 4,441,445 38.3 -- 4,441,445 28.4
Timothy M. Murray(5)........................ 1,521,313 13.1 -- 1,521,313 9.7
William Blair Capital Partners V, L.P.(6)... 1,521,313 13.1 -- 1,521,313 9.7
M. and L. Marcus Family
Limited Partnership(7).................... 1,490,299 12.8 140,000 1,350,299 8.6
Martin H. Marcus(8)......................... 1,490,299 12.8 -- 1,350,299 8.6
Edward L. Samek(9).......................... 1,042,666 8.4 -- 1,042,666 6.3
H. and R. Marcus Family
Limited Partnership(10)................... 881,217 7.6 63,000 818,217 5.2
Herbert L. Marcus(11)....................... 881,217 7.6 -- 818,217 5.2
John H. Dayani(12).......................... 839,093 7.2 62,093 777,000 4.9
National City Capital
Corporation(13)........................... 647,229 5.6 -- 647,229 4.1
Philip M. Cohen(14)......................... 356,640 3.1 35,000 321,640 2.1
Steven Bell(15)............................. 51,800 * -- 51,800 *
All executive officers and directors of the
Company as a group (12 persons)........... 9,032,078 71.8% 175,000(16) 8,857,078 53.4%
OTHER SELLING SHAREHOLDERS
- --------------------------------------------
Edgewater Private Equity Fund, L.P.......... 141,221 1.22% 141,221 -- --
Gregory A. Marcus(17)....................... 133,127 1.15 17,500 115,627 *
Derace L. Schaffer M.D.(18)................. 104,040 * 104,040 -- --
John Pappajohn(19).......................... 87,232 * 39,457 -- --
Mary Pappajohn(20).......................... 87,232 * 4,900 -- --
Mutual Ventures of South Dakota, Inc........ 60,902 * 60,902 -- --
Donna G. Lazos(21).......................... 44,516 * 14,000 30,516 *
Halkis Ltd.................................. 24,500 * 24,500 -- --
J. Andrew Bolt.............................. 18,825 * 10,080 8,745 *
Thebes Ltd.................................. 18,375 * 18,375 -- --
Fredrik C. Schreuder........................ 18,289 * 18,289 -- --
Jane K. Bolt................................ 13,328 * 7,000 6,328 *
Stan E. and Elisabeth Litchman.............. 7,350 * 5,250 2,100 *
John E. Hassenfeld.......................... 6,125 * 6,125 -- --
Theodore Chafoulias......................... 6,080 * 6,080 -- --
Anthony M. and Pamela H. Innacio............ 4,900 * 4,900 -- --
W. Bruce Steever, Trustee of the W. Bruce
Steever 1997 Trust dated August 15,
1997...................................... 3,236 * 1,079 2,157 *
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the listed beneficial owner has sole voting and
investment power over such shares. Shares listed in the "Shares to be
Offered" column are the shares actually being sold by the listed holder,
without regard to whether the holder may also be deemed to beneficially own
shares being sold by other record holders.
(2) Includes 4,441,445 shares held by Welsh, Carson, Anderson & Stowe VI, L.P.
("WCAS VI"), over which Mr. Anderson may be deemed to share voting and
investment power. The general partners of WCAS VI are Patrick J. Welsh,
Russell L. Carson, Andrew M. Paul, Thomas E. McInerney, Laura Van Buren,
James B. Hoover, Bruce K. Anderson, Robert A. Minicucci, Anthony J. de
Nicola, Paul B. Queally and Richard H. Stowe. Mr. Anderson disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. Mr. Anderson's address is 320 Park Avenue, Suite 2500,
New York, New York 10022.
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<PAGE> 47
(3) Includes 4,441,445 shares held by WCAS VI, over which Mr. Stowe may be
deemed to share voting and investment power. Mr. Stowe disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein. Includes 5,311 shares held in trust for the benefit of Mr. Stowe,
over which he may be deemed to have voting and investment power. Mr.
Stowe's address is 320 Park Avenue, Suite 2500, New York, New York 10022.
(4) Consists of 4,441,445 shares held by WCAS VI. The address of Welsh, Carson,
Anderson & Stowe is 320 Park Avenue, Suite 2500, New York, New York 10022.
(5) Consists of 1,521,313 shares held by William Blair Capital Partners V, L.P.,
over which Mr. Murray may be deemed to share voting and investment power.
Mr. Murray disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein. Mr. Murray's address is 222 West
Adams Street, Chicago, Illinois, 60606.
(6) Consists of 1,521,313 shares held by William Blair Capital Partners V, L.P.
The general partner of William Blair Capital Partners V, L.P. is William
Blair Capital Partners LLC. The members of William Blair Capital Partners
LLC are William Blair & Company, L.L.C., Wilblairco, Ellen Carnahan, David
G. Chandler, James M. Denny, Samuel B. Guren, Edgar D. Jannotta, Edgar D.
Jannotta, Jr., Ian M. Larkin, Timothy M. Murray, Gregg S. Newmark, Lawrence
I. Shagrin, and Thomas C. Theobold. The address of William Blair Capital
Partners V, L.P. and William Blair Capital Partners LLC is 222 West Adams
Street, Chicago, Illinois, 60606.
(7) The address of the M. and L. Marcus Family Limited Partnership is 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(8) Consists of 1,490,299 shares held by M. and L. Marcus Family Limited
Partnership of which the 1991 L.W. Marcus Living Trust is the general
partner. Lois W. Marcus is the sole trustee of the 1991 L.W. Marcus Living
Trust. Mrs. Marcus is the wife of Martin H. Marcus. Mrs. Marcus' address is
23240 Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(9) Includes 817,961 shares of Common Stock issuable pursuant to options that
have vested or will vest within the next 60 days. Excludes 21,000 shares of
Common Stock subject to unvested options. Mr. Samek's address is 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(10) The address of the H. and R. Marcus Family Limited Partnership is 3637
Green Road, Cleveland, Ohio 44122.
(11) Consists of 881,217 shares of Common Stock held by H. and R. Marcus Family
Limited Partnership of which Herbert L. Marcus Living Trust is the general
partner. Herbert L. Marcus is the sole trustee of the Herbert L. Marcus
Living Trust. Mr. Marcus' address is 3637 Green Road, Cleveland, Ohio
44122.
(12) Includes 122,500 shares of Common Stock issuable pursuant to options which
are presently exercisable. Mr. Dayani's address is 1029 Manley Lane,
Brentwood, Tennessee 57027.
(13) The address of National City Capital Corporation is 1965 East 6th Street,
Cleveland, Ohio 44114. National City Capital Corporation is a subsidiary of
National City Corporation.
(14) Includes 7,000 shares of Common Stock issuable pursuant to options that
have vested or will vest within the next 60 days. Excludes 45,500 shares of
Common Stock subject to unvested options. Mr. Cohen's address is 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(15) Consists of 51,800 shares issuable pursuant to options which are presently
exercisable. Excludes 18,200 shares of Common Stock subject to unvested
options. Mr. Bell's address is 23240 Chagrin Boulevard, Suite 400,
Cleveland, Ohio 44122.
(16) Includes 140,000 shares being offered by M. and L. Marcus Family Limited
Partnership, which may be deemed to be beneficially owned by Martin H.
Marcus, a director of the Company.
(17) Mr. Gregory A. Marcus, Vice President of Administration of the Company, is
the son of Mr. Martin H. Marcus, a director of the Company.
(18) From May 1992 until the Reincorporation Merger, Dr. Schaffer was a director
of the Company's precedessor, MRC Missouri. Includes 35,000 shares of
Common Stock issuable pursuant to options which are presently exercisable.
(19) Includes 24,500 shares held by Halkis Ltd., which is 100% owned by Mr.
Pappajohn, 18,375 shares held by Thebes Ltd., which is 100% owned by Mr.
Pappajohn's wife, Mary Pappajohn, and 4,900 shares held by Mary Pappajohn,
over which Mr. Pappajohn may be deemed to share voting and investment
power.
(20) Includes 24,500 shares held by Halkis Ltd., 18,375 shares held by Thebes
Ltd. and 39,457 shares held by Mrs. Pappajohn's husband, John Pappajohn,
over which Mrs. Pappajohn may be deemed to share voting and investment
power.
(21) Includes 7,766 shares held by Antone John Lazos and Donna G. Lazos, as
Trustee UDT, dated October 22, 1990, over which Mrs. Lazos may be deemed to
share voting and investment power. Includes 36,750 shares held by Donna G.
Lazos, as the Trustee of the DGT Trust dated May 15, 1992.
CERTAIN TRANSACTIONS
In connection with the acquisition of Medical Records Corp. by the Company
on July 19, 1996, the Company issued promissory notes in the aggregate principal
amount of $2.0 million (the "Notes") as a portion of the consideration paid to
the shareholders of Medical Records Corp. Interest on the Notes is payable
quarterly at a rate of 8% per annum. Principal payments under the Notes are
payable in four substantially equal annual installments commencing July 19,
2000. Mr. Philip Cohen, Senior Vice President, Corporate Development of the
Company, and his wife hold
46
<PAGE> 48
a portion of the Notes in the aggregate principal amount of $608,548. Mr. Martin
Marcus, who is Mr. Cohen's father-in-law and a director of the Company, and
members of his immediate family (other than Mr. and Mrs. Philip Cohen) hold a
portion of the Notes in the aggregate principal amount of $691,452. The Notes
may be prepaid at any time without penalty. The Company intends to repay all of
the Notes from the net proceeds of this offering.
Mr. Murray, a director of the Company, is a principal of William Blair &
Company, L.L.C., one of the Underwriters of this offering. See "Underwriting."
The Company leases office space in Beachwood, Ohio from 3637 Green Road
Co., Ltd. Mr. Martin Marcus, a director of the Company, and his brother, Herbert
Marcus, own 10% and 15% general partnership interests, respectively, in 3637
Green Road Co., Ltd., which owns the building housing the Company's technical
department staff. In 1995, 1996 and 1997, respectively, the Company paid
$70,007, $85,214 and $81,066 in rent to 3637 Green Road Co., Ltd. In 1998, the
Company will continue to pay rent to 3637 Green Road Co., Ltd.
The Company and certain of the Company's pre-offering stockholders (the
"Rights Holders") are parties to an Amended and Restated Registration Rights
Agreement dated July 19, 1996 (the "Registration Rights Agreement"), pursuant to
which certain of the Rights Holders have the right, subject to certain
restrictions, to cause the Company to effect a registration of their shares of
Common Stock under the Securities Act. All of the Rights Holders also have
certain "piggy back" registration rights in the event the Company registers any
of its securities for either itself or for security holders exercising their
registration rights. The Rights Holders have waived their registration rights in
connection with this offering.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, $.01 par value, and
300,000 shares of authorized but unissued preferred stock, $.01 par value (the
"Preferred Stock"). As of June 30, 1998, there were 11,557,580 shares of Common
Stock issued and outstanding (giving effect to the conversion of the Series IV
Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock into
7,262,094 shares of Common Stock upon completion of this offering) and held by
approximately 85 holders of record. See "Capitalization."
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share
for the election of directors and on all other matters submitted to a vote of
stockholders. Holders of Common Stock are not entitled to preemptive rights or
to cumulative voting in the election of directors. Subject to any senior rights
of the Preferred Stock which may from time to time be outstanding, holders of
Common Stock are entitled to receive such dividends as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon dissolution and liquidation of the Company, holders of the Common
Stock are entitled to a ratable share of the net assets of the Company remaining
after payments to creditors of the Company and to the holders of any Preferred
Stock of the full preferential amounts to which they may be entitled. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Upon consummation of the offering, the outstanding shares of Series IV
Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock will be
converted into Common Stock and the Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock will be retired and declared
unavailable for issuance. Thus, upon consummation of the offering, the Company
will have
47
<PAGE> 49
authorized but unissued 300,000 shares of Preferred Stock which may be issued in
one or more series as determined by the Board of Directors without further
stockholder approval, and the Board of Directors is authorized to fix and
determine the terms, limitations, and relative rights and preferences of the
Preferred Stock, and to fix and determine the variations among series of the
Preferred Stock. If any Preferred Stock is issued following the offering, such
Preferred Stock could have priority over the Common Stock with respect to
dividends and to other distributions, including the distribution of assets upon
liquidation and dissolution. The Preferred Stock may be subject to repurchase or
redemption by the Company. The Board of Directors, without stockholder approval,
could issue Preferred Stock with voting and conversion rights that could
adversely affect the voting power of the holders of Common Stock and the
issuance of which could be used by the Board of Directors in defense of a
hostile takeover of the Company. The Company has no present intention to issue
Preferred Stock. See "Risk Factors -- Anti-Takeover Effect of Charter and By-Law
Provisions; Availability of Preferred Stock for Issuance."
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and By-Laws of the Company provide that directors may not be
removed from office by the stockholders except by the affirmative vote of
stockholders exercising at least two-thirds of the voting power in the election
of directors, except that if two-thirds of the entire Board of Directors
recommend to the stockholders that a director be removed, then such director may
be removed by the stockholders exercising at least a majority of the voting
power in the election of directors. The Certificate of Incorporation requires
all actions by stockholders to be taken at annual or special meetings. The By-
Laws divide the Board of Directors into three classes, each with a term of three
years, with the term of one class expiring each year. No provision of the
Certificate of Incorporation nor certain provisions of the By-Laws, including
those relating to indemnification and election and removal of directors, may be
altered, amended or repealed nor may any inconsistent provision be adopted
except by the affirmative vote of stockholders exercising at least two-thirds of
the voting power of the Company, except that if any such action was previously
approved by at least two-thirds of the directors, then such action may be taken
by the stockholders exercising a majority of the voting power. The foregoing
provisions could have an anti-takeover effect by delaying, averting or
preventing a change in control or management of the Company, unless such
takeover or change in control is approved by the Board.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law which, with certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such time,
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) on or after such time, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least two-thirds of the outstanding voting stock
which is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period
48
<PAGE> 50
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
REGISTRAR AND TRANSFER AGENT
The Company has selected National City Bank, Cleveland, Ohio as the
transfer agent and registrar for its Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Sales of substantial amounts of such shares in
the public market, or the perception that such sales could occur, could
materially and adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
SALES OF RESTRICTED SHARES
Upon completion of this offering, the Company will have a total of
shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option). Of these shares, the shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company, as defined in the Securities Act, who would be required to sell such
shares under Rule 144 under the Securities Act. The remaining
outstanding shares of Common Stock will be "restricted securities" as that term
is defined by Rule 144 (the "Restricted Shares"). The Restricted Shares were
issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act.
The Company believes that substantially all of the Restricted Shares will
be eligible for sale in the public market pursuant to Rule 144 beginning 90 days
after the date of this Prospectus, shares of which will be held by
affiliates. Substantially all such shares are subject to the lock-up agreements
described below. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, including persons who may be deemed
"affiliates" of the Company, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding (approximately
shares upon completion of this offering) or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at the time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate), would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above. Rule 144 also
provides that affiliates who are selling shares that are not Restricted Shares
must nonetheless comply with the same restrictions applicable to Restricted
Shares with the exception of the holding period requirement. As defined in Rule
144, an "affiliate" of an issuer is a person who directly, or indirectly through
the use of one or more intermediaries, controls, or is controlled by, or is
under common control with, that issuer.
49
<PAGE> 51
LOCK-UP AGREEMENTS
Certain of the stockholders of the Company, including the executive
officers and directors, who will own in the aggregate approximately 10,963,000
shares of Common Stock after the offering, have agreed that they will not,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock
beneficially owned by them during the 180-day period following the date of this
Prospectus, except for certain permitted transfers or with the prior written
consent of BT Alex. Brown Incorporated.
STOCK OPTION PLAN
Upon completion of the offering, 4,000,000 shares of Common Stock will be
reserved for issuance under the Plan, which includes 2,175,889 shares subject to
outstanding options. See "Management -- Stock Option Plan." The Company intends
to file a registration statement on Form S-8 under the Securities Act after this
offering to register all Common Stock issuable pursuant to stock options. Shares
covered by the registration statement will thereupon be eligible for sale in the
public markets, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements described above.
REGISTRATION RIGHTS
The holders of approximately 6,970,000 shares of Common Stock have the
right under certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public on Form S-1 on no more
than two occasions. Holders of approximately 11,870,000 shares have the right,
under certain circumstances, to require the Company to register their shares
under the Securities Act for resale to the public if the Company is eligible to
use Form S-3 and the reasonably anticipated price to the public in the aggregate
will exceed $2.0 million. See "Certain Transactions."
50
<PAGE> 52
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation
and William Blair & Company, L.L.C., have severally agreed to purchase from the
Company and the Selling Stockholders the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------- -----------
<S> <C>
BT Alex. Brown Incorporated.................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
William Blair & Company, L.L.C..............................
-----------
Total.............................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
public offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to , and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the shares are being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Stockholders of the Company, holding in the aggregate approximately
10,963,000 shares of Common Stock, have agreed, subject to certain exceptions,
not to offer, sell, or otherwise dispose of any of such Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated. See "Shares Eligible for Future Sale."
William Blair Capital Partners V, L.P., a beneficial holder of
approximately 13.1% of the Common Stock prior to this offering, is an affiliate
of William Blair & Company, L.L.C., one of the Representatives. Timothy M.
Murray, a director of the Company, is a principal of William Blair & Company,
L.L.C. and Managing Director of William Blair Capital Partners V, L.P. See
"Management -- Executive Officers and Directors." The NASD Conduct Rules do not
permit such Representative to participate in this offering unless the initial
public offering price is no higher than that recommended by a qualified
independent underwriter, as defined in Section 2720 of the NASD Conduct Rules.
BT Alex. Brown Incorporated, one of the Representatives of the Underwriters,
will
51
<PAGE> 53
serve as the qualified independent underwriter and has assumed the
responsibilities of acting as qualified independent underwriter in pricing the
Common Stock offered hereby and conducting "due diligence" in respect thereto.
See "Risk Factors -- Conflict of Interest."
In connection with this offering, the Underwriters may purchase and sell
the Common Stock in the open market in accordance with Regulation M under the
Securities Exchange Act of 1934, as amended. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Stockholders in the offering. The Underwriters may also impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in this offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time. These transactions may be effected in
the over-the-counter market or otherwise.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies that the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover page of this preliminary prospectus is subject to change as a result
of market conditions and other factors.
EXPERTS
The audited consolidated financial statements and schedules of the Company
and Medical Records Corp., included in this Prospectus and elsewhere in the
Registration Statement of which this Prospectus is a part, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The combined restated financial statements of Medical Records Corp. and
Affiliate, included in this Prospectus and elsewhere in the Registration
Statement of which this Prospectus is a part, have been audited by Skoda,
Minotti, Reeves & Co., independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Baker & Hostetler LLP, Cleveland, Ohio. Certain
legal matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
52
<PAGE> 54
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (of which this Prospectus is
a part) under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement (certain portions of which have been omitted as permitted
by the rules and regulations of the Commission), and reference is made to the
Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock to which this Prospectus relates.
Statements contained herein concerning the provisions of any contract, agreement
or other document are not necessarily complete, and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference. The Registration
Statement, including the exhibits and schedules filed therewith, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60606. You can
request copies of these documents, upon payment of a duplication fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Commission also
maintains a Web site (address http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed financial
statements for each of the first three quarters of each fiscal year.
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MRC GROUP, INC. AND SUBSIDIARY -- CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1997..... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements, December 31,
1995, 1996 and 1997....................................... F-7
Report of Independent Public Accountants.................... F-21
Schedule II-Valuation and Qualifying Accounts............... F-22
THE MRC GROUP, INC. AND SUBSIDIARY -- CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Balance Sheets, December 31, 1997 and June 30,
1998 (Unaudited).......................................... F-23
Unaudited Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1998....................... F-24
Consolidated Statements of Stockholders' Equity for the Year
Ended December 31, 1997 and the Six Months Ended June 30,
1998 (Unaudited).......................................... F-25
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1998........... F-26
Notes to Condensed Consolidated Financial Statements, June
30, 1997 and 1998 (Unaudited)............................. F-27
MEDICAL RECORDS CORP. AND AFFILIATE -- COMBINED FINANCIAL
STATEMENTS
Independent Auditors' Report................................ F-29
Combined Statement of Income (As Restated) for the Year
Ended December 31, 1995................................... F-30
Combined Statement of Stockholders' Equity (As Restated) for
the Year Ended December 31, 1995.......................... F-31
Combined Statement of Cash Flows (As Restated) for the Year
Ended December 31, 1995................................... F-32
Notes to Combined Financial Statements for the Year Ended
December 31, 1995......................................... F-33
MEDICAL RECORDS CORP. -- FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-36
Statement of Operations for the Period January 1, 1996 to
July 19, 1996............................................. F-37
Statement of Stockholders' Equity for the Period January 1,
1996 to July 19, 1996..................................... F-38
Statement of Cash Flows for the Period January 1, 1996 to
July 19, 1996............................................. F-39
Notes to Financial Statements for the Period January 1, 1996
to July 19, 1996.......................................... F-40
</TABLE>
F-1
<PAGE> 56
After the reorganization transaction discussed in Note 12 to The MRC Group,
Inc. and Subsidiary's consolidated financial statements is effected, we expect
to be in a position to render the following audit report.
Arthur Andersen LLP
Cleveland, Ohio,
June 23, 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of The MRC Group, Inc.:
We have audited the accompanying consolidated balance sheets of The MRC
Group, Inc. (a Delaware corporation) and Subsidiary as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for the three years in the period ended December 31, 1997. 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 audit 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, the financial statements referred to above present fairly,
in all material respects, the financial position of The MRC Group, Inc. and
Subsidiary as of December 31, 1996 and 1997 and the results of their operations
and their cash flows for the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
Cleveland, Ohio,
March 3, 1998 (except with respect to the matters discussed in Notes 11 and 12,
as to which the date is , 1998).
F-2
<PAGE> 57
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,050,856 $ 1,192,959
Short-term investments.................................... 3,001,737 4,003,094
Trade accounts receivable, less allowance for doubtful
accounts of $714,370 and $819,218 in 1996 and 1997,
respectively............................................ 15,374,391 18,305,630
Deferred tax asset........................................ 2,248,936 1,792,176
Prepaid expenses and other current assets................. 441,702 91,435
----------- -----------
Total current assets............................... 26,117,622 25,385,294
----------- -----------
Property and equipment, net................................. 11,708,170 13,306,013
----------- -----------
Other assets:
Goodwill and other intangible assets, net................. 37,203,549 35,214,857
Long-term investments..................................... 2,973,517 --
Preferred stock investment................................ -- 1,200,000
Other..................................................... 413,133 362,972
----------- -----------
Total other assets................................. 40,590,199 36,777,829
----------- -----------
Total assets....................................... $78,415,991 $75,469,136
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,694,254 $ 2,852,198
Accounts payable.......................................... 3,616,075 4,288,695
Accrued liabilities....................................... 6,688,996 7,980,270
----------- -----------
Total current liabilities.......................... 13,999,325 15,121,163
----------- -----------
Long-term liabilities:
Long-term debt............................................ 8,208,841 6,184,212
Deferred tax liability.................................... 4,505,921 3,478,161
Other..................................................... 588,167 585,000
----------- -----------
Total long-term liabilities........................ 13,302,929 10,247,373
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $.01 par value; 345,902
shares authorized in 1996 and 1997:
Series V convertible and mandatorily redeemable
preferred stock, 45,902 shares issued and outstanding
(liquidation preference $17,493,252)................... 17,493,252 17,493,252
Series VI convertible and mandatorily redeemable
preferred stock, 300,000 shares issued and outstanding
(liquidation preference $30,000,000)................... 30,000,000 30,000,000
Stockholders' equity:
Convertible preferred stock, $.01 par value; 10,362 shares
authorized in 1996 and 1997:
Series IV convertible preferred stock, 10,362 shares
issued and outstanding (liquidation preference
$3,948,958)............................................ 104 104
Preferred stock, $.01 par value; 300,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 4,106,364 shares issued and outstanding in
1996 and 1997........................................... 41,064 41,064
Additional paid-in capital................................ 11,639,316 11,639,316
Accumulated deficit....................................... (8,059,999) (9,073,136)
----------- -----------
Total stockholders' equity......................... 3,620,485 2,607,348
----------- -----------
Total liabilities and stockholders' equity......... $78,415,991 $75,469,136
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE> 58
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues.................................. $49,179,660 $71,699,888 $108,117,494
Cost of revenues.............................. 40,153,549 57,329,739 86,975,531
----------- ----------- ------------
Gross profit.................................. 9,026,111 14,370,149 21,141,963
Selling, general and administrative
expenses.................................... 4,352,860 8,329,470 9,742,462
Depreciation and amortization................. 3,906,758 6,331,680 10,027,192
Restructuring charges......................... 346,877 643,724 2,075,458
----------- ----------- ------------
Operating income (loss)....................... 419,616 (934,725) (703,149)
----------- ----------- ------------
Other income (expense):
Investment income........................... 167,826 422,679 465,714
Interest expense............................ (706,473) (804,399) (775,702)
----------- ----------- ------------
Total other (expense)............... (538,647) (381,720) (309,988)
----------- ----------- ------------
Loss before provision for income taxes........ (119,031) (1,316,445) (1,013,137)
Provision for income taxes.................... (7,160) -- --
----------- ----------- ------------
Net loss...................................... $ (126,191) $(1,316,445) $ (1,013,137)
=========== =========== ============
Basic and diluted net loss per share.......... $ (0.10) $ (0.51) $ (0.25)
=========== =========== ============
Weighted average common shares outstanding.... 1,272,048 2,578,421 4,106,364
=========== =========== ============
Unaudited pro forma data (note 11):
Basic and diluted net loss per share....................................
============
Weighted average common shares outstanding..............................
============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE> 59
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SERIES IV $.01 PAR VALUE COMMON STOCK ADDITIONAL
---------------- ------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------- ------ -------- -------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.. 10,362 $104 -- $ -- 1,251,632 $12,516 $ 6,185,088 $(6,617,363)
Common stock issued for
exercise of stock
options................. -- -- -- -- 49,000 490 295,310 --
Net loss.................. -- -- -- -- -- -- -- (126,191)
------- ---- -------- -------- ---------- ------- ----------- -----------
Balance, December 31, 1995.. 10,362 104 -- -- 1,300,632 13,006 6,480,398 (6,743,554)
Issuance costs of Series
VI convertible and
mandatorily redeemable
preferred stock......... -- -- -- -- -- -- (228,252) --
Common stock issued for
acquisitions............ -- -- -- -- 2,854,732 28,548 5,682,480 --
Common stock repurchased
and retired............. -- -- -- -- (49,000) (490) (295,310) --
Net loss.................. -- -- -- -- -- -- -- (1,316,445)
------- ---- -------- -------- ---------- ------- ----------- -----------
Balance, December 31, 1996.. 10,362 104 -- -- 4,106,364 41,064 11,639,316 (8,059,999)
Net loss.................. -- -- -- -- -- -- -- (1,013,137)
------- ---- -------- -------- ---------- ------- ----------- -----------
Balance, December 31, 1997.. 10,362 $104 -- $ -- 4,106,364 $41,064 $11,639,316 $(9,073,136)
======= ==== ======== ======== ========== ======= =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, December 31, 1994.. $ (419,655)
Common stock issued for
exercise of stock
options................. 295,800
Net loss.................. (126,191)
-----------
Balance, December 31, 1995.. (250,046)
Issuance costs of Series
VI convertible and
mandatorily redeemable
preferred stock......... (228,252)
Common stock issued for
acquisitions............ 5,711,028
Common stock repurchased
and retired............. (295,800)
Net loss.................. (1,316,445)
-----------
Balance, December 31, 1996.. 3,620,485
Net loss.................. (1,013,137)
-----------
Balance, December 31, 1997.. $ 2,607,348
===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 60
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (126,191) $(1,316,445) $(1,013,137)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization..................... 3,906,758 6,331,680 10,027,192
Deferred tax provision (benefit).................. 7,160 (40,855) (571,000)
(Gain) loss on disposal of property............... (871) -- 222,950
Changes in operating assets and liabilities, net
of acquisitions:
Trade accounts receivable..................... 1,366,169 (498,438) (2,291,426)
Prepaid expenses and other assets............. (217,430) 696,325 400,428
Accounts payable.............................. (441,968) (645,485) 545,912
Accrued and other liabilities................. (960,339) (585,607) 177,180
Other......................................... 104,384 69,686 (178,846)
----------- ----------- -----------
Total adjustments.......................... 3,763,863 5,327,306 8,332,390
----------- ----------- -----------
Net cash from operating activities......... 3,637,672 4,010,861 7,319,253
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................... (3,174,985) (2,779,615) (7,547,628)
Proceeds from sale of property......................... 68,410 -- --
Sale of investments.................................... 2,399,928 156,542 3,173,006
Purchase of investments................................ -- (6,050,000) (1,000,000)
Preferred stock investment............................. -- -- (1,200,000)
Acquisition of businesses, net of stock issued and
acquired............................................. (1,825,000) (21,394,551) (1,921,389)
----------- ----------- -----------
Net cash from investing activities......... (2,531,647) (30,067,624) (8,496,011)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings.................... 1,306,821 -- --
Repayments of short-term borrowings.................... (3,596,821) -- --
Common stock repurchased............................... -- (295,800) --
Proceeds from sale of mandatorily redeemable preferred
stock................................................ -- 29,271,748 --
Proceeds from exercise of stock options................ 295,800 -- --
Proceeds from long-term debt........................... 5,000,000 7,000,000 --
Repayments of long-term debt........................... (2,822,121) (8,885,086) (2,681,139)
----------- ----------- -----------
Net cash from financing activities......... 183,679 27,090,862 (2,681,139)
----------- ----------- -----------
Net change in cash and cash equivalents.................. 1,289,704 1,034,099 (3,857,897)
Cash and cash equivalents, beginning of year............. 2,727,053 4,016,757 5,050,856
----------- ----------- -----------
Cash and cash equivalents, end of year................... $ 4,016,757 $ 5,050,856 $ 1,192,959
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest................................. $ 650,165 $ 688,034 $ 830,485
=========== =========== ===========
Cash paid for income taxes............................. $ 42,665 $ -- $ 631,856
=========== =========== ===========
Supplemental disclosures of noncash investing and
financing activities:
Common stock issued in connection with acquisitions.... $ -- $ 5,711,028 $ --
=========== =========== ===========
Notes issued in connection with acquisition............ $ -- $ 2,000,000 $ --
=========== =========== ===========
Exchange of debt for preferred stock................... $ -- $ 500,000 $ --
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 61
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The MRC Group, Inc., formerly MEDIFAX, Inc., and Subsidiary (collectively,
the "Company") provides electronic medical transcription and document management
services to the health care industry. The primary customers are hospitals,
medical centers and other health care providers across the United States.
Significant accounting and reporting policies are described below.
The Company operates in an environment with many financial and operational
risks including, but not limited to, a history of losses, intense competition,
rapid technology changes, dependence on the health care industry and the ability
to attract and retain qualified personnel.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary from the date of acquisition. All
significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Since actual results could differ from those estimates,
revisions to estimates are made as better information becomes available.
Cash Equivalents
The Company considers all highly liquid short-term investments, including
money market funds, with an original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at cost, which approximates fair value.
Investments
Investments held by the Company at December 31, 1996 and 1997 consisted
primarily of investments in high-quality, fixed-income bonds with varying
maturities and rates. At December 31, 1996 and 1997, these investments totaled
$5,975,254, and $4,003,094, respectively, and are included in short-term and
long-term investments in the accompanying consolidated balance sheets. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," debt securities that the
Company has both the intent and ability to hold to maturity are carried at
amortized cost.
Financial Instruments
Financial instruments held by the Company include cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The book
value of cash and cash equivalents, accounts receivable and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. The fair values of the borrowings of long-term debt
approximate book value based on the contractual fixed interest rates currently
in effect and due to a considerable portion of the debt being subject to
fluctuating market interest rates.
F-7
<PAGE> 62
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Equipment Two to five years
Leasehold improvements Lesser of lease term or useful life of asset
Furniture and fixtures Five to seven years
Automobiles Three to five years
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was approximately $3,507,000, $4,467,000 and $6,104,000, respectively.
Goodwill and Other Intangibles
The Company has capitalized certain costs associated with various
acquisitions, including goodwill, non-compete agreements and other intangible
assets. Management regularly evaluates its accounting for goodwill. Impairment
of goodwill would be recognized when events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Measurement of the
amount of impairment will be based on appraisal, market value of similar assets
or estimated discounted future cash flows resulting from the use and ultimate
disposition of the asset. As of December 31, 1997, no revision to the remaining
useful lives or write-down of intangible assets has been recorded.
Preferred Stock Investment
During 1997, the Company invested $1,200,000 for an approximate 10%
preferred stock equity interest in Articulate Systems, Inc. The investment has
been accounted for under the cost method of accounting.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." In 1996, the Company adopted the disclosure option of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation."
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Research and Development Costs
Research and development costs are expensed as incurred. There were no
research and development costs in 1995. Total research and development costs
were approximately $450,000 and $550,000 in 1996 and 1997, respectively.
F-8
<PAGE> 63
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Income Taxes
The Company accounts for income taxes, using the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.
Per Share Data
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128") "Earnings per Share" in 1997. SFAS 128 requires the presentation of
basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by dividing
net income by all potential dilutive common shares that were outstanding during
the period. Refer to Note 11 for discussion of pro forma basic and diluted
earnings per share.
For the purposes of the Company's diluted per share calculation, the
effects of stock options, warrants, and convertible preferred stock are
antidilutive and have been excluded. Weighted average common shares outstanding
for the years ended December 31, 1995, 1996, and 1997 were 1,272,048, 2,578,421,
and 4,106,364, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. ACQUISITIONS
In July 1996, the Company acquired all the outstanding stock of Medical
Records Corp. The total purchase price of approximately $27,700,000 was financed
with cash from debt, the issuance of Series VI Preferred Stock and the issuance
of Common Stock. The acquisition has been accounted for as a purchase, and the
results of Medical Records Corp., a wholly owned subsidiary of the Company, were
included in the accompanying consolidated financial statements from the date of
the acquisition. In connection with the acquisition, the Company assumed certain
acquisition-related liabilities from Medical Records Corp. The cost of the
acquisition has been allocated on the basis of the estimated fair market value
of the assets acquired and liabilities assumed. The allocation resulted in
goodwill and other intangible assets of approximately $33,014,800, which are
being amortized over lives of 1.5 to 40 years.
The unaudited results of operations of the Company for the year ended
December 31, 1996 on a pro forma basis as though Medical Records Corp. had been
acquired as of the beginning of 1996 are as follows:
<TABLE>
<S> <C>
Revenues.................................... $99,273,800
Operating loss.............................. (3,948,600)
Net loss.................................... (4,675,700)
Net loss per share.......................... $ (1.13)
</TABLE>
During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities.
F-9
<PAGE> 64
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Each of the 1997 acquisitions was accounted for as a purchase, and the
results of operations are included in the accompanying consolidated financial
statements from the date of acquisition. The allocation of the purchase prices
resulted in approximately $1,797,600 of intangibles, primarily non-compete
covenants, customer lists and goodwill. The intangibles are being amortized over
periods ranging from four to 40 years.
Several of the Company's purchase contracts contain contingent purchase
price adjustments. These contracts provide for additional consideration to be
paid by the Company if net future billings to defined customers exceed specified
contractual levels. These contracts expire in 2000 and 2001, and are generally
payable on a quarterly basis. When the contingency is resolved and additional
consideration is due, the Company accounts for the payment as additional
purchase price and amortizes the additional amount paid over the remaining life
of the asset.
Pro forma information is not presented for the 1997 acquisitions, as these
acquisitions are not significant.
3. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Equipment...................................... $20,149,055 $22,624,014
Leasehold improvements......................... 754,643 1,005,699
Furniture and fixtures......................... 802,233 1,399,557
Automobiles.................................... 49,415 56,451
----------- -----------
21,755,346 25,085,721
Less accumulated depreciation.................. (10,047,176) (11,779,708)
----------- -----------
$11,708,170 $13,306,013
=========== ===========
</TABLE>
Included in equipment is property under capital leases of $2,377,786 at
December 31, 1996 and 1997 with accumulated depreciation of $496,391 and
$1,607,476 at December 31, 1996 and 1997, respectively.
In 1995, the Company evaluated the remaining estimated useful lives of
certain equipment, including dictation equipment and related software. As a
result, the remaining lives of these assets were shortened which resulted in an
increase in depreciation expense of $740,735 in 1995.
Maintenance and repair expenditures which are not considered betterments
and do not extend the useful life of the property are charged to expense as
incurred.
F-10
<PAGE> 65
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the acquisitions discussed in Note 2, the Company
recorded goodwill and other intangible assets. The components of these amounts
at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
LIVES 1996 1997
----- ----------- -----------
(IN YEARS)
<S> <C> <C> <C>
Noncompete agreements.................... 1.5-4 $ 3,305,000 $ 3,405,000
Software................................. 3 37,800 37,800
Employee base............................ 5 2,439,000 2,514,000
Customer lists........................... 10-20 4,908,300 5,033,300
Goodwill................................. 40 28,778,152 30,413,259
----------- -----------
Total.................................... 39,468,252 41,403,359
Less accumulated amortization............ (2,264,703) (6,188,502)
----------- -----------
$37,203,549 $35,214,857
=========== ===========
</TABLE>
Amortization expense totaled approximately $400,000, $1,865,000 and
$3,923,000 in 1995, 1996 and 1997, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accrued payroll and related taxes................ $3,310,546 $3,693,813
Acquisition and accrued restructuring costs...... 3,006,071 3,027,981
Other............................................ 372,379 1,258,476
---------- ----------
$6,688,996 $7,980,270
========== ==========
</TABLE>
6. LONG-TERM DEBT AND LINE OF CREDIT
Total long-term debt at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Note payable repaid in January 1998............. $ 979,375 $ 500,000
Note payable to bank (a)........................ 6,650,000 5,250,000
Capital lease obligations (Note 8).............. 2,138,045 1,210,163
Note payable to former shareholders of Medical
Records Corp. (b)............................. 2,000,000 2,000,000
Other........................................... 135,675 76,247
----------- ----------
11,903,095 9,036,410
Less current portion............................ 3,694,254 2,852,198
----------- ----------
$ 8,208,841 $6,184,212
=========== ==========
</TABLE>
F-11
<PAGE> 66
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
- ---------------
(a) In connection with the acquisition of Medical Records Corp., the Company
entered into a note agreement with a bank. The note was for $7,000,000 with
an interest rate of LIBOR plus 1.65%, which totals approximately 7.3% at
December 31, 1997. The note is secured by substantially all of the Company's
assets. The agreement requires that the Company pay interest quarterly along
with equal monthly principal payments of $117,000 through September 2001.
The note requires the Company to maintain certain financial covenants,
including a minimum net income covenant. The Company was either in
compliance or had obtained the necessary waivers relating to the restrictive
covenants at December 31, 1997.
(b) In connection with the acquisition of Medical Records Corp., the Company
issued seven year, 8% unsecured notes to former shareholders of Medical
Records Corp. for $2,000,000. The notes require the Company to pay interest
quarterly, with annual principal payments of $500,000 beginning in July
2000.
Future maturities of long-term debt as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998......................................... $2,852,198
1999......................................... 1,636,541
2000......................................... 1,964,004
2001......................................... 1,576,758
2002......................................... 506,909
2003......................................... 500,000
----------
$9,036,410
==========
</TABLE>
At December 31, 1997, the Company has a line of credit agreement which
expires on June 30, 1998 with the same bank under which it can borrow up to
$10,000,000 with an interest rate of LIBOR plus 1.25%. The line of credit is
secured by substantially all of the Company's assets. No amounts were
outstanding under the line of credit at December 31, 1996 and 1997.
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Convertible and Mandatorily Redeemable Preferred Stock
The Company has authorized 345,902 shares of $.01 par value, convertible
and mandatorily redeemable preferred stock.
Series V Convertible and Mandatorily Redeemable Preferred Stock
The Company issued 45,902 shares of Series V Preferred Stock at $381.10 per
share to an investment limited partnership and several related purchasers in
1993 for total consideration of $17,493,252, before deducting stock issuance
expenses, which were accounted for as reductions of additional paid-in capital.
Each share is convertible into 63.128653 shares of Common Stock.
If not previously converted, the Company is required to redeem one-fourth
of the shares of the Series V Preferred Stock in July 2001, one-third of the
remaining outstanding shares in July 2002, one-half of the remaining shares in
July 2003, and all remaining outstanding shares in July 2004. However, the
Company may redeem any or all Series V Preferred Stock at any time after July 1,
2000 by paying $381.10 per share.
F-12
<PAGE> 67
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
The holders of Series V Preferred Stock vote together with the holders of
all series of preferred stock and Common Stock and are entitled to one vote for
each share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series V Preferred Stockholders are
entitled to receive $381.10 for each share on parity with the Series IV and
Series VI Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series V Preferred Stockholders so
requesting at a redemption price of $381.10 per share.
In the event of any initial public offering with gross proceeds to the
Company in excess of $10,000,000 and a per share initial public offering price
in excess of five times the Series V conversion price (or proceeds in excess of
$25,000,000 and a per share initial public offering price in excess of 1.333
times the Series V conversion price if the initial public offering occurs on or
before June 30, 1999), or based on other defined criteria, the Company may
require the conversion of all Series V Preferred Stock at the conversion ratio
then in effect.
Series VI Convertible and Mandatorily Redeemable Preferred Stock
The Company issued 300,000 shares of Series VI Preferred Stock at $100 per
share in 1996 for total consideration of $30,000,000, before deducing stock
issuance expenses, which were accounted for as reductions of additional paid-in
capital. Each share is convertible into 12.944589 shares of Common Stock.
If not previously converted, the Company is required to redeem one-fourth
of the shares of the Series VI Preferred Stock in July 2001, one-third of the
remaining outstanding shares in July 2002, one-half of the remaining shares in
July 2003, and all remaining outstanding shares in July 2004. However, the
Company may redeem any or all Series VI Preferred Stock at any time after July
1, 2000 by paying $100 per share.
The holders of Series VI Preferred Stock vote together with the holders of
all series of preferred stock and Common Stock and are entitled to one vote for
each share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series VI Preferred Stockholders are
entitled to receive $100 for each share on parity with the Series IV and Series
V Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series VI Preferred Stockholders so
requesting at a redemption price of $100 per share.
In the event of any initial public offering with gross proceeds to the
Company in excess of $25,000,000 and a per share initial public offering price
in excess of 3.733 times the Series VI conversion price (or proceeds in excess
of $25,000,000 and a per share initial public offering price in excess of 1.333
times the Series VI conversion price if the initial public offering occurs on or
before June 30, 1999), or based on other defined criteria, the Company may
require the conversion of all Series VI Preferred Stock at the conversion ratio
then in effect.
Convertible Preferred Stock
The Company has authorized 10,362 shares of $.01 par value convertible
preferred stock.
F-13
<PAGE> 68
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Series IV Convertible Preferred Stock
The Company has issued 10,362 shares of Series IV Preferred Stock in 1991
and 1992 for total consideration of $3,948,936. Each outstanding share of this
preferred stock issue is convertible into 46.419387 shares of Common Stock.
The holders of Series IV Preferred Stock vote together with holders of all
series of preferred stock and Common Stock and are entitled to one vote for each
share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series IV Preferred Stockholders are
entitled to receive $381.10 for each share on parity with the Series V and
Series VI Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series IV Preferred Stockholders so
requesting at a redemption price of $381.10 per share.
The Company may redeem any or all Series IV Preferred Stock at any time
after July 1, 2000 by paying $381.10 per share.
In the event of an initial public offering with gross proceeds to the
Company in excess of $10,000,000 and a per share initial public offering price
in excess of five times the Series IV conversion price (or proceeds in excess of
$25,000,000 and a per share initial public offering price in excess of 1.333
times the Series IV conversion price if the initial public offering occurs on or
before June 30, 1999), or based on other defined criteria, the Company may
require the conversion of all Series IV Preferred Stock at the conversion ratio
then in effect.
Common Stock
During 1996, the Company issued 2,854,293 shares of Common Stock as part of
the acquisition of Medical Records Corp. and repurchased 49,000 shares at $6.04
per share from a stockholder under an agreement reached in 1995. The purchase
price was at the estimated fair value at the time of the agreement. Under the
provisions of the agreement for a previous acquisition, 439 shares were also
issued to the former sole shareholder of the acquired company during 1996.
Common Stock Warrants
In connection with the sale of equity securities to certain investors in
1992 and 1993, warrants to purchase Common Stock were issued by the Company to
these investors. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into Common Stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements.
F-14
<PAGE> 69
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Information relating to the Company's outstanding warrants is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TOTAL EXERCISE EXERCISE
SHARES PRICE PRICE
-------- ------------ --------
<S> <C> <C> <C>
Shares under warrant at December 31, 1994............ 420,024 $6.83-$10.00 $8.44
======== ============ =====
Shares under warrant at December 31, 1995............ 420,024 $6.83-$10.00 $8.44
Expired.............................................. (157,395) $6.83 $6.83
--------
Shares under warrant at December 31, 1996............ 262,629 $9.07-$10.00 $9.36
======== ============ =====
Shares under warrant at December 31, 1997............ 262,629 $9.07-$10.00 $9.36
======== ============ =====
</TABLE>
All of the warrants outstanding at December 31, 1997 are exercisable. All
of the warrants expire in July 1998.
Common Stock Options
The Company has reserved 4,000,000 shares of Common Stock for issuance
under its Amended and Restated 1992 Employee Stock Option Plan (the "Plan"). The
options have been granted at amounts equal to or in excess of the fair market
value of the Company's Common Stock as determined by the board of directors. The
options vest over periods ranging from the date of grant to five years as
determined by the board of directors at the date of grant. As of December 31,
1997, the Company had 1,049,611 shares outstanding under the Plan and 2,901,389
shares available for grant.
The board of directors also has issued options in addition to those issued
under the Plan. The number of shares that may be granted under this arrangement
has not been limited. These options have been granted at amounts equal to or in
excess of the fair market value of the Company's Common Stock as determined by
the board of directors. The options vest over periods ranging from the date of
grant to ten years as determined by the board of directors at the date of grant.
As of December 31, 1997, the board of directors had granted 877,462 shares under
this arrangement.
F-15
<PAGE> 70
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Information relating to the Company's outstanding option plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TOTAL OPTION EXERCISE
OPTIONS PRICE PRICE
--------- ------------ --------
<S> <C> <C> <C>
Shares under option at December 31, 1994........ 885,896 $6.04-$10.00 $9.41
Granted......................................... 893,382 6.04-9.19 6.41
Forfeited/canceled.............................. (855,446) 9.19-10.00 9.20
Exercised....................................... (49,000) 6.04 6.04
---------
Shares under option at December 31, 1995........ 874,832 6.04-9.19 6.37
Granted......................................... 961,451 6.13-7.73 7.44
Forfeited/canceled.............................. (89,075) 6.13-9.19 6.23
---------
Shares under option at December 31, 1996........ 1,747,208 6.04-9.19 6.97
Granted......................................... 314,020 7.73 7.73
Forfeited/canceled.............................. (134,155) 6.13-9.19 6.91
---------
Shares under option at December 31, 1997........ 1,927,073 6.04-9.19 7.07
=========
Options exercisable at December 31, 1997........ 1,004,438 $ 6.04-$9.19 $6.71
=========
</TABLE>
The weighted average grant date fair value of options granted during 1995,
1996 and 1997 was $6.41, $7.44 and $7.73, respectively.
The weighted average remaining contractual life of the stock options
outstanding at December 31, 1997 was 8.05 years.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied.
The Company has elected to account for its stock-based compensation plan
under APB Opinion No. 25. The Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 to 1997 using the
Black-Scholes option pricing model using the following weighted average
assumptions for grants in 1996 and 1997:
<TABLE>
<S> <C>
Risk-free interest rate 5.5%-7.0%
Expected dividend yield 0%
Expected lives 7-10 years
Expected volatility 0%
</TABLE>
The total value of the options granted during the years ended December 31,
1995, 1996, and 1997 was computed as approximately $792,000, $2,203,600 and
$704,000 respectively, which would
F-16
<PAGE> 71
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
be amortized over the vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS 123, the Company's reported
pro forma net loss and pro forma net loss per share for the years ended December
31, 1995, 1996 and 1997 would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss:
As reported in the financial
statements.................. $(126,191) $(1,316,445) $(1,013,137)
In accordance with SFAS 123.... (646,919) (2,291,289) (1,838,650)
Pro forma basic and diluted net
loss per share:
As reported in the financial
statements.................. $ (0.10) $ (0.51) $ (0.25)
In accordance with SFAS 123.... (0.51) (0.89) (0.45)
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under noncancellable operating leases for office
space and equipment. Total rental expense under operating leases was
approximately $1,542,000, $3,612,000 and $2,768,000 for the years ended December
31, 1995, 1996 and 1997, respectively. The Company also has certain equipment
under capital leases with initial terms ranging from 46 to 60 months. Future
minimum payments under capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
1998........................................... $1,011,000 $2,991,000
1999........................................... 241,000 2,586,000
2000........................................... 52,000 1,952,000
2001........................................... 7,163 1,104,000
2002........................................... -- 435,000
2003 and thereafter............................ -- 10,000
---------- ----------
Total minimum lease payments..................... 1,311,163 $9,078,000
==========
Less-Portion representing interest............. 101,000
----------
Present value of future minimum lease payments... $1,210,163
==========
</TABLE>
Litigation Contingencies
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of business. The amount of potential liability with respect
to these actions is not expected to materially affect the financial position or
results of operations of the Company.
9. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires, among other things, the determination of deferred
income taxes using the liability method, under which deferred
F-17
<PAGE> 72
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
tax assets and liabilities are determined based on the differences between the
financial accounting and tax bases of assets and liabilities. Deferred tax
assets or liabilities at the end of each period are determined using the
currently enacted tax rates to apply to taxable income in the period in which
the deferred tax asset or liability is expected to be settled or realized.
The Company's net operating loss carryforwards for tax purposes total
approximately $441,200 at December 31, 1997 and expire through 2011 unless
utilized. The Company also has alternative minimum tax credit carryforwards of
$161,855 at December 31, 1997.
The net deferred taxes recorded in the consolidated balance sheets are as
follows at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Restructuring and acquisition
costs....................... $ 119,354 $ -- $ 602,365 $ --
Accruals not currently
deductible.................. 763,874 -- 1,068,872 196,708
Net operating loss
carryforwards............... 1,000,000 964,204 176,494 --
Alternative minimum tax credit
carry-forwards.............. 40,855 -- 161,855 --
Other.......................... 324,853 146,437 120,590 109,270
---------- ----------- ---------- -----------
Subtotal.................. 2,248,936 1,110,641 2,130,176 305,978
---------- ----------- ---------- -----------
Deferred tax liabilities:
Depreciation................... -- (499,773) -- (315,434)
Intangible amortization........ -- (3,424,200) -- (2,297,651)
Other.......................... -- (1,253,589) -- (1,171,054)
---------- ----------- ---------- -----------
Subtotal.................. -- (5,177,562) -- (3,784,139)
---------- ----------- ---------- -----------
Net deferred tax assets
(liabilities) before valuation
allowance...................... 2,248,936 (4,066,921) 2,130,176 (3,478,161)
Valuation allowance.............. -- (439,000) (338,000) --
---------- ----------- ---------- -----------
Net deferred tax assets.......... $2,248,936 $(4,505,921) $1,792,176 $(3,478,161)
========== =========== ========== ===========
</TABLE>
The Company's provision (benefit) for income taxes for the years ended
December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ -------- ---------
<S> <C> <C> <C>
Federal -- current............................. $ -- $ 40,855 $ 116,000
-- deferred........................... 7,160 (40,855) (571,000)
State and local................................ -- -- 455,000
------ -------- ---------
$7,160 $ -- $ --
====== ======== =========
</TABLE>
F-18
<PAGE> 73
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
The Company's consolidated income tax provision (benefit) for the years
ended December 31, 1995, 1996 and 1997 differs from that computed based strictly
on the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Income tax benefit at federal statutory income tax
rate............................................... $(40,471) $(447,591) $(344,353)
State income taxes, net of federal income tax
benefit............................................ (4,761) (52,658) (50,640)
Permanent differences and other...................... 52,392 134,790 495,993
Change in valuation allowance........................ -- 365,459 (101,000)
-------- --------- ---------
Income tax provision................................. $ 7,160 $ -- $ --
======== ========= =========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has two defined contribution 401(k) plans, covering
substantially all employees. Eligible employees of the Company may contribute
certain amounts of their annual compensation. During 1995, 1996 and 1997 the
Company made matching contributions to the plans of $142,000, $171,000 and
$117,000 respectively.
The Company does not provide any other retirement, postretirement or
postemployment benefits to its employees.
11. UNAUDITED PRO FORMA DATA
The unaudited pro forma data set forth in the consolidated statements of
operations present pro forma basic and diluted earnings per share, and pro forma
weighted average common shares outstanding for 1997 assuming (i) all of the
Company's Series IV Preferred Stock, Series V Preferred Stock and Series VI
Preferred Stock had been converted to Common Stock based on the conversion
ratios outlined in Note 7 as of the beginning of the stated period presented;
(ii) the issuance of Common Stock by the Company in the Offering discussed in
Note 12 as of the beginning of the stated period presented; and (iii) the
application of net proceeds to reduce interest expense on debt expected to be
repaid with the proceeds of the Offering.
The following is a reconciliation of historical basic and diluted earnings
per share (EPS) to pro forma basic and diluted EPS for the year ended December
31, 1997.
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED EPS............................ $(1,013,137) 4,106,364 $(0.25)
======
Convertible manditorily redeemable stock......... -- 6,781,097
Convertible preferred stock...................... -- 480,997
Issuance of Offering shares for debt repayment... --
Interest expense on debt to be repaid, net of
tax............................................ 356,610 --
----------- ---------
PRO FORMA BASIC EPS.............................. (656,527) $
======
EFFECT OF DILUTIVE SECURITIES
Options and warrants............................. -- 693,842
----------- ---------
PRO FORMA DILUTED EPS............................ $ (656,527) $
=========== ========= ======
</TABLE>
F-19
<PAGE> 74
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
12. SUBSEQUENT EVENTS
In March 1998, the Company acquired the assets and assumed certain
liabilities of Transcription Concepts, Inc. for an aggregate consideration of
$1,420,000 which was funded from operations. The acquisition was accounted for
as a purchase.
In June 1998, the Company filed a Registration Statement relating to the
initial public offering of its Common Stock (the "Offering"). The net proceeds
to the Company will be used to pay debt and for working capital and general
corporate purposes. Prior to finalization of the Offering, the Company intends
to reincorporate in the State of Delaware and to change its capital structure.
The significant changes include: (i) a reverse Common Stock split based on a 0.7
to 1.0 ratio, and a corresponding adjustment to all option shares and prices,
warrant shares and prices and preferred stock conversion rates; (ii) an increase
in its authorized Common Stock to 100,000,000; (iii) creation of 300,000 newly
authorized, undesignated Preferred Stock, $.01 par value; and (iv) an increase
in the number of shares of Common Stock reserved for issuance upon exercise of
options granted under the Plan discussed in Note 7 to 4,000,000 shares. The
accompanying Consolidated Financial Statements reflect these changes. Effective
upon closing of the Offering, all issued preferred stock will be converted into
Common Stock under the terms set forth in Note 7.
F-20
<PAGE> 75
After the reorganization transaction discussed in Note 12 to The MRC Group,
Inc. and Subsidiary's consolidated financial statements is effected, we expect
to be in a position to render the following audit report.
Arthur Andersen LLP
Cleveland, Ohio,
June 23, 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
The MRC Group, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The MRC Group, Inc. and Subsidiary
included in this Form S-1 Registration Statement, and have issued our report
thereon dated March 3, 1998. Our audits were made for the purpose of forming an
opinion on those financial statements taken as a whole. The schedule on page
F-22 is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Cleveland, Ohio,
March 3, 1998.
F-21
<PAGE> 76
THE MRC GROUP, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
OF PERIOD EXPENSES OTHER ACCOUNTS WRITE-OFFS PERIOD
---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended December 31,
1995................ $321,934 $425,082 $ -- $297,268 $449,748
Year ended December 31,
1996................ 449,748 364,812 64,000(a) 164,190 714,370
Year ended December 31,
1997................ 714,370 539,000 -- 434,152 819,218
</TABLE>
- ---------------
(a) Related to purchase accounting adjustment in connection with the Medical
Records Corp. acquisition.
F-22
<PAGE> 77
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
ACTUAL ACTUAL PRO FORMA
DEC. 31, 1997 JUNE 30, 1998 JUNE 30, 1998
------------- ------------- -------------
(NOTE 3)
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,192,959 $ 6,007,740 $ 6,007,740
Short-term investments.................................... 4,003,094 1,990,944 1,990,944
Trade accounts receivable, less allowance for doubtful
accounts of $819,218 and $981,581 in 1997 and 1998,
respectively............................................ 18,305,630 18,508,344 18,508,344
Deferred tax asset........................................ 1,792,176 1,710,463 1,710,463
Prepaid expenses and other current assets................. 91,435 602,506 602,506
----------- ----------- -----------
Total current assets............................... 25,385,294 28,819,997 28,819,997
----------- ----------- -----------
Property and equipment, net................................. 13,306,013 12,950,990 12,950,990
Other assets:
Goodwill and other intangible assets, net................. 35,214,857 35,546,949 35,546,949
Preferred stock investment................................ 1,200,000 1,200,000 1,200,000
Other..................................................... 362,972 511,581 511,581
----------- ----------- -----------
Total other assets................................. 36,777,829 37,258,530 37,258,530
----------- ----------- -----------
Total assets....................................... $75,469,136 $79,029,517 $79,029,517
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,852,198 $ 2,014,092 $ 2,014,092
Accounts payable 4,288,695 3,802,828 3,802,828
Accrued liabilities....................................... 7,980,270 10,683,655 10,683,655
----------- ----------- -----------
Total current liabilities.......................... 15,121,163 16,500,575 16,500,575
----------- ----------- -----------
Long-term liabilities:
Long-term debt............................................ 6,184,212 5,256,085 5,256,085
Deferred tax liability.................................... 3,478,161 3,231,406 3,231,406
Other..................................................... 585,000 438,750 438,750
----------- ----------- -----------
Total long-term liabilities........................ 10,247,373 8,926,241 8,926,241
----------- ----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $.01 par value; 345,902
shares authorized in 1997 and 1998:
Series V convertible and mandatorily redeemable
preferred stock, 45,902 shares issued and outstanding
(liquidation preference $17,493,252); none issued, pro
forma................................................. 17,493,252 17,493,252 --
Series VI convertible and mandatorily redeemable
preferred stock, 300,000 shares issued and outstanding
(liquidation preference $30,000,000); none issued, pro
forma................................................. 30,000,000 30,000,000 --
Stockholders' equity:
Convertible preferred stock, $.01 par value; 10,362 shares
authorized in 1997 and 1998:
Series IV convertible preferred stock, 10,362 shares
issued and outstanding (liquidation preference
$3,948,958); none issued, pro forma................... 104 104 --
Preferred Stock, $.01 par value; 300,000 shares
authorized, none issued and outstanding................. -- -- --
Common Stock, $.01 par value; 100,000,000 shares
authorized 4,106,364 and 4,295,486 issued and
outstanding in 1997 and 1998; 11,557,580 issued pro
forma................................................... 41,064 42,955 115,576
Additional paid-in capital................................ 11,639,316 13,622,605 61,043,340
Accumulated deficit....................................... (9,073,136) (7,556,215) (7,556,215)
----------- ----------- -----------
Total stockholders' equity......................... 2,607,348 6,109,449 53,602,701
----------- ----------- -----------
Total liabilities and stockholders' equity......... $75,469,136 $79,029,517 $79,029,517
=========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-23
<PAGE> 78
THE MRC GROUP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues................................................ $53,267,568 $60,172,857
Cost of revenues............................................ 42,685,489 47,869,544
----------- -----------
Gross profit................................................ 10,582,079 12,303,313
Selling, general and administrative expenses................ 4,782,960 5,276,904
Depreciation and amortization............................... 4,743,699 4,284,711
----------- -----------
Operating income............................................ 1,055,420 2,741,698
Other (expense):
Interest (expense), net................................... (150,575) (97,777)
----------- -----------
Total other (expense)............................. (150,575) (97,777)
----------- -----------
Income before provision for income taxes.................... 904,845 2,643,921
Provision for income taxes.................................. 522,265 1,127,000
----------- -----------
Net income.................................................. $ 382,580 $ 1,516,921
=========== ===========
Basic net income per share.................................. $ 0.09 $ 0.37
=========== ===========
Diluted net income per share................................ $ 0.03 $ 0.12
=========== ===========
Basic weighted average common shares outstanding............ 4,106,364 4,111,588
=========== ===========
Diluted weighted average common shares outstanding.......... 12,062,300 12,182,270
=========== ===========
Unaudited pro forma data (note 3):
Basic net income per share................................
Diluted net income per share..............................
Basic weighted average common shares outstanding..........
Diluted weighted average common shares outstanding........
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-24
<PAGE> 79
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SERIES IV $.01 PAR VALUE COMMON STOCK ADDITIONAL TOTAL
---------------- ---------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------- ------ ------- --------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996............... 10,362 $ 104 -- $ -- 4,106,364 $41,064 $11,639,316 $(8,059,999) $ 3,620,485
Net loss........... -- -- -- -- -- -- -- (1,013,137) (1,013,137)
------ ------- ------ ------- --------- ------- ----------- ----------- -----------
Balance, December 31,
1997............... 10,362 104 -- -- 4,106,364 41,064 11,639,316 (9,073,136) 2,607,348
Compensation
expense for stock
options
(unaudited)...... -- -- -- -- -- -- 269,506 -- 269,506
Common stock issued
for exercise of
warrants
(unaudited)...... -- -- -- -- 189,122 1,891 1,713,783 -- 1,715,674
Net income
(unaudited)...... -- -- -- -- -- -- -- 1,516,921 1,516,921
------ ------- ------ ------- --------- ------- ----------- ----------- -----------
Balance, June 30,
1998 (unaudited)... 10,362 $ 104 -- $ -- 4,295,486 $42,955 $13,622,605 $(7,556,215) $ 6,109,449
====== ======= ====== ======= ========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-25
<PAGE> 80
THE MRC GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 382,580 $ 1,516,921
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization........................ 4,743,699 4,284,711
Compensation expense for stock options............... -- 269,506
Deferred tax provision (benefit)..................... 647,732 (165,042)
Loss on disposal of property......................... 59,876 1,479
Changes in operating assets and liabilities, net of
acquisitions:
Trade accounts receivable......................... (1,640,481) (87,250)
Prepaid expenses and other assets................. 115,483 (641,498)
Accounts payable.................................. 283,641 (485,868)
Accrued and other liabilities..................... (51,474) 2,736,176
----------- -----------
Total adjustments............................... 4,158,476 5,912,214
----------- -----------
Net cash from operating activities.............. 4,541,056 7,429,135
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (4,431,823) (3,234,177)
(Sale) purchases of investments, net...................... (1,019,404) 2,012,150
Acquisition of businesses, net of stock issued and
acquired............................................... (1,921,389) (1,838,018)
----------- -----------
Net cash from investing activities.............. (7,372,616) (3,060,045)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt, net......................... (1,241,910) (1,269,983)
Proceeds from exercise of warrants........................ -- 1,715,674
----------- -----------
Net cash from financing activities.............. (1,241,910) 445,691
----------- -----------
Net change in cash and cash equivalents..................... (4,073,470) 4,814,781
Cash and cash equivalents, beginning of year................ 5,050,856 1,192,959
----------- -----------
Cash and cash equivalents, end of year...................... $ 977,386 $ 6,007,740
=========== ===========
Supplemental cash flow information:
Cash paid for interest.................................... $ 460,621 $ 302,103
=========== ===========
Cash paid for income taxes................................ $ 112,627 $ 892,654
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-26
<PAGE> 81
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The MRC Group, Inc., formerly MEDIFAX, Inc. and Subsidiary (collectively,
the "Company") provides electronic medical transcription and document management
services to the health care industry. The primary customers are hospitals,
medical centers across the United States. Significant accounting and reporting
policies are described below.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
The accompanying interim consolidated financial statements included herein
have been prepared in accordance with generally accepted accounting principles.
In the opinion of management, the accompanying consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been incorporated herein.
For purposes of these interim consolidated financial statements, certain
information and disclosures normally included in annual consolidated financial
statements have been omitted. These unaudited consolidated financial statements
should be read in conjunction with the audited Consolidated Financial Statements
and Notes thereto at December 31, 1995, 1996 and 1997.
2. ACQUISITIONS
During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities.
In March 1998, the Company acquired the assets and assumed certain
liabilities of Transcription Concepts, Inc. for an aggregate consideration of
approximately $1.4 million, which was funded from operations.
All of the above acquisitions were accounted for as purchases, and the
results of operations are included in the accompanying consolidated financial
statements from the date of acquisition.
All of these acquisitions, excluding the 1998 acquisition, contain certain
contingent purchase price agreements which are payable based upon the results of
the operations of the Company.
3. UNAUDITED PRO FORMA DATA
The unaudited pro forma data set forth in the consolidated balance sheet
and consolidated statements of operations presents pro forma basic and diluted
earnings per share, and pro forma weighted average common shares outstanding
assuming all of the Company's Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock had been converted to Common Stock based on
specified conversion ratios as of the beginning of the stated periods presented.
For earnings per share pro forma calculation purposes, it also assumes the
issuance of Common Stock in the Offering discussed in Note 4 as of the beginning
of the stated periods presented and the application of net proceeds to reduce
interest expense on debt to be repaid with the proceeds of the Offering.
F-27
<PAGE> 82
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997 AND 1998
(UNAUDITED)
The following is a reconciliation of historical basic earnings per share
(EPS) to pro forma basic and diluted EPS for the six months ended June 30, 1997
and 1998:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997 FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS............ $382,580 4,106,364 $0.09 $1,516,921 4,111,588 $0.37
===== =====
Convertible
mandatorily
redeemable stock... -- 6,781,097 -- 6,781,097
Convertible preferred
stock.............. -- 480,997 -- 480,997
Issuance of Offering
shares for debt
repayment.......... -- --
Interest expense on
debt to be repaid,
net of tax......... 175,224 -- 155,310 --
-------- --------- ---------- ---------
PRO FORMA BASIC
EPS................ 557,804 $ 1,672,231 $
===== =====
EFFECT OF DILUTIVE
SECURITIES
Options and
warrants........... -- 693,842 -- 808,588
-------- --------- ---------- ---------
PRO FORMA DILUTED
EPS................ $557,804 $ $1,672,231 $
======== ========= ===== ========== ========= =====
</TABLE>
4. SIGNIFICANT SUBSEQUENT EVENTS
In June 1998, the Company filed a Registration Statement relating to the
initial public offering of its Common Stock (the "Offering"). The net proceeds
to the Company will be used to pay debt and for working capital and general
corporate purposes. Prior to finalization of the Offering, the Company intends
to reincorporate in the State of Delaware and to change its capital structure.
The significant changes include (i) a reverse Common Stock split based on a 0.7
to 1.0 ratio, and a corresponding adjustment to all option shares and prices,
warrant shares and prices and preferred stock conversion rates; (ii) an increase
in its authorized Common Stock to 100,000,000 shares; (iii) creation of 300,000
shares of newly authorized, undesignated preferred stock, $.01 par value; and
(iv) an increase in the number of shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's stock option plan to
4,000,000 shares. The accompanying consolidated financial statements reflect
these changes. Effective upon closing of the Offering, all issued preferred
stock will be converted into Common Stock under its specified terms.
F-28
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
TO MEDICAL RECORDS CORP. AND AFFILIATE
We have audited the accompanying restated combined statements of income,
stockholders' equity, and cash flows of Medical Records Corp. and Affiliate for
the year ended December 31, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis
for our opinion.
In our opinion, the accompanying restated combined financial statements
referred to above present fairly, in all material respects, the results of
operations, stockholders' equity, and cash flows for Medical Records Corp. and
Affiliate for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
SKODA, MINOTTI, REEVES & CO.
Mayfield Village, Ohio
February 16, 1996
(except for Note 2, as to which the date is May 26, 1998)
F-29
<PAGE> 84
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF INCOME (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net revenues................................................ $42,602,194
Cost of revenues............................................ 27,191,643
-----------
Gross profit................................................ 15,410,551
Selling, general and administrative expenses................ 13,024,066
Depreciation and amortization............................... 1,765,625
-----------
Operating income............................................ 620,860
Interest expense (net of interest income of $9,544)......... 307,679
-----------
Net income.................................................. $ 313,181
===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-30
<PAGE> 85
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NO PAR VOTING NO PAR NON-VOTING
COMMON STOCK, COMMON STOCK,
STATED AT STATED AT ADDITIONAL TOTAL
--------------- ----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995.................. 278.45 $1,432 -- $ -- $178,840 $4,598,936 $4,779,208
Capital contributions... -- -- -- -- 400,000 -- 400,000
Issuance of shares...... -- -- 5290.55 -- -- -- --
Stockholders'
distributions......... -- -- -- -- -- (409,121) (409,121)
Net income.............. -- -- -- -- -- 313,181 313,181
------ ------ ------- ------- -------- ---------- ----------
Balance, December 31,
1995.................. 278.45 $1,432 5290.55 $ -- $578,840 $4,502,996 $5,083,268
====== ====== ======= ======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-31
<PAGE> 86
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 313,181
Adjustments to reconcile net income to net cash from
operating activities:
Addback: Items not affecting cash
Depreciation and amortization........................ $ 1,765,625
Write-off of software development costs.............. 307,500
Cash provided from (used in) changes in the following
items:
Increase in accounts receivable...................... (1,995,002)
Decrease in prepaid expenses......................... 31,018
Increase in deposits................................. (6,652)
Increase in accounts payable - trade................. 917,106
Increase in accrued and other liabilities............ 183,783
-----------
Total Adjustments............................... 1,203,378
-----------
Net cash from operating activities.............. 1,516,559
Cash flows from investing activities:
Acquisitions of businesses................................ $ (795,653)
Additional amounts paid for business acquisitions......... (643,988)
Acquisitions of property and equipment.................... (613,633)
-----------
Net cash from investing activities.............. (2,053,274)
Cash flows from financing activities:
Proceeds from note payable -- bank........................ $ 1,350,000
Proceeds from long-term obligations....................... 580,583
Repayment of long-term obligations principal.............. (649,974)
Stockholders' distributions............................... (659,121)
-----------
Net cash from financing activities.............. 621,488
-----------
Net increase in cash and cash equivalents................... 84,773
Cash and cash equivalents -- beginning of year.............. 156,302
-----------
Cash and cash equivalents -- end of year.................... $ 241,075
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 316,239
===========
Income taxes......................................... $ 26,611
===========
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company acquired $2,442,040 of equipment through capital
lease obligations. In addition, during 1995, certain stockholders contributed
$400,000 of loans to additional paid-in capital.
The accompanying notes are an integral part of these combined statements.
F-32
<PAGE> 87
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Combined in these financial statements is Transcription Specialists, Inc.,
an affiliate through common ownership of Medical Records Corp. Management
believes this inclusion of the five branches of Transcription Specialists, Inc.
is useful for the clear reflection of the Company's combined results of
operations.
Nature of Business
Medical Records Corp. and Transcription Specialists, Inc. transcribe
medical records for hospitals throughout the United States.
Depreciation and Amortization
Depreciation and amortization of property and equipment, including assets
held under capital leases, are provided by the use of accelerated and
straight-line methods over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Equipment five years
Equipment held under capital leases three years
Computer software three to five years
Furniture and fixtures seven years
Automobiles five years
</TABLE>
Depreciation expense for the year ended December 31, 1995, was $1,476,165.
In addition, during 1995, the Company wrote off software development costs.
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Income Taxes
The Companies, with the consent of their stockholders, have elected under
the Internal Revenue Code to be taxed as S Corporations. In lieu of corporation
income and franchise taxes, the stockholders of an S Corporation are taxed on
their proportionate share of each Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been included in
these combined financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Combined Statement of Cash Flows
For purposes of the combined statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
F-33
<PAGE> 88
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
2. CHANGE IN METHOD OF ACCOUNTING FOR BUSINESS COMBINATIONS
The 1995 statements of income, stockholders' equity, and cash flows have
been restated to capitalize costs related to non-compete agreements and payments
related to revenues generated by certain acquired companies, incurred in
connection with business combinations. These costs were recorded as period
expenses in previously issued financial statements. The Company has recorded
these non-compete and revenue-related costs as identifiable intangible assets
and goodwill, which are being amortized over 7 and 40 years, respectively. The
new method of accounting for business combinations was adopted in order for the
Company to be consistent in its accounting policies with a company with whom
they merged on July 19, 1996. The effects of the accounting change are an
increase to retained earnings at January 1, 1995 of $1,255,952 and an increase
to net income for the year ended December 31, 1995 of $696,888.
3. RELATED PARTY TRANSACTIONS
During 1995, administrative service fees of $440,969 were paid to a
partnership owned by certain officers/stockholders of the Company.
4. BUSINESS COMBINATIONS
During the year ended December 31, 1995, the Company acquired certain
assets of Stat Transcription Services, Inc., Medi-Transcriptions, LTD. and
Transcribe, Inc. in business combinations accounted for as purchases. These
companies transcribe medical records. The results of operations are included in
the accompanying financial statements since the dates of acquisition. The total
purchase price of these acquisitions was $1,086,441, including $795,653 of cash
paid and $290,788 of liabilities assumed.
In connection with the acquisition of certain businesses, the Company has
capitalized additional obligations related to covenants not to compete and
obligations based on revenues generated by the acquired businesses. These
obligations have been recorded as identifiable intangible assets and goodwill
and are amortized over 7 and 40 years, respectively. The obligations are
recorded in the year they are incurred and amortized over their remaining
respective lives, based on the original acquisition date.
Amortization expense, related principally to goodwill, for the year ended
December 31, 1995, was $289,460.
Management regularly evaluates its accounting for goodwill. Impairment of
goodwill would be recognized when events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. As of December 31,
1995, no revision to the remaining useful lives or write-down of intangible
assets has been recorded.
5. FINANCING ARRANGEMENTS
At December 31, 1995, the Company has a line of credit agreement with a
bank, due April 1996 that bears interest at the bank's prime rate (8.5% at
December 31, 1995). Borrowings under the line are secured by accounts receivable
and equipment.
Under the terms of specific loan agreements with a bank, the Company is
required to maintain and meet certain loan covenant requirements pertaining to
such items as net worth, debt to net worth ratio, cash flow coverage and minimum
working capital levels. At December 31, 1995, the Company was in compliance with
or received bank waivers for the above mentioned covenants.
F-34
<PAGE> 89
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
6. LEASING ARRANGEMENTS
The Company leases its facilities under operating leases which expire
through October 2000. The Company also leases equipment under capital and
operating leases which expire through September 1999. Total rental expense under
operating leases was $1,424,390 for the year ended December 31, 1995.
7. PROFIT SHARING PLAN
The Company sponsors the Medical Records Corp. Profit Sharing and Savings
Plan and Trust, which covers substantially all employees. Participating
employees may elect to contribute, on a tax-deferred basis, a portion of their
compensation, in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches 20% of employee contributions for participants with less
than 10 years of service and 40% for those participants with 10 or more years of
service. Additional contributions may be made to the plan at the discretion of
the employer. Company matching contributions for the year ended December 31,
1995 were $231,778.
8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
There are 178.45 shares of Common Stock of Medical Records Corp. and 100
shares of Common Stock of Transcription Specialists, Inc. issued and outstanding
at December 31, 1995, with a combined stated value of $1,432. During 1995, each
of the Companies issued shares of Class B Common Non-Voting Stock by way of a
stock dividend. There are 3,390.55 shares of Common Non-Voting Stock of Medical
Records Corp. and 1,900 shares of Common Non-Voting Stock of Transcription
Specialists, Inc. issued and outstanding at December 31, 1995. The total
authorized shares are 500 shares of Common Stock for both Medical Records Corp.
and Transcription Specialists, Inc., and 3,400 and 1,900 shares of Class B
Common Non-Voting Stock, respectively. Additional paid-in capital is for Medical
Records Corp. only, and at December 31, 1995, totaled $578,840, which includes
$400,000 of loans from stockholders which were contributed to capital during
1995.
F-35
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The MRC Group, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of the Medical Records Corp. (the "Acquired Company"), as
described in Note 1, for the period January 1, 1996 to July 19, 1996. These
financial statements are the responsibility of the Acquired Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
The statements of operations, stockholders' equity and cash flows of the
Acquired Company were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the operations and cash flows of the Acquired Company,
for the period January 1, 1996 to July 19, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
May 1, 1998.
F-36
<PAGE> 91
MEDICAL RECORDS CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
<TABLE>
<S> <C>
Net revenues................................................ $27,573,883
Cost of revenues............................................ 21,053,795
-----------
Gross profit................................................ 6,520,088
Selling, general and administrative expenses................ 5,391,300
Depreciation and amortization............................... 1,259,311
Compensation expense from stock issuance.................... 3,912,047
-----------
Operating loss.............................................. (4,042,570)
-----------
Other expense:
Interest expense.......................................... (250,716)
Other..................................................... (5,527)
-----------
Total other expense............................... (256,243)
-----------
Net loss.................................................... $(4,298,813)
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-37
<PAGE> 92
MEDICAL RECORDS CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
<TABLE>
<CAPTION>
NO PAR VOTING NO PAR NON-VOTING
COMMON STOCK, COMMON STOCK,
STATED AT STATED AT ADDITIONAL RETAINED TOTAL
---------------- ------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ -------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 278.45 $1,432 5290.55 $ -- $ 578,840 $ 4,502,996 $5,083,268
Capital
contributions...... -- -- -- -- 1,250,000 -- 1,250,000
Issuance of shares,
including
compensation
expense from stock
issuance (Note 2).. -- -- 916.00 -- 3,912,047 -- 3,912,047
Stockholders'
distributions...... -- -- -- -- -- (1,225,898) (1,225,898)
Net loss............. -- -- -- -- -- (4,298,813) (4,298,813)
------ ------ -------- ---- ---------- ----------- ----------
Balance, July 19, 1996... 278.45 $1,432 6,206.55 $ -- $5,740,887 $(1,021,715) $4,720,604
====== ====== ======== ==== ========== =========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-38
<PAGE> 93
MEDICAL RECORDS CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,298,813)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.......................... 1,259,311
Compensation expense for stock issuance................ 3,912,047
Changes in operating assets and liabilities:
Trade accounts receivable............................ (778,768)
Prepaid expenses..................................... (123,661)
Other assets......................................... (1,915,350)
Accounts payable..................................... 1,460,133
Accrued and other liabilities........................ 953,001
-----------
Total adjustments................................. 4,766,713
-----------
Net cash from operating activities................ 467,900
-----------
Cash flows from investing activities:
Capital expenditures...................................... (310,451)
-----------
Net cash from investing activities................ (310,451)
-----------
Cash flows from financing activities:
Repayments of long-term debt, net......................... (422,626)
Stockholders' distributions............................... (1,225,898)
Capital contributions..................................... 1,250,000
-----------
Net cash from financing activities................ (398,524)
-----------
Net change in cash and cash equivalents..................... (241,075)
Cash and cash equivalents, beginning of year................ 241,075
-----------
Cash and cash equivalents, end of year...................... $ --
===========
Supplemental cash flow information:
Cash paid for interest.................................... $ 257,211
===========
Cash paid for taxes....................................... $ --
===========
Supplemental statement of non-cash investing and financing
activities:
The Acquired Company entered into equipment lease
obligations totaling $560,872, which were accounted for
as capital leases.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-39
<PAGE> 94
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Medical Records Corp., an Ohio corporation, transcribes medical records for
hospitals throughout the United States.
Organization
Effective May 28, 1996, Transcription Specialists, Inc., was merged into
Medical Records Corp. Since Medical Records Corp. and Transcription Specialists,
Inc. shared common ownership, the merger of these entities was accounted for as
a related party pooling-of-interests. The accompanying financial statements
include the results of both entities.
Effective July 19, 1996, all of the outstanding stock of Medical Records
Corp. (the "Acquired Company") was acquired by The MRC Group, Inc. (formerly
MEDIFAX, Inc.) for a total purchase price of approximately $27,700,000.
Basis of Presentation
The accompanying statements of operations, stockholders' equity and cash
flows are presented to comply with the requirements under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
Depreciation and Amortization
Depreciation and amortization of property and equipment, including assets
held under capital leases, are provided by the use of accelerated and
straight-line methods over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Equipment five years
Equipment held under capital leases three years
Computer software three to five years
Furniture and fixtures seven years
Automobiles five years
</TABLE>
Depreciation expense for the period January 1, 1996 to July 19, 1996 was
$1,030,138.
Goodwill and Other Intangibles
The Acquired Company has capitalized certain costs associated with various
acquisitions including goodwill and non-compete agreements. Management regularly
evaluates its accounting for goodwill and other intangible assets. Impairment of
goodwill and other intangible assets would be recognized when events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. As of July 19, 1996, no revision to the remaining useful lives or
write-down of intangible assets has been recorded.
Goodwill is being amortized on the straight-line method over 40 years.
Other intangible assets are being amortized over the seven year life of the
non-compete agreements. Amortization expense for the period of January 1, 1996
to July 19, 1996 was $229,173.
F-40
<PAGE> 95
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
Income Taxes
The Acquired Company, with the consent of their stockholders, elected under
the Internal Revenue Code to be taxed as an S Corporation. In lieu of
corporation income and franchise taxes, the stockholders of an S Corporation are
taxed on their proportionate share of the Acquired Company's taxable income.
Therefore, no provision or liability for federal or state income taxes has been
included in these financial statements.
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Research and Development Costs
Research and development costs are expensed as incurred. There were no
research and development costs during the period January 1, 1996 to July 19,
1996.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Since actual results could differ from those estimates,
revisions to estimates are made as better information becomes available.
2. RELATED PARTY TRANSACTIONS
Administrative service fees of $244,350 were paid to a partnership owned by
certain officers and shareholders of the Acquired Company. These fees are
included in other operating expenses in the accompanying statement of
operations.
Stock compensation expense of $3,912,047 was recognized in 1996 for the
issuance of 916 shares of non-voting common stock to several employees for past
services. These shares were issued at no cost to these employees. The offset to
the charge was recorded as additional paid-in capital.
A special cash bonus in the amount of $350,000 was paid in 1996 to a
director and the expense is included as a part of other operating expenses in
the accompanying statement of operations.
3. COMMITMENTS AND CONTINGENCIES
The Acquired Company entered into various non-compete and consulting
agreements with stockholders of its acquired companies. The following is a
summary of these agreements:
Non-Competition Agreements
The Acquired Company has entered into non-competition agreements with
former stockholders of acquired entities for terms ending October 1997 through
July 2000. These costs are being amortized on a straight-line basis over the
life of the agreements and are included in amortization expense.
F-41
<PAGE> 96
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
Consulting Fees
The Acquired Company has entered into consulting agreements with former
stockholders of acquired entities for terms ending November 1996 through
February 2000. Expense is charged in the year services are rendered. Total costs
for the period January 1, 1996 to July 19, 1996 was $143,818.
4. LEASING ARRANGEMENTS
The Acquired Company leases certain of its facilities under operating
leases, which expire through October 2000. The Acquired Company also leases
certain equipment under capital and operating leases, which expire through
September 1999.
Total rental expense under operating leases was $1,044,667 for the period
January 1, 1996 to July 19, 1996.
5. PROFIT SHARING PLAN
The Acquired Company sponsors the Medical Records Corp. Profit Sharing and
Savings Plan and Trust, which covers substantially all employees. Participating
employees may elect to contribute, on a tax-deferred basis, a portion of their
compensation, in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches 20% of employee contributions for participants with less
than 10 years of service and 40% for those participants with 10 or more years of
service. Additional contributions may be made to the plan at the discretion of
the employer. Total matching contributions for the period January 1, 1996 to
July 19, 1996 were $144,127.
F-42
<PAGE> 97
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. 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 COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO BUY, OR SOLICITATION OF, ANY
PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 39
Principal and Selling Stockholders.... 45
Certain Transactions.................. 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Experts............................... 52
Legal Matters......................... 52
Additional Information................ 53
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
SHARES
[MRC LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
BT Alex. Brown
Donaldson, Lufkin & Jenrette
William Blair & Company
, 1998
======================================================
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the Commission registration fee, the NASD filing fee and the Nasdaq National
Market listing fee, all amounts are estimates. All of the foregoing fees and
expenses will be paid by the Company pursuant to pre-existing agreements with
the Selling Stockholders.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 20,355
NASD filing fee............................................. 7,400
Nasdaq National Market listing fee.......................... 90,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses..................................... 250,000
Blue Sky fees and expenses (including counsel fees)......... 5,000
Printing and engraving expenses............................. 242,000
Transfer agent's and registrar's fees and expenses.......... 15,000
Miscellaneous expenses...................................... 20,245
Initial public offering directors' and officers' liability
insurance................................................. 150,000
----------
TOTAL..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
The By-Laws of the Company, a copy of which is filed as Exhibit 3.2,
contain certain indemnification provisions adopted pursuant to authority
contained in Section 145 of the DGCL. The By-Laws provide for the
indemnification of its officers, directors, employees, and agents against all
expenses with respect to any judgments, fines, and amounts paid in settlement,
or with respect to
II-1
<PAGE> 99
any threatened, pending, or completed action, suit, or proceeding to which they
were or are parties or are threatened to be made parties by reason of acting in
such capacities, provided that it is determined, either by a majority vote of a
quorum of disinterested directors of the Company or by the stockholders of the
Company or otherwise as provided in the By-Laws, that: (i) they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company; (ii) in any action, suit, or proceeding by or in
the right of the Company, they were not, and have not been adjudicated to have
been liable to the Company; and (iii) with respect to any criminal action or
proceeding, that they had no reasonable cause to believe that their conduct was
unlawful. The By-Laws provide that to the extent a director, officer, employee,
or agent has been successful on the merits or otherwise in defense of any such
action, suit, or proceeding, he shall be indemnified against expenses actually
and reasonably incurred in connection therewith.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit. The Certificate of Incorporation of the Company, a copy of which is
filed as Exhibit 3.1, eliminates personal liability of a director to the Company
and its stockholders for monetary damages for breach of fiduciary as a director
to the maximum extent permitted by Section 102(b)(7) of the DGCL.
The Registrant maintains a directors' and officers' insurance policy which
insures the officers and directors of the Registrant from any claim arising out
of an alleged wrongful act by such persons in their respective capacities as
officers and directors of the Registrant.
Reference is made to Section 8 of the Underwriting Agreement, a copy of
which is filed herewith as Exhibit 1.1, for information concerning
indemnification arrangements among the Registrant, Selling Stockholders and the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1998, in connection with the formation of the Registrant for the
purposes of the Reincorporation Merger, the Registrant issued 100 shares of
Common Stock to the Company's predecessor, The MRC Group, Inc., a Missouri
corporation, for $1,000.00 in cash. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS -- The following is a list of exhibits in this Registration
Statement.
<TABLE>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
*1.1 Proposed Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the
Company
3.2 By-Laws of the Company
4.1 Specimen Share Certificate
**5.1 Opinion of Baker & Hostetler LLP regarding the legality of
the shares of Common Stock being registered
10.1 Second Amended and Restated Loan and Security Agreement by
and between MEDIFAX, Inc., Medical Records Corp. and Summit
Bank dated July 30,1996
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
**10.2 Development and Marketing Agreement dated as of October 25,
1996 by and between Articulate Systems, Inc. and MEDIFAX,
Inc. d/b/a MRC Group
10.3 Amended and Restated 1992 Employee Stock Option Plan
10.4 Amended and Restated Registration Rights Agreement dated
July 19, 1996
*10.5 Covenant Not to Compete and Severance Agreement by and
between the Company and Edward L. Samek dated July 19, 1996
*10.6 Covenant Not to Compete and Severance Agreement by and
between the Company and Martin H. Marcus dated July 19, 1996
*10.7 Covenant Not to Compete and Severance Agreement by and
between the Company and Herbert L. Marcus dated July 19,
1996
*10.8 Employment Agreement by and between the Company and Dennis
R. Byerly dated July 7, 1997
*10.9 Employment Agreement by and between the Company and Steven
Bell dated July 2, 1996
*10.10 Employment Agreement by and between the Company and Ethan H.
Cohen dated March 19, 1997
*10.11 Covenant Not to Compete and Severance Agreement by and
between the Company and Philip M. Cohen dated July 19, 1996
*10.12 Covenant Not to Compete and Severance Agreement by and
between the Company and James W. Mills October 22, 1996
*10.13 MEDIFAX, Inc. Stock Option Agreement with Edward L. Samek
dated April 1, 1995
*10.14 MEDIFAX, Inc. Stock Option Agreements with Edward L. Samek
dated July 19, 1996 (Option I, II and III)
*10.15 Form of Promissory Note dated July 19, 1996
10.16 Contract for License of Medwrite Software and Support
Arrangements dated February 1, 1994.
*10.17 Green Park Building Lease dated January 1, 1998
*10.18 1998 Incentive Compensation Plan
11.1 Statement re Computation of Earnings Per Share
*21.1 Subsidiaries
**23.1 Consent of Baker & Hostetler LLP (to be contained in Exhibit
5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Skoda, Minotti, Reeves & Co.
*24.1 Powers of Attorney
*27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by Amendment.
(b) FINANCIAL STATEMENT SCHEDULES
See page F-1 of the Prospectus for a list of the financial statements
schedules included as part of the Prospectus.
II-3
<PAGE> 101
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Cleveland, State of Ohio, on the 30th day of July, 1998.
THE MRC GROUP, INC.
By /s/ EDWARD L. SAMEK
------------------------------------
Edward L. Samek, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated on the 30th day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ EDWARD L. SAMEK Chairman and Chief Executive Officer (principal
- ------------------------------------------ executive officer)
Edward L. Samek
/s/ STEVEN BELL Senior Vice President and Chief Financial Officer
- ------------------------------------------ (principal financial officer and principal accounting
Steven Bell officer)
BRUCE K. ANDERSON* Director
- ------------------------------------------
Bruce K. Anderson
MARTIN H. MARCUS* Director
- ------------------------------------------
Martin H. Marcus
TIMOTHY M. MURRAY* Director
- ------------------------------------------
Timothy M. Murray
RICHARD H. STOWE* Director
- ------------------------------------------
Richard H. Stowe
</TABLE>
*By /s/ STEVEN BELL
-----------------------------------------
Steven Bell, Attorney-in-Fact
II-5
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE MRC GROUP, INC.
FIRST: The name of this corporation (the "Corporation") is The MRC
Group, Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is THE CORPORATION
TRUST COMPANY.
THIRD: The purpose or purposes of the Corporation are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 100,656,264 shares, consisting of
(a) 656,254 shares of preferred stock, consisting of (i) 10,362 shares of Series
IV Preferred Stock, $.01 par value (the "Series IV Preferred Stock"), (ii)
45,902 shares of Series V Preferred Stock, $.01 par value (the "Series V
Preferred Stock"), (iii) 300,000 shares of Series VI Preferred Stock, $.01 par
value (the "Series VI Preferred Stock"; the Series IV Preferred Stock, the
Series V Preferred Stock and the Series VI Preferred Stock being hereinafter
referred to collectively from time to time as the "Designated Preferred Stock"),
and (iv) 300,000 shares of undesignated preferred stock to be issued in
accordance with paragraph 1 of Subdivision B of Division I of Article FOURTH
(collectively with the Designated Preferred Stock, the "Preferred Stock"); and
(b) 100,000,000 shares of Common Stock, $0.01 par value (the "Common Stock").
All references in each Subdivision of this ARTICLE FOURTH
refer to other paragraphs in such Subdivision unless otherwise indicated.
The following is a statement of the designations, and the
powers, preferences and rights, and the qualifications, limitations or
restrictions thereof, in respect of each class of stock of the Corporation:
DIVISION I. THE PREFERRED STOCK
A. The Designated Preferred Stock
1. Dividends.
(a) Cash Dividends. The holders of Designated
Preferred Stock shall be entitled to receive, out of funds legally available for
such purpose, cash dividends when and as declared by the board of directors of
the Corporation (the "Board of Directors"); provided,
<PAGE> 2
however, that holders of Designated Preferred Stock shall only be entitled to
receive dividends if and to the extent (ratably per share of Common Stock,
treating the holders of Designated Preferred Stock as the holders of the shares
of Common Stock issuable upon conversion thereof) that the holders of Common
Stock shall receive dividends.
(b) Other Distributions. In the event the Corporation
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by the Corporation or other persons, assets (excluding
cash dividends) or options or rights not otherwise referred to in subparagraph
4(d) below, then, in each such case, the holders of Designated Preferred Stock
shall be entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Common Stock of the Corporation
into which their shares of Designated Preferred Stock are convertible at the
then-effective conversion prices as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
2. Liquidation Preference.
(a) Upon any liquidation, dissolution or winding-up
of the Corporation, either voluntary or involuntary, the holders of shares of
Series IV Preferred Stock, Series V Preferred Stock and Series VI Preferred
Stock shall be entitled to receive, pari passu with each other and the holders
of any other capital stock of the Corporation ranking on a parity with the
Designated Preferred Stock as to distribution on liquidation, dissolution or
winding-up, but prior and in preference to any distribution of any of the assets
of the Corporation to the holders of Common Stock and any other class of capital
stock of the Corporation ranking junior to the Designated Preferred Stock as to
distribution on liquidation, dissolution or winding-up, by reason of their
ownership thereof, an amount per share equal to the sum of (i) $381.10 for each
outstanding share of Series IV Preferred Stock and Series V Preferred Stock and
(ii) $100 for each outstanding share of Series VI Preferred Stock, plus an
amount equal to all accrued but unpaid dividends per share since the date of
issuance of such Designated Preferred Stock, and no more. If upon such
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of the Designated
Preferred Stock and any other capital stock of the Corporation ranking on a
parity with the Designated Preferred Stock as to distribution upon liquidation,
dissolution or winding-up shall be insufficient to permit payment to such
holders of the preferential amounts to which they are respectively entitled,
then the entire assets of the Corporation shall be distributed among the holders
of the Designated Preferred Stock and any other capital stock of the Corporation
ranking on a parity with the Designated Preferred Stock ratably per share in
proportion to the full per share amounts to which they respectively are
entitled. The holders of the Designated Preferred Stock shall be given 10 days
prior written notice of any such liquidation, dissolution or winding-up of the
Corporation, during which time such holders may exercise the conversion rights
set forth in paragraph 4 below. If such notice is not given or is not feasible,
the holders of Designated Preferred Stock shall be entitled to receive the
amount that such holders would have received had their shares been converted
immediately prior to such liquidation, dissolution or winding-up of the
Corporation, if such amount is greater than the amount payable under the first
sentence of this subparagraph 2(a).
Page 2
<PAGE> 3
(b) A consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale, conveyance or
disposition of all or substantially all of the assets of the Corporation or the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of, shall not be deemed to be a liquidation, dissolution or winding-up
within the meaning of this paragraph 2, but shall instead be subject to the
provisions of subparagraphs 3(a)(ii) and 4(g).
3. Redemption. The shares of Designated Preferred Stock shall
be redeemable as follows:
(a) Mandatory Redemption.
(i) The Corporation shall redeem (A)
one-quarter of the outstanding shares of Series V Preferred Stock and
Series VI Preferred Stock on July 1, 2001, (B) one-third of the
remaining outstanding shares of Series V Preferred Stock and Series VI
Preferred Stock on July 1, 2002, (C) one-half of the remaining
outstanding shares of Series V Preferred Stock and Series VI Preferred
Stock on July 1, 2003, and (D) all of the remaining outstanding shares
of Series V Preferred Stock and Series VI Preferred Stock on July 1,
2004 (in the manner and with the effect provided in subparagraphs 3(c)
through 3(e) below). The foregoing mandatory redemption requirements
shall be cumulative so that, if in any year the full number of shares
of Series V Preferred Stock and Series VI Preferred Stock required to
be redeemed in such year (including any amount carried over from any
preceding year) is not so redeemed for any reason, the deficiency shall
be added to the requirements of the mandatory redemption for such
series of Designated Preferred Stock for the next year. The Corporation
shall be entitled, at its option, to credit against the number of
shares of Series V Preferred Stock and Series VI Preferred Stock
required to be redeemed in any year pursuant to this subparagraph 3(a),
a number of shares equal to the number of shares of Series V Preferred
Stock or Series VI Preferred Stock, as the case may be, theretofore
redeemed pursuant to subparagraph 3(b) below or otherwise purchased by
the Corporation and not theretofore so credited.
(ii) In case of the consolidation or merger
of the Corporation with or into any other corporation (other than a
merger in which the Corporation is the surviving corporation and which
will not result in more than 50% in voting power of the equity
securities of the Corporation having general voting power outstanding
immediately after the effective date of such merger being owned of
record or beneficially other than by persons who were the beneficial
owners of such capital stock immediately prior to such merger, in
substantially the same proportions), and in the case of a sale of all
or substantially all of the properties and assets of the Corporation as
an entirety to any other person, the Corporation shall, not later than
20 days prior to the effective date of any such consolidation, merger
or sale of properties and assets, give notice thereof to the holder or
holders of shares of Designated Preferred Stock and, in the event that
within 15 days after receipt of such notice, any holder or holders of
shares of Designated Preferred Stock shall elect, by written notice to
the Corporation, to have any or all of his, her or its shares of
Designated Preferred Stock redeemed, the Corporation shall redeem the
same (in the manner and with the effect provided in subparagraphs 3(c)
through 3(e) below) not
Page 3
<PAGE> 4
later than the day prior to the effective date of such consolidation,
merger or sale of properties and assets.
(b) Optional Redemption. The Corporation may redeem
at any time after July 1, 2000, and from time to time thereafter (in the manner
and with the effect provided in subparagraphs 3(c) through 3(e) below), any
whole number of shares of Designated Preferred Stock. Any date on which the
Corporation elects to redeem shares of Designated Preferred Stock as provided in
this subparagraph 3(b) and each date on which the Corporation shall be required
to redeem shares of Designated Preferred Stock as provided in subparagraph 3(a)
above, shall be referred to as a "Redemption Date."
(c) Redemption Price. The Series IV Preferred Stock
to be redeemed on a Redemption Date shall be redeemed by paying for each share
in cash the sum of $381.10 plus in each case an amount equal to dividends
accrued thereon to such Redemption Date, such amount being herein sometimes
referred to as the "Series IV Redemption Price." The Series V Preferred Stock to
be redeemed on a Redemption Date shall be redeemed by paying for each share in
cash the sum of $381.10 plus in each case an amount equal to dividends accrued
thereon to such Redemption Date, such amount being herein sometimes referred to
as the "Series V Redemption Price." The Series VI Preferred Stock to be redeemed
on a Redemption Date shall be redeemed by paying for each share in cash the sum
of $100 plus in each case an amount equal to dividends accrued thereon to such
Redemption Date, such amount being herein sometimes referred to as the "Series
VI Redemption Price." Not less than 60 days before any Redemption Date, written
notice shall be given by mail, postage prepaid, to the holders of record of the
series of Designated Preferred Stock to be redeemed, such notice to be addressed
to each such stockholder at his, her or its post office address as shown by the
records of the Corporation, specifying the number of shares to be redeemed, the
subparagraph or subparagraphs of this paragraph 3 pursuant to which such
redemption shall be made, the applicable Redemption Price and the place and date
of such redemption, which date shall not be a day on which the Corporation's
principal bank is required or authorized to close. If such notice of redemption
shall have been duly given and if on or before such Redemption Date the funds
necessary for redemption shall have been set aside so as to be and continue to
be available therefor, then, notwithstanding that any certificate for shares of
Designated Preferred Stock to be redeemed shall not have been surrendered for
cancellation, after the close of business on such Redemption Date, the shares so
called for redemption shall no longer be deemed outstanding, the dividends
thereon shall cease to accrue, and all rights with respect to such shares shall
forthwith cease after the close of business on the applicable Redemption Date,
except only the right of the holders thereof to receive, upon presentation of
the certificate representing shares so called for redemption, the applicable
Redemption Price therefor, without interest thereon.
(d) Redeemed or Otherwise Acquired Shares to Be
Retired. Any shares of Designated Preferred Stock redeemed pursuant to this
paragraph 3 or otherwise acquired by the Corporation in any manner whatsoever
shall be permanently retired and shall not under any circumstances be reissued;
and the Corporation may from time to time take such appropriate corporate action
as may be necessary to reduce the number of authorized shares of Designated
Preferred Stock accordingly.
Page 4
<PAGE> 5
(e) Shares to Be Redeemed. In case of the redemption
pursuant to clause (i) of subparagraph 3(a) above, for any reason, of only a
part of the outstanding shares of Series V Preferred Stock and Series VI
Preferred Stock on a Redemption Date, all shares of Series V Preferred Stock and
Series VI Preferred Stock to be redeemed shall be selected pro rata, and there
shall be so redeemed from each registered holder of Series V Preferred Stock or
Series VI Preferred Stock, as the case may be, a number of whole shares, as
nearly as practicable to the nearest share, equal to the total number of shares
of such series held of record by such holder multiplied by a fraction, of which
the numerator shall be the aggregate Redemption Price of all shares of Series V
Preferred Stock and Series VI Preferred Stock actually being redeemed on such
Redemption Date, and the denominator shall be the aggregate Redemption Price of
all shares of Series V Preferred Stock and Series VI Preferred Stock required to
be redeemed on such Redemption Date. In case of the redemption pursuant to
clause (ii) of subparagraph 3(a) above, for any reason, of only a part of the
shares of Designated Preferred Stock the holders of which shall have elected to
have their shares redeemed, all shares of Designated Preferred Stock to be
redeemed shall be selected pro rata, and there shall be so redeemed from each
registered holder electing to have shares redeemed a number of whole shares, as
nearly as practicable to the nearest share, equal to the total number of shares
of such series held of record by such holder multiplied by a fraction, of which
the numerator shall be the aggregate Redemption Price of all shares of
Designated Preferred Stock actually being redeemed on such Redemption Date, and
the denominator shall be the aggregate Redemption Price of all shares of
Designated Preferred Stock required to be redeemed (by reason of election of the
holder) on such Redemption Date. In case of the redemption pursuant to
subparagraph 3(b) above, for any reason, of only a part of the shares of
Designated Preferred Stock on a Redemption Date, all shares of Designated
Preferred Stock to be redeemed shall be selected pro rata, and there shall be so
redeemed from each registered holder a number of whole shares, as nearly as
practicable to the nearest share, equal to the total number of shares of such
series held of record by such holder multiplied by a fraction, of which the
numerator shall be the aggregate Redemption Price of all shares of Designated
Preferred Stock actually being redeemed on such Redemption Date, and the
denominator shall be the aggregate Redemption Price of all shares of Designated
Preferred Stock.
4. Conversion. The holders of Designated Preferred Stock shall
have the following conversion rights:
(a) Optional Conversion.
(i) Series IV Preferred Stock. Subject to
the terms and conditions of this paragraph 4, the holder of any share
or shares of Series IV Preferred Stock shall have the right, at his,
her or its option at any time, to convert any such shares of Series IV
Preferred Stock (except that, upon any liquidation of the Corporation,
the right of conversion shall terminate at the close of business on the
last full business day next preceding the date fixed for payment of the
amount distributable on the Series IV Preferred Stock) into such number
of fully paid and nonassessable whole shares of Common Stock as is
obtained by multiplying (A) the number of shares of Series IV Preferred
Stock so to be converted by (B) the sum of $381.10 plus all accrued and
unpaid dividends per share of Series IV Preferred Stock to be
converted, and dividing the result by the conversion price of $8.20993
per share or by the conversion price as last adjusted and in effect at
the date any
Page 5
<PAGE> 6
share or shares of Series IV Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred
to herein as the "Series IV Conversion Price").
(ii) Series V Preferred Stock and Series VI
Preferred Stock. Subject to the terms and conditions of this paragraph
4, the holder of any share or shares of Series V Preferred Stock or
Series VI Preferred Stock shall have the right, at his, her or its
option at any time, to convert any such shares of Preferred Stock
(except that, upon any liquidation of the Corporation, the right of
conversion shall terminate at the close of business on the last full
business day next preceding the date fixed for payment of the amount
distributable on such Preferred Stock) into such number of fully paid
and nonassessable whole shares of Common Stock as is obtained by
multiplying the number of shares of (A) Series V Preferred Stock so to
be converted by $381.10 and dividing the result by the conversion price
of $6.03687, or (B) Series VI Preferred Stock so to be converted by
$100 and dividing the result by the conversion price of $7.72523, per
share or by the conversion price as last adjusted and in effect at the
date any share or shares of such Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred
to herein as the "Series V Conversion Price", with respect to
conversion of Series V Preferred Stock, or the "Series VI Conversion
Price", with respect to conversion of Series VI Preferred Stock). The
Series IV Conversion Price, Series V Conversion Price and Series VI
Conversion Price are herein sometimes collectively referred to as the
"Conversion Prices", and individually as a "Conversion Price."
(iii) Method of Conversion. Such rights of
conversion shall be exercised by the holder thereof by giving written
notice that the holder elects to convert a stated number of shares of
Series IV Preferred Stock, Series V Preferred Stock and/or Series VI
Preferred Stock into Common Stock and by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at
its principal office (or such other office or agency of the Corporation
as the Corporation may designate by notice in writing to the holder or
holders of the Designated Preferred Stock) at any time during its usual
business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate
or certificates for shares of Common Stock shall be issued.
(b) Issuance of Certificates; Time Conversion
Effected. Promptly after the receipt of the written notice referred to in
subparagraph 4(a)(iii) above and surrender of the certificate or certificates
for the share or shares of the Designated Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered, to the
holder, registered in such name or names as such holder may direct, a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such share or shares of such Designated
Preferred Stock. To the extent permitted by law, such conversion shall be deemed
to have been effected and the applicable Conversion Price shall be determined as
of the close of business on the date on which such written notice shall have
been received by the Corporation and the certificate or certificates for such
share or shares shall have been surrendered as aforesaid, and at such time the
rights of the holder of such share or shares of Designated Preferred Stock shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
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shall be deemed to have become the holder or holders of record of the shares
represented thereby.
(c) Fractional Shares; Dividends; Partial Conversion.
No fractional shares shall be issued upon conversion of the Designated Preferred
Stock into Common Stock and, other than as set forth in subparagraph 4(a)(i)
above, no payment or adjustment shall be made upon any conversion on account of
any cash dividends on the Common Stock issued upon such conversion. At the time
of each conversion of Series V Preferred Stock and/or Series VI Preferred Stock,
the Corporation shall pay in cash an amount equal to all dividends accrued and
unpaid on the shares surrendered for conversion to the date upon which such
conversion is deemed to take place as provided in subparagraph 4(b). In case the
number of shares of Designated Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 4(a) above exceeds the number
of shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder thereof, at the expense of the Corporation, a new
certificate or certificates for the number of shares of Designated Preferred
Stock represented by the certificate or certificates surrendered which are not
to be converted. If any fractional interest in a share of Common Stock would,
except for the provisions of the first sentence of this subparagraph 4(c), be
deliverable upon any such conversion, the Corporation, in lieu of delivering the
fractional share thereof, shall pay to the holder surrendering the Designated
Preferred Stock for conversion an amount in cash equal to the current market
price of such fractional interest as determined in good faith by the Board of
Directors.
(d) Adjustment of Price upon Issuance of Common
Shares. Except as provided in subparagraph 4(f) hereof, if the Corporation shall
issue or sell, or is deemed, in accordance with subparagraphs 4(d)(i) through
4(d)(vii), to have issued or sold, any shares of its Common Stock for a
consideration per share less than any Conversion Price in effect immediately
prior to the time of such issue or sale, then, forthwith upon such issue or
sale, such Conversion Price shall be reduced to the price (calculated to the
nearest cent) determined by dividing (i) an amount equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale (including as outstanding all shares of Common Stock issuable upon
conversion of the outstanding Designated Preferred Stock) multiplied by such
then existing Conversion Price, and (B) the consideration, if any, received by
the Corporation upon such issue or sale, by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale (including as
outstanding all shares of Common Stock issuable upon conversion of the
outstanding Designated Preferred Stock).
No adjustment of any Conversion Price, however, shall
be made in an amount less than $.01 per share, and any such lesser adjustment
shall be carried forward and shall be made at the time and together with the
next subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per share or more.
For purposes of this subparagraph 4(d), the following
subparagraphs 4(d)(i) to 4(d)(vii) shall also be applicable:
(i) Issuance of Rights or Options. In case
at any time the Corporation shall in any manner grant (whether directly
or by assumption in a merger or
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otherwise) any rights to subscribe for or to purchase, or any options
for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such rights or
options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities") whether or not such options, or the right to convert or
exchange any such Convertible Securities, are immediately exercisable,
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined by dividing (A) the total amount, if
any, received or receivable by the Corporation as consideration for the
granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by
(B) the total maximum number of shares of Common Stock issuable upon
the exercise of such options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options)
shall be less than any Conversion Price in effect immediately prior to
the time of the granting of such Options, then for purposes of
adjustment of such Conversion Price the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of granting
of such Options and thereafter shall be deemed to be outstanding.
Except as otherwise provided in subparagraph 4(d)(iii) below, no
adjustment of such Conversion Price shall be made upon the actual issue
of such Common Stock or of such Convertible Securities upon exercise of
such Options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. In
case the Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by
dividing (A) the total amount received or receivable by the Corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange thereof, by
(B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities) shall be
less than any Conversion Price in effect immediately prior to the time
of such issue or sale, then for purposes of adjustment of such
Conversion Price, the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall be deemed to have been issued for such price per share as of the
date of the issue or sale of such Convertible Securities and thereafter
shall be deemed to be outstanding, provided that (A) except as
otherwise provided in subparagraph 4(d)(iii) below, no adjustment of
such Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities
and (B) if
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any such issue or sale of such Convertible Securities is made upon
exercise of any Option to purchase any such Convertible Securities for
which adjustments of such Conversion Price have been or are to be made
pursuant to other provisions of this subparagraph 4(d), no further
adjustment of such Conversion Price shall be made by reason of such
issue or sale.
(iii) Change in Option Price or Conversion
Rate. Upon the happening of any of the following events, namely, if the
purchase price provided for in any Option referred to in subparagraph
4(d)(i), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph 4(d)(i) or 4(d)(ii), or the rate at which any Convertible
Securities referred to in subparagraph 4(d)(i) or 4(d)(ii) are
convertible into or exchangeable for Common Stock shall change at any
time (other than under or by reason of provisions designed to protect
against dilution), any Conversion Price in effect at the time of such
event which shall have previously been adjusted upon the issuance of
any such Options or Convertible Securities shall forthwith be
readjusted to the Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted,
issued or sold; and on the expiration of any such Option or termination
of any such right to convert or exchange such Convertible Securities,
such Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price which would have been in effect at
the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such Option referred to in
subparagraph 4(d)(i) or the rate at which any Convertible Securities
referred to in subparagraph 4(d)(i) or 4(d)(ii) are convertible into or
exchangeable for Common Stock shall be reduced at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then, in case of the delivery of Common Stock upon the
exercise of any such Option or upon conversion or exchange of any such
Convertible Securities, each Conversion Price then in effect hereunder
shall forthwith be adjusted to such respective amounts as would have
been obtained had such Option or Convertible Securities never been
issued as to such Common Stock and had adjustments been made upon the
issuance of the shares of Common Stock delivered as aforesaid, but only
if as a result of such adjustment such Conversion Price then in effect
hereunder is thereby reduced.
(iv) Stock Dividends. In case the
Corporation shall declare a dividend or make any other distribution
upon any stock of the Corporation payable in Common Stock, Options or
Convertible Securities, any Common Stock, Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(v) Consideration for Stock. In case any
shares of Common Stock, Options or Convertible Securities shall be
issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the
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Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed
by the Corporation in connection therewith. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to be the
fair value of such consideration as determined in good faith by the
Board of Directors, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any Options shall be
issued in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no
specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
(vi) Record Date. In case the Corporation
shall take a record of the holders of its Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution
payable in Common Stock, Options or Convertible Securities, or (B) to
subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(vii) Treasury Shares. The number of shares
of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or sale of
Common Stock for the purposes of this subparagraph 4(d).
(e) Subdivision or Combination of Stock. In case the
Corporation shall at any time subdivide its outstanding shares of Common Stock
into a greater number of shares, the Conversion Prices in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the Corporation shall be combined
into a smaller number of shares, the Conversion Prices in effect immediately
prior to such combination shall be proportionately increased.
(f) Certain Issues of Common Stock Excepted. Anything
herein to the contrary notwithstanding, the Corporation shall not be required to
make any adjustment of the Conversion Prices in the case of (i) the issuance by
the Corporation of shares of Common Stock upon conversion of any shares of
Designated Preferred Stock, (ii) the issuance by the Corporation of shares of
Common Stock upon the exercise of certain warrants issued by The MRC Group,
Inc., a Missouri corporation and a predecessor of the Corporation ("MRC
Missouri"), that were outstanding as of July 19, 1996, (iii) the grant of
options to purchase or the issuance by the Corporation of up to an aggregate
1,750,000 shares of Common Stock to employees, directors and consultants of the
Corporation or any subsidiary pursuant to the 1992 Employee Stock Option Plan of
MRC Missouri (whether such options were issued before or after July 19, 1996),
and (iv) the issuance of up to 352,461 shares of Common Stock upon exercise of
options granted by MRC Missouri and outstanding on July 19, 1996 held by two
directors of the
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Corporation; provided, however, that the Corporation shall not be required to
make any adjustment of the Series IV Conversion Price in the case of any grants
or issuances under any employee benefit plan of the Corporation, regardless of
the number of shares of Common Stock issuable under any such plan.
(g) Reorganization or Reclassification. If any
capital reorganization or reclassification of the capital stock of the
Corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provisions (in form satisfactory to the
holders of at least (i) a majority of the outstanding shares of Series IV
Preferred Stock, (ii) 66-2/3% of the outstanding shares of Series V Preferred
Stock, and (iii) 75% of the outstanding shares of Series VI Preferred Stock,
voting as separate classes) shall be made whereby each holder of a share or
shares of Designated Preferred Stock shall thereafter have the right to receive,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock of the Corporation immediately theretofore receivable
upon the conversion of such share or shares of Designated Preferred Stock, such
shares of stock, securities or assets as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore so receivable had
such reorganization or reclassification not taken place, and in any such case
appropriate provision shall be made with respect to the rights and interests of
such holder to the end that the provisions hereof (including without limitation
provisions for adjustments of the Series IV Conversion Price, the Series V
Conversion Price and the Series VI Conversion Price) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise of such conversion rights
(including an immediate adjustment, by reason of such reorganization or
reclassification, of the Series V Conversion Price and the Series VI Conversion
Price to the value of the Common Stock reflected by the terms of such
reorganization or reclassification if the value so reflected is less than any
such Conversion Price in effect immediately prior to such reorganization or
reclassification). In the event of a merger or consolidation of the Corporation
as a result of which a greater or lesser number of shares of Common Stock of the
surviving corporation are issuable to holders of Common Stock of the Corporation
outstanding immediately prior to such merger or consolidation, the Conversion
Prices in effect immediately prior to such merger or consolidation shall be
adjusted in the same manner as though there were a subdivision or combination of
the outstanding shares of Common Stock of the Corporation. The Corporation will
not effect any such consolidation, merger or any sale of all or substantially
all of its assets or properties, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the Corporation purchasing such assets shall assume,
by written instrument (in form reasonably satisfactory to the holders of at
least (i) a majority of the outstanding shares of Series IV Preferred Stock,
(ii) 66-2/3% of the outstanding shares of Series V Preferred Stock, and (iii)
75% of the outstanding shares of Series VI Preferred Stock, voting as separate
classes), executed and mailed or delivered to each holder of shares of
Designated Preferred Stock at the last address of such holder appearing on the
books of the Corporation, the obligation to deliver to such holder such shares
of stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to receive.
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(h) Notice of Adjustment. Upon any adjustment of any
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by first-class mail, postage prepaid, addressed to each holder
of shares of the affected series of Designated Preferred Stock at the address of
such holder as shown on the books of the Corporation, which notice shall state
such Conversion Price, resulting from such adjustment, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(i) Other Notices. In case at any time:
(i) the Corporation shall declare any
dividend upon its Common Stock payable in cash or stock or make any
other distribution to the holders of its Common Stock;
(ii) the Corporation shall offer for
subscription pro rata to the holders of its Common Stock any additional
shares of stock of any class or other rights;
(iii) there shall be any capital
reorganization or reclassification of the capital stock of the
Corporation, or a consolidation or merger of the Corporation with, or a
sale of all or substantially all its assets to, another corporation; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding-up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by
first-class mail, postage prepaid, addressed to each holder of any shares of
Designated Preferred Stock at the address of such holder as shown on the books
of the Corporation, (A) at least 20 days prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, and (B) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, at least 20 days prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (A) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (B)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. Any notice
required by the provisions of the Certificate of Incorporation of the
Corporation, as it may be amended from time to time (the "Certificate of
Incorporation") to be given to the holders of shares of Designated Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record of Designated Preferred Stock at
his, her or its address appearing on the books of the Corporation.
(j) Stock to Be Reserved. The Corporation will at all
times reserve and keep available out of its authorized Common Stock or its
treasury shares, solely for the purpose of issue upon the conversion of the
Designated Preferred Stock as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
Designated Preferred Stock. The Corporation covenants that all shares of
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Common Stock that shall be so issued shall be duly and validly issued and fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to ensure that the par value per share of the Common Stock is at
all times equal to or less than the lowest of the effective Conversion Prices.
The Corporation will take all such action as may be necessary to ensure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirements of any national securities exchange
upon which the Common Stock of the Corporation may be listed. The Corporation
will not take any action which results in any adjustment of any of the
Conversion Prices if the total number of shares of Common Stock issued and
issuable after such action upon conversion of the Designated Preferred Stock
would exceed the total number of shares of Common Stock then authorized by the
Certificate of Incorporation.
(k) No Reissuance of Designated Preferred Stock.
Shares of Designated Preferred Stock that are converted into shares of Common
Stock as provided herein shall not be reissued.
(l) Issue Tax. The issuance of certificates for
shares of Common Stock upon conversion of the Designated Preferred Stock shall
be made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Designated Preferred Stock which is being converted.
(m) Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Designated Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Designated Preferred Stock in any manner which interferes with the
timely conversion of such Designated Preferred Stock.
(n) Definition of Common Stock. As used in this
paragraph 4, the term "Common Stock" shall mean and include the Corporation's
authorized Common Stock, $0.01 par value, as constituted on the date this
Amended and Restated Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware, and shall also include any capital stock of
any class of the Corporation thereafter authorized which shall not be limited to
a fixed sum or percentage of par value in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; provided that the shares of Common Stock receivable upon conversion
of shares of Designated Preferred Stock of the Corporation shall include only
shares designated as Common Stock of the Corporation on the date this Amended
and Restated Certificate of Incorporation was filed with the Secretary of the
State of the State of Delaware, or, in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in subparagraph 4(g) above.
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(o) Mandatory Conversion. If (i) at any time the
Corporation shall complete a firm commitment underwritten public offering of
shares of its Common Stock (a "Public Offering") in which (A) the gross proceeds
to the Corporation in such offering (before deducting underwriting discounts, if
any) shall be at least equal the amount specified in the table below for such
series of Designated Preferred Stock and (B) the price per share to the public
for such shares shall be at least equal to the multiple of the Conversion Price
specified in the table below for such series (as adjusted for any stock splits,
stock dividends or similar events occurring after the filing of this Amended and
Restated Certificate of Incorporation) or (ii) any time prior to June 30, 1999
the Corporation shall complete a Public Offering in which (A) the gross proceeds
to the Corporation in such offering (before deducting underwriting discounts, if
any) shall be at least $25,000,000 and (B) the price per share to the public for
such series of Designated Preferred Stock shall at least be equal to 1.333 times
the Conversion Price for such series (as adjusted for any stock splits, stock
dividends or similar events occurring after the filing of this Amended and
Restated Certificate of Incorporation), the Corporation, upon written notice to
the registered holders of Designated Preferred Stock at least five days prior to
the anticipated closing of the sale of such shares by the Corporation pursuant
to such Public Offering, may cause all (but not less than all) outstanding
shares of each series of Designated Preferred Stock pursuant to subparagraphs
4(o)(i) or (ii) above, automatically on the closing date for such offering, so
long as such closing date is within five business days of the date specified in
such written notice and without any further action by any person, to be
converted into shares of Common Stock in accordance with the terms of this
subparagraph 4 (o) with the same effect as if the certificates evidencing such
shares had been surrendered for conversion, such conversion to be effective
simultaneously with the closing of such Public Offering, provided, however, that
certificates evidencing the shares of Common Stock issuable upon such conversion
shall not be issued except on surrender of the certificates for the shares of
the series of Designated Preferred Stock so converted:
Minimum Price to
Minimum Proceeds Public as a Multiple
Series to Corporation of Conversion Prices
- ------ -------------- --------------------
Series IV $10,000,000 5.000
Series V $10,000,000 5.000
Series VI $25,000,000 3.733
(p) No Impairment. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this paragraph 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of Designated Preferred Stock against
impairment.
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5. General Voting Rights.
(a) Except as otherwise provided by law and the
Certificate of Incorporation, the holders of Common Stock and Designated
Preferred Stock shall vote together as a class on all matters to be voted on by
the stockholders of the Corporation on the following bases: (i) each holder of
Designated Preferred Stock shall be entitled to one (1) vote for each share of
Common Stock which would be issuable to such holder upon the conversion of all
the shares of Designated Preferred Stock so held on the record date for the
determination of stockholders entitled to vote and (ii) each holder of Common
Stock shall be entitled to one (1) vote per share.
(b) The holders of Series IV Preferred Stock shall,
in addition, as a single class, be entitled to elect one (1) member of the Board
of Directors.
(c) The holders of Series V Preferred Stock shall, in
addition, as a single class, be entitled to elect two (2) members of the Board
of Directors.
(d) The holders of Series VI Preferred Stock shall,
in addition, as a single class, be entitled to elect one (1) member of the Board
of Directors.
6. Restrictions.
(a) At any time when shares of Designated Preferred
Stock are outstanding, except where the vote or written consent of the holders
of a greater number of shares of the Corporation is required by law or by the
Certificate of Incorporation and in addition to any other vote required by law,
without the prior consent of the holders of at least (i) a majority of the
outstanding shares of Series IV Preferred Stock, (ii) 66-2/3% of the outstanding
shares of Series V Preferred Stock, and (iii) 75% of the outstanding shares of
Series VI Preferred Stock given in person or by proxy, either in writing or at a
special meeting called for that purpose, at which meeting the holders of the
shares of each series of such Designated Preferred Stock shall vote as separate
classes:
(A) The Corporation will not create or
authorize the creation of any additional class of shares of stock
unless the same ranks junior to the Designated Preferred Stock as to
the distribution of assets on the liquidation, dissolution or
winding-up of the Corporation, or increase the authorized amount of the
Designated Preferred Stock or increase the authorized amount of any
additional class of shares of stock unless the same ranks junior to the
Designated Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding-up of the Corporation, or create or
authorize any obligation or security convertible into shares of
Designated Preferred Stock or into shares of any other class of stock
unless the same ranks junior to the Designated Preferred Stock as to
the distribution of assets on the liquidation, dissolution or
winding-up of the Corporation, whether any such creation or
authorization or increase shall be by means of amendment of the
Certificate of Incorporation or by merger, consolidation or otherwise;
and
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(B) The Corporation will not amend, alter or
repeal its Certificate of Incorporation or its by-laws in any manner so
as to adversely affect the respective relative rights and preferences
of any series of the Designated Preferred Stock or adversely affect any
series of the Designated Preferred Stock or the holders thereof.
(b) At any time when shares of Series V Preferred
Stock or Series VI Preferred Stock are outstanding, except where the vote or
written consent of holders of a greater number of shares of the Corporation is
required by law or the Certificate of Incorporation and in addition to any other
vote required by law, without the prior written consent of the holders of at
least (i) 66-2/3% of the outstanding shares of Series V Preferred Stock and (ii)
75% of the outstanding shares of Series VI Preferred Stock, given in person or
by proxy, either in writing or at a special meeting called for that purpose, at
which meeting the holders of the shares of Series V Preferred Stock and Series
VI Preferred Stock shall vote as separate classes, the Corporation will not
merge or consolidate or authorize the merger or consolidation of the Corporation
with or into any other corporation or recapitalize or authorize the
recapitalization of the Corporation.
(c) At any time when shares of Series VI Preferred
Stock are outstanding, except where the vote or written consent of holders of a
greater number of shares of the Corporation is required by law or the
Certificate of Incorporation and in addition to any other vote required by law,
without the prior written consent of the holders of at least 75% of the
outstanding shares of Series VI Preferred Stock, given in person or by proxy,
either in writing or at a special meeting called for that purpose, the
Corporation will not sell or authorize the sale of all or substantially all of
its assets.
7. No Preemptive Rights. The holders of Designated Preferred
Stock shall have no preemptive rights to acquire additional shares of capital
stock of the Corporation.
B. The Undesignated Preferred Stock.
1. The Corporation may issue one or more additional series of
shares of Preferred Stock, each of which series may have such voting powers,
full or limited, or no voting powers, such other powers, and such designations,
preferences, and relative participating, optional, or other special rights, and
qualifications, limitations, or restrictions thereof, if any, as shall be stated
and expressed in the resolution or resolutions providing for the issuance of
such shares adopted by the Board of Directors. The authority of the Board of
Directors with respect to each series of shares of Preferred Stock shall
include, but not be limited to, determination of the following:
(a) the number of shares of Preferred Stock of any
series issued and the distinctive designation of the shares of such series of
stock, if any;
(b) the dividend rate, if any, on the shares of any
series of Preferred Stock, whether dividends shall be cumulative, and, if so,
from which date or dates, and whether they shall
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<PAGE> 17
be payable in preference to, or in another relation to, the dividends payable on
any other series of stock;
(c) whether any series of shares of Preferred Stock
shall have conversion or exchange privileges, and, if so, the terms and
conditions of such conversion or exchange, including without limitation
provision for adjustment of the conversion or exchange rate upon the occurrence
of such events as the Board of Directors shall determine;
(d) whether or not any series of shares of Preferred
Stock shall be redeemable, and, if so, the terms and conditions of such
redemption, including the manner of selecting shares of Preferred Stock for
redemption if less than all shares of stock of a series are to be redeemed, the
date or dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption rates;
(e) whether any series of shares of Preferred Stock
shall be entitled to the benefit of a sinking fund to be applied to the purchase
or redemption of the shares of stock, and, if so, the terms and amount of such
sinking fund;
(f) the rights of any series of shares of Preferred
Stock in the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Corporation and whether such rights shall be in preference to,
or in another relation to, the comparable rights of any other class or classes
or series of shares of stock; and
(g) any other relative, participating, optional or
other special rights, qualifications, limitations, or restrictions of any series
of shares of Preferred Stock.
DIVISION II. THE COMMON STOCK
1. Dividends. The holders of shares of Common Stock shall be
entitled to receive such dividends as from time to time may be declared by the
Board of Directors, subject to the rights of holders of any Preferred Stock
(which includes for purposes of this Division II Preferred Stock issued pursuant
to paragraph 1 of Subdivision B of Division I of this Article FOURTH).
2. Liquidation. In the event of any liquidation, dissolution
or winding-up of the Corporation, whether voluntary or involuntary, after
payment shall have been made to holders of Preferred Stock of the full amounts
to which they shall respectively be entitled as stated and expressed in this
Article FOURTH or as may be stated and expressed pursuant thereto, the holders
of Common Stock shall be entitled, to the exclusion of the holders of Preferred
Stock, to share ratably according to the number of shares of Common Stock held
by them in all remaining assets of the Corporation available for distribution to
its stockholders.
3. Voting. Except as otherwise provided by law or as provided
in or fixed and determined pursuant to paragraph 5 of Subdivision A of Division
I of this Article FOURTH or paragraph 1 of Subdivision B of Division I of this
Article FOURTH, each holder of one or
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more shares of Common Stock shall be entitled to one (1) vote for each share
outstanding in such holder's name on the books of the Corporation.
FIFTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The Board of Directors is expressly authorized to adopt,
amend, or repeal the by-laws of the Corporation, except as otherwise provided in
the by-laws.
B. Elections of directors need not be by written ballot unless
the by-laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place
within or without the State of Delaware as the by-laws of the Corporation may
provide or as may be designated from time to time by the Board of Directors.
SIXTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
SEVENTH: The Corporation hereby elects that it shall be governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in any
manner permitted by the General Corporation Law of the State of Delaware, and
all rights and powers conferred herein on stockholders, directors and officers,
if any, are subject to this reserved power. Notwithstanding the foregoing, in
addition to any necessary percentage voting requirements (and notwithstanding
that a lesser percentage may be required) under this Certificate of
Incorporation or under the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended, for the amendment or repeal of any
provision of this Amended and Restated Certificate of Incorporation, the
amendment or repeal of any provision of this Certificate of Incorporation shall
require the affirmative vote of the holders of at least two-thirds of the shares
of stock entitled to vote on such
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<PAGE> 19
proposal and, if any class of shares is required or entitled to be voted
separately as a class, the affirmative vote of holders of at least two-thirds of
the shares of such class; provided that if two-thirds of the directors then in
office recommend to the stockholders that such proposal be approved, then such
proposal may be approved by the affirmative vote of the holders of at least a
majority of the shares of stock entitled to vote on such proposal and, if any
class of shares is required or entitled to be voted separately as a class, by
the affirmative vote of the holders of at least a majority of the shares of such
class.
NINTH: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided, however, that, to the extent provided by applicable law, this
provision shall not eliminate the liability of a director (a) for any breach of
a director's duty of loyalty to the Corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of Delaware, or (d) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
TENTH: To the extent permitted by law, the Corporation may purchase or
otherwise acquire shares of stock of any class issued by it for such
consideration and upon such terms and conditions as may be authorized by the
Board of Directors, in its discretion, from time to time.
ELEVENTH: Any director or the entire Board of Directors may be removed,
with or without cause. Such removal shall require the affirmative vote of the
holders of at least two-thirds of the shares of stock then entitled to vote in
the election of directors; provided that if two-thirds of the directors then in
office recommend to the stockholders that a director be removed, then such
director may be removed, with or without cause, by the affirmative vote of the
holders of at least a majority of the shares of stock then entitled to vote in
the election of directors.
TWELFTH: If at any time the Corporation has a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
then for so long as such class of stock is so registered, all actions by the
stockholders of the Corporation must be taken at an annual or special meeting of
the stockholders and may not be taken by written consent.
THIRTEENTH: In the event any provision (or portion thereof) of this
Certificate of Incorporation shall be found to be invalid, prohibited, or
unenforceable for any reason, the remaining provisions (or portions thereof) of
this Certificate shall be deemed to remain in full force and effect, and shall
be construed as if such invalid, prohibited, or unenforceable provision had been
stricken herefrom or otherwise rendered inapplicable, it being the intent of the
Corporation and its stockholders that each such remaining provision (or portion
thereof) of this Certificate of Incorporation remain, to the fullest extent
permitted by law, applicable and enforceable as to all stockholders,
notwithstanding any such finding.
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<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
THE MRC GROUP, INC.
ARTICLE 1
Meetings of Stockholders
------------------------
Section 1.1 ANNUAL MEETING. The annual meeting of stockholders, for the
purpose of electing directors and transacting such other business as may come
before the meeting, shall be held on such date and at such time in each year as
may be fixed by the Board of Directors and stated in the notice of the meeting.
Section 1.2 SPECIAL MEETINGS. Special meetings of the stockholders may
be called by the chairman of the board, the president or a majority of the
directors acting with or without a meeting. Upon delivery to the chairman of the
board, the president or the secretary of the Corporation of a request in writing
for a special meeting of the stockholders by any person entitled to call such
meeting, the officer to whom the request is delivered shall give notice to the
stockholders of such meeting. Any such request shall specify the purposes and
the date and hour for such meeting. The date shall be at least 10 and not more
than 60 days after delivery of the request. If such officer does not call the
meeting within five days after any such request, the persons making the request
may call the meeting by giving notice as provided in Section 1.4 or by causing
it to be given by their designated representative. Only business specified in
the notice of the meeting shall be considered at any special meeting.
Section 1.3 PLACE OF MEETINGS. All meetings of stockholders shall be
held at such place or places, within or without the State of Delaware, as may be
fixed by the Board of Directors or, if not so fixed, as shall be specified in
the notice of the meeting.
Section 1.4 NOTICE OF MEETINGS. Except as otherwise expressly required
by law, unless waived, written notice of each meeting of stockholders, whether
annual or special, shall be given by personal delivery or mail to each
stockholder entitled to notice of the meeting, not less than 10 or more than 60
days before the date specified for the meeting. Such notice shall be given by
the chairman of the board, the president or the secretary or, in case of their
refusal or failure to do so, by the person or persons entitled to call such
meeting. If mailed, such notice shall be directed to the stockholder at his
address as it appears on the records of the Corporation. Notice is deemed to be
given when deposited in the United States mail in the manner set forth above or
when delivered personally. Except when expressly required by law, no publication
of any notice of a meeting of stockholders shall be required. If shares of stock
are transferred after
<PAGE> 2
notice has been given, notice need not be given to the transferee. A record date
may be fixed for determining the stockholders entitled to notice of any meeting
of stockholders, in accordance with the provisions of Section 1.11. Every notice
of a stockholders' meeting shall state the date, place and hour of the meeting
and, in the case of a special meeting, shall state briefly the purpose or
purposes of the meeting as may be specified by the person or persons requesting
or calling the meeting. Notice of the adjournment of a meeting need not be given
if the time and place to which it is adjourned are fixed and announced at the
meeting and the adjournment is for not more than 30 days. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 1.5 WAIVER OF NOTICE. Any stockholder, either before or after
any meeting, may waive any notice required by law, the Corporation's certificate
of incorporation (the "Certificate of Incorporation") or these by-laws (the
"By-laws"). Waivers must be in writing and filed with or entered upon the
records of the meeting. Notice of a meeting will be deemed to have been waived
by any stockholder who attends the meeting, either in person or by proxy, and
who does not, before or at the commencement of the meeting, protest the lack of
proper notice.
Section 1.6 QUORUM. The holders of shares of stock entitling them to
exercise a majority of the voting power of the Corporation entitled to vote at a
meeting, present in person or by proxy, shall constitute a quorum for the
transaction of business, except when a greater number is required by law, the
Certificate of Incorporation or the By-laws. In the absence of a quorum at any
meeting, or at any adjournment of the meeting, the holders of shares of stock
entitling them to exercise a majority of the voting power of the stockholders
present, either in person or by proxy, and entitled to vote may adjourn the
meeting from time to time. At any adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally called.
Section 1.7 ORGANIZATION. At each stockholders' meeting the chairman of
the board, or, in his absence or at his discretion, the president, or, in the
absence of both of them, a chairman chosen by the holders of shares of stock
entitling them to exercise a majority of the voting power of the stockholders
present either in person or by proxy shall act as chairman of the meeting; and
the secretary of the Corporation, or, in his absence, any assistant secretary,
or, in the absence of all of them, any person whom the chairman of the meeting
appoints, shall act as secretary of the meeting.
Section 1.8 ORDER OF BUSINESS. Unless otherwise determined by the Board
of Directors prior to the meeting, the chairman of any meeting of stockholders
shall determine the order of business and shall have the authority in his
discretion to regulate the conduct of any such meeting, including, without
limitation, by imposing restrictions on the persons (other than stockholders of
the Corporation or their duly appointed proxies) who may attend any such meeting
of stockholders, whether any stockholder or his proxy may be excluded from any
meeting of stockholders based upon any determination by the chairman of the
meeting, in his sole discretion, that any such person has unduly disrupted or is
likely to disrupt the proceedings thereat, and the circumstances in which any
person may make a statement or ask questions at any meeting of stockholders.
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<PAGE> 3
Section 1.9 PROXIES. Any stockholder who is entitled to attend or vote
at a stockholders' meeting, or to express consent or dissent to corporate action
in writing without a meeting, may be represented at such meeting or vote thereat
or execute consents or dissents and exercise any of his other rights by a proxy
or proxies appointed in a manner permitted by Section 212 of the Delaware
General Corporation Law or any similar statute which may hereafter be enacted.
Except as otherwise specifically provided in the By-laws, actions taken by proxy
shall be governed by the provisions of Section 212 of the Delaware General
Corporation Law or any similar statute that may hereafter be enacted.
Section 1.10 INSPECTORS OF ELECTIONS. Inspectors of elections shall be
appointed and act as provided in Section 231 of the Delaware General Corporation
Law or any similar statute that may hereafter be enacted.
Section 1.11 RECORD DATE. The Board of Directors may fix a record date
for any lawful purpose including, without limitation, the determination of
stockholders entitled to: (a) notice of, or to vote at, any meeting of
stockholders or any adjournment thereof; (b) consent to corporate action in
writing without a meeting to the extent permitted by law and the Certificate of
Incorporation; (c) receive payment of any dividend or other distribution or
allotment of any rights; or (d) exercise any rights in respect of any change,
conversion or exchange of stock. Such record date shall not precede the date
upon which the resolution fixing the record date is adopted. A record date
established under subsection (a) shall not be more than 60 or less than 10 days
before such meeting. If no such record date is established, then the record date
for such purposes shall be deemed to be at the close of business on the date
preceding the date upon which notice is given. A record date established under
subsection (b) shall not be more than 10 days after the date upon which the
resolution fixing the record date is adopted. If no such record date is
established, then the record date for such purposes, provided that no prior
action of the Board of Directors is otherwise required by law, shall be the
first date upon which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation. If prior action of the
Board of Directors is required and no record date is established, then the
record date for such purposes shall be the date upon which the Board of
Directors adopts the resolution taking such prior action. A record date
established under subsection (c) or (d), or for any other lawful action, shall
not be more than 60 days prior to such action. If no such record date is
established, then the record date for such purposes shall be the date upon which
the Board of Directors adopts the resolution relating to such action.
Section 1.12 LIST OF STOCKHOLDERS AT MEETING. The officer having charge
of the Corporation's stock ledger shall prepare and make, or cause to be
prepared and made, at least 10 days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote at such meeting. Such list
shall be arranged in alphabetical order showing the address of each stockholder
and the number of shares of stock registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
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<PAGE> 4
ARTICLE 2
Board of Directors
------------------
Section 2.1 GENERAL POWERS OF BOARD. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, except as otherwise provided by the laws of the State of Delaware,
the Certificate of Incorporation or the By-laws. In addition to the powers and
authorities expressly conferred by the By-laws, the Board may do all such lawful
things and acts as are not by statute, the Certificate of Incorporation or the
By-laws directed or required to be done by the stockholders.
Section 2.2 Number, Nomination and Election of Directors.
---------------------------------------------
(a) NUMBER. The Board of Directors from time to time
shall consist of not less than three or more than 15 members. The initial Board
of Directors shall consist of six members. The Board of Directors shall be
divided into three classes as nearly equal in number as possible, to be known as
Class I, Class II and Class III. Each class shall be elected to staggered terms.
The Board of Directors may increase or decrease the number of the members of the
Board of Directors within the above limitation of three to 15 members. No
reduction in the number of directors shall of itself have the effect of
shortening the term of any incumbent director. In case of any increase in the
number of directors, the additional directors shall be distributed among the
several classes as nearly equally as possible.
(b) ELECTION. The directors shall be elected at the
annual meeting of stockholders or if, not so elected, at a special meeting of
stockholders called for that purpose. At any meeting of stockholders at which
directors are to be elected, only persons nominated as candidates shall be
eligible for election, and the candidates receiving the greatest number of votes
entitled to be cast shall be elected.
(c) NOMINATIONS.
------------
(i) QUALIFICATIONS. Directors of the
Corporation need not be stockholders or residents of Delaware. No
person shall be appointed or elected a director of the Corporation
unless: (A) that person is elected to fill a vacancy in the Board of
Directors pursuant to Section 2.6; or (B) that person is nominated for
election as a director of the Corporation in accordance with this
Section 2.2(c).
(ii) NOMINATIONS BY THE BOARD. Nominations
of candidates for election as directors at any meeting of stockholders
called for election of directors (an "Election Meeting") may be made
pursuant to the Corporation's notice of annual meeting or otherwise by
the Board or a committee thereof.
(iii) NOMINATIONS BY STOCKHOLDERS.
Nominations other than pursuant to Section 2.2(c)(ii) shall be made not
fewer than 60 days prior to the date of an Election Meeting and may be
made only by a shareholder of record at the time the nomination is
made. At the request of the secretary, each proposed nominee shall
provide the Corporation with such information concerning himself as is
required under
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<PAGE> 5
the rules of the Securities and Exchange Commission to be included in
the Corporation's proxy statement soliciting proxies for the election
of that nominee as a director.
(iv) SUBSTITUTION OF NOMINEES. In the event
that a person is validly designated as a nominee in accordance with the
By-laws and shall thereafter become unable or unwilling to stand for
election to the Board of Directors, the Board of Directors or a
committee thereof may designate a substitute nominee upon delivery, not
fewer than five days prior to the date of an Election Meeting, of a
written notice to the secretary setting forth such information
regarding such substitute nominee as would have been required to be
delivered to the secretary pursuant to the By-laws had such substitute
nominee been initially proposed as a nominee. Such notice shall include
a signed consent to serve as a director of the Corporation, if elected,
of each such substitute nominee.
(v) COMPLIANCE WITH PROCEDURES. If the
chairman of the Election Meeting determines that a nomination of any
candidate for election as a director was not made in accordance with
the applicable provisions of the By-laws, he shall so declare to the
meeting and such nomination shall be void.
Section 2.3 TERM OF OFFICE OF DIRECTORS. The term of office of
directors shall be three years and the members of one class of directors shall
be elected annually to serve for that term; provided, however, that whenever
necessary, a director may be elected for a shorter term in order to provide for
a proper rotation of directors and, provided further, that Class I directors
shall initially be elected for a term expiring at the first annual meeting
following the effective date of the By-laws, Class II directors shall initially
be elected for a term expiring at the second annual meeting following the
effective date of the By-laws, and Class III directors shall be elected for a
term expiring at the third annual meeting following the effective date of the
By-laws.
Section 2.4 RESIGNATIONS. Any director may resign by giving written
notice to the chairman of the board, the president or the secretary of the
Corporation. Such resignation shall take effect at the time specified therein
and, unless otherwise specified, the acceptance of a resignation shall not be
necessary to make it effective.
Section 2.5 REMOVAL OF DIRECTORS. Any director or the entire Board of
Directors of the Corporation may be removed, with cause, by the affirmative vote
of the holders of at least two-thirds of the shares of stock then entitled to
vote in the election of directors; provided that if at least two-thirds of the
directors then in office recommend to the stockholders that a director be
removed, then such director may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the shares of stock
then entitled to vote in the election of directors.
Section 2.6 VACANCIES. Vacancies on the Board of Directors caused by
death, resignation, removal or other cause and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by action of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. Each director so chosen shall hold
office until the next election of the class of directors for which such director
was chosen and until a successor is duly elected and qualified.
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<PAGE> 6
Section 2.7 COMPENSATION AND EXPENSES. The directors shall be entitled
to such compensation, if any, on a monthly or annual basis, or on the basis of
meetings attended, or on both bases, as the Board of Directors may from time to
time determine and establish. No director shall be precluded from serving the
Corporation as an officer or in any other capacity, or from receiving
compensation for so serving. Directors may be reimbursed for their reasonable
expenses incurred in the performance of their duties, including the expense of
traveling to and from meetings of the Board and any committees thereof, provided
that such reimbursement is authorized by the Board of Directors. The Board may
authorize such reimbursement by either a general resolution specifying the
general type and nature of expenses to be reimbursed or by resolution setting
forth specific expenses to be reimbursed.
Section 2.8 PLACE OF MEETINGS. Meetings of the Board shall be held at
such place or places, within or without the State of Delaware, as may from time
to time be fixed by the Board of Directors or as shall be specified or fixed in
the notice of the meeting.
Section 2.9 REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held, without notice, at such times and places, within or
without the State of Delaware, as the Board of Directors may from time to time
determine.
Section 2.10 SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the chairman of the board, or by the
president, or by any two directors.
Section 2.11 NOTICES OF MEETINGS. Every director shall furnish the
secretary of the Corporation with an address at which notices of meetings and
all other corporate notices may be served on or mailed to such director. Unless
waived before, at, or after the meeting as hereinafter provided, and except as
provided in Section 2.9, notice of each Board meeting shall be given by the
chairman of the board, the president, the secretary, an assistant secretary or
the persons calling such meeting, to each director in any of the following ways:
(a) By orally informing such director of the meeting
in person or by telephone not later than 24 hours before the date of the
meeting.
(b) By delivering written notice to such director not
later than 24 hours before the date of the meeting.
(c) By mailing written notice to such director, or by
sending notice to such director by facsimile telecommunication, telegram,
cablegram, or radiogram, postage or other costs prepaid, addressed to such
director at the address furnished by such director to the secretary of the
Corporation, or to such other address as the person sending the notice shall
know to be correct or, in the case of a facsimile telecommunication, to the
telephone number furnished by the director to the Corporation for such purpose
or to the facsimile telephone number at which the director is known to be
present. Such notice shall be posted or dispatched a sufficient length of time
before the meeting so that in the ordinary course of the mail or the
transmission of facsimiles, telegrams, cablegrams, or radiograms, delivery would
normally be made to such director not later than 24 hours before the date of the
meeting.
Unless otherwise required by the Certificate of Incorporation, the laws
of the State of Delaware or the By-laws, the notice of any meeting need not
specify the purposes of the meeting.
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<PAGE> 7
Notice of any meeting of the Board may be waived by any director, either before,
at, or after the meeting, in writing, or by facsimile telecommunication,
telegram, cablegram, or radiogram. In addition, notice of a meeting will be
deemed to have been waived by any director who attends the meeting and who does
not, before or at the commencement of the meeting, protest the lack of proper
notice.
Section 2.12 NOTICE OF ADJOURNMENT OF MEETING. Notice of adjournment of
a meeting need not be given if the time and place to which it is adjourned are
fixed and announced at the meeting.
Section 2.13 QUORUM AND MANNER OF ACTING. A majority of the total
number of directors fixed or established pursuant to Section 2.2 as of the time
of any meeting of the Board of Directors must be present at such meeting in
order to constitute a quorum for the transaction of business, provided that
meetings of the directors may include participation by directors through any
conference telephone or similar communications equipment if all directors
participating can hear each other, and such participation in a meeting shall
constitute presence at such meeting. Unless otherwise required by the
Certificate of Incorporation, the laws of the State of Delaware or the By-laws,
the act of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the Board of Directors. In the absence of a
quorum, a majority of those present may adjourn a meeting from time to time
until a quorum is present. Notice of an adjourned meeting need not be given.
Section 2.14 ORDER OF BUSINESS. The order of business at meetings of
the Board shall be such as the chairman of the meeting may prescribe or follow;
subject, however, to his being overruled with respect thereto by a majority of
the members of the Board present.
Section 2.15 WRITTEN CONSENT OF DIRECTORS IN LIEU OF MEETING. Any
action required or permitted to be taken at any meeting of the Board of
Directors or any committee of the Board may be taken without a meeting if all
members of the Board or committee, as the case may be, consent to such action in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
Section 2.16 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may
from time to time, by resolution passed by a majority of the whole Board,
designate an executive committee and any other committee or committees of
directors, each to consist of one or more directors of the Corporation. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
other than that of filling vacancies in the Board of Directors or in any
committee of directors; provided that, except as otherwise provided by the
Delaware General Corporation Law, no such committee shall have any power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution or amending these By-laws. Unless the directors'
resolution establishing a committee expressly provides, no committee shall have
the power or authority to declare a dividend, to authorize the issuance of
shares of stock or to adopt a certificate of ownership and merger. Each
committee shall serve at
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the pleasure of the directors, shall act only in the intervals between meetings
of the Board of Directors, and shall be subject to the control and direction of
the Board of Directors. The directors may adopt or authorize the committees to
adopt provisions with respect to the government of any such committee or
committees that are not inconsistent with applicable law, the Certificate of
Incorporation or the By-laws. An act or authorization of any act by any such
committee within the authority properly delegated to it by the directors shall
be as effective for all purposes as the act or authorization of the directors.
Any right, power or authority conferred in the By-laws to the "directors" or to
the "Board of Directors" shall also be deemed conferred upon each committee or
committees of directors to which any such right, power or authority is delegated
(expressly, or by general delegation, or by necessary implication) by the Board
of Directors.
ARTICLE 3
Officers
--------
Section 3.1 NUMBER AND TITLES. The officers of the Corporation shall be
a chairman of the board, if elected, a chief executive officer, if elected, a
president, one or more vice presidents, if elected, a secretary, one or more
assistant secretaries, if elected, a treasurer, and one or more assistant
treasurers, if elected. If there is more than one vice president, the Board may,
in its discretion, establish designations for the vice presidencies so as to
distinguish among them as to their functions or their order, or both. Any two or
more offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument is required by law, the Certificate of Incorporation or the By-laws
to be executed, acknowledged or verified by two or more officers.
Section 3.2 ELECTION, TERMS OF OFFICE, QUALIFICATIONS AND COMPENSATION.
The officers shall be elected by the Board of Directors. Each officer shall be
elected for an indeterminate term and shall hold office at the pleasure of the
Board of Directors. The Board of Directors may hold annual elections of
officers; in that event, each such officer shall hold office until a successor
is elected and qualified or until such officer's earlier resignation or removal.
The chairman of the board, if one is elected, shall be a director, but no other
officer need be a director. The other qualifications of all officers shall be
such as the Board of Directors may establish from time to time. The Board of
Directors or a committee appointed by it shall fix the compensation, if any, of
each officer; provided, however, that subject to the right of the Board of
Directors to modify or rescind such action or reserve for the Board or a
committee thereof the right to fix the compensation of all officers or any
categories of officers, the chief executive officer of the Corporation may fix
the compensation of all officers subordinate to him.
Section 3.3 ADDITIONAL OFFICERS, AGENTS, ETC. In addition to the
officers designated in Section 3.1, the Corporation may have such other
officers, agents and committees as the Board of Directors may deem necessary and
may appoint, each of whom or each member of which shall hold office for such
period, have such authority, and perform such duties as may be provided in the
By-laws or as may be determined by the Board from time to time. The Board of
Directors may delegate to any officer or committee the power to appoint any
subordinate officer,
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agent or committee. In the absence of any officer, or for any other reason the
Board of Directors may deem sufficient, the Board of Directors may delegate, for
a designated period, the powers and duties, or any of them, of such officer to
any other officer or to any director.
Section 3.4 REMOVAL. Any officer may be removed, either with or without
cause, at any time, by the Board of Directors by a vote of two-thirds of the
directors present at a meeting at which a quorum is present. Any officer
appointed by an officer or committee to which the Board shall have delegated the
power of appointment may be removed, either with or without cause, by the
committee or superior officer (including successors) who made the appointment or
by any committee or officer upon whom such power of removal may be conferred by
the Board of Directors. In addition, subject to the right of the Board of
Directors to modify or rescind such action, the chief executive officer of the
Corporation shall have the authority to remove officers of the Corporation who
are subordinate to him.
Section 3.5 RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors, the chairman of the board, the chief
executive officer, the president or the secretary. Any such resignation shall
take effect at the time specified in such notice and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective.
Section 3.6 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise shall be filled in the
manner prescribed for regular appointments or elections to such office.
ARTICLE 4
Duties of Officers
------------------
Section 4.1 CHAIRMAN OF THE BOARD. The chairman of the board, if one be
elected, shall preside at all meetings of the stockholders and of the Board of
Directors and shall have such other powers and duties as the Board of Directors
may prescribe. The chairman of the board shall have authority to execute bonds,
mortgages, notes, agreements, deeds, certificates for shares and other
instruments requiring an officer's signature on behalf of the Corporation,
except where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the Corporation.
Section 4.2 PRESIDENT. The president shall, subject to the powers of
the Board of Directors and the chief executive officer (provided he is not the
chief executive officer), exercise supervision over the business of the
Corporation and over its several officers, agents and employees and shall see
that all orders and resolutions of the Board of Directors and the chief
executive officer (provided he is not the chief executive officer) are carried
into effect. The president shall have authority to execute bonds, mortgages,
notes, agreements, deeds, certificates for shares and other instruments
requiring an officer's signature on behalf of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some
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other officer or agent of the Corporation. The president shall have such other
powers and perform such other duties as the Board of Directors, the chief
executive officer (provided he is not the chief executive officer) or the
By-laws may, from time to time, prescribe.
Section 4.3 CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate the chairman of the board or the president as chief executive officer.
The chief executive officer shall have, subject to the powers of the Board of
Directors, charge of the overall general direction of the business and affairs
of the Corporation, control of the general policies relating to all aspects of
the Corporation's business operations, and the power to fix the compensation of
and remove subordinate officers as provided in Sections 3.2 and 3.4,
respectively. The chief executive officer may appoint and discharge agents and
employees and perform such other duties as are incident to such office. The
chief executive officer shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or as may be provided in
the By-laws. In the absence or disability of the officer designated as chief
executive officer, the other aforementioned officer (chairman of the board or
president) shall perform any and all duties of the chief executive officer.
Section 4.4 VICE PRESIDENTS. The vice presidents, if they are elected,
shall have such powers and duties as may from time to time be assigned to them
by the Board of Directors, the chief executive officer or the president. At the
request of the president or, in the case of his absence or disability, the vice
president designated by the president or, in the absence of such designation,
the vice president designated by the Board of Directors or the chief executive
officer shall perform all the duties of the president and, when so acting, shall
have all the powers of the president. The authority of vice presidents to
execute bonds, mortgages, notes, agreements, deeds, certificates for shares and
other instruments shall be coordinated with like authority of the president.
Section 4.5 SECRETARY. The secretary shall keep minutes of all the
proceedings of the stockholders and Board of Directors and shall make proper
record of the same, which shall be attested by him; shall have authority to
execute and deliver certificates as to any of such proceedings and any other
records of the Corporation; shall have authority to sign all certificates for
shares and all deeds, mortgages, bonds, agreements, notes and other instruments
to be executed by the Corporation which require his signature; shall give notice
of meetings of stockholders and directors; shall produce, on request, at each
meeting of stockholders a certified list of stockholders arranged in
alphabetical order in accordance with Section 1.12; shall keep such books and
records as may be required by law or by the Board of Directors; and, in general,
shall perform all duties incident to the office of secretary and such other
duties as may from time to time be assigned to him by the Board of Directors,
the chief executive officer or the president.
Section 4.6 TREASURER. The treasurer shall have general supervision of
all finances; he shall receive and have in charge all money, bills, notes,
deeds, leases, mortgages and similar property belonging to the Corporation and
shall do with the same as may from time to time be required by the Board of
Directors. He shall cause to be kept adequate and correct accounts of the
business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, stated capital and shares
of stock, together with such other accounts as may be required, and upon the
expiration of his term of office shall turn over to his successor or to the
Board of Directors all property, books, papers and money of the Corporation in
his
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hands; and he shall have such other powers and duties as may from time to time
be assigned to him by the Board of Directors, the chief executive officer or the
president.
ARTICLE 5
Shares of Stock and Their Transfer
----------------------------------
Section 5.1 CERTIFICATES FOR SHARES OF STOCK. Every owner of one or
more shares of stock in the Corporation shall be entitled to a certificate or
certificates, which shall be in such form as may be approved by the Board of
Directors, certifying the number and class of shares of stock in the Corporation
owned by him. The certificates for the respective classes of such shares of
stock shall be numbered in the order in which they are issued and shall be
signed in the name of the Corporation by the chairman of the board, the
president or a vice president and by the secretary, an assistant secretary, the
treasurer or assistant treasurer. All or any of the signatures on a certificate
may be a facsimile. Even though any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the Corporation with the
same effect as if such person was still such officer, transfer agent or
registrar at the date of issue. A record shall be kept of the name of the owner
or owners of the shares of stock represented by each such certificate and the
number of shares of stock represented thereby, the date thereof and, in case of
cancellation, the date of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be cancelled and no new certificate
or certificates shall be issued in exchange for any existing certificates until
such existing certificates shall have been so cancelled, except in cases
provided for in Section 5.5.
Section 5.2 TRANSFER AGENTS, REGISTRARS AND DIVIDEND DISBURSING AGENTS.
The Board of Directors may from time to time by resolution appoint one or more
incorporated transfer agents and registrars (which may or may not be the same
corporation) for the shares of the Corporation, and the Board of Directors from
time to time by resolution may appoint a dividend disbursing agent to disburse
any and all dividends authorized by the Board of Directors payable upon the
shares of the Corporation.
Section 5.3. TRANSFER OF SHARES OF STOCK. Any certificate for shares of
stock of the Corporation shall be transferable in person or by attorney upon the
surrender of the certificate to the Corporation or any transfer agent for the
Corporation (for the class of shares represented by the certificate
surrendered), properly endorsed for transfer and accompanied by such assurances
as the Corporation or its transfer agent may require as to the genuineness and
effectiveness of each necessary endorsement. The person in whose name any shares
stand on the books of the Corporation shall, to the fullest extent permitted by
law, be conclusively deemed to be the unqualified owner and holder of the shares
and entitled to exercise all rights of ownership, for all purposes relating to
the Corporation. Neither the Corporation nor any transfer agent of the
Corporation shall be required to recognize any equitable interest in, or any
claim to, any such shares on the part of any other person, whether disclosed on
the certificate or any other way, nor shall they be required to see to the
performance of any trust or other obligation.
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Section 5.4 REGULATIONS. The Board of Directors may make such rules and
regulations as it may deem expedient or advisable (not inconsistent with the
By-laws) concerning the issue, transfer and registration of certificates for
shares of stock. It may appoint one or more transfer agents or one or more
registrars, or both, and may require all certificates for shares to bear the
signature of either or both.
Section 5.5 LOST, DESTROYED OR STOLEN CERTIFICATES. A new certificate
or certificates may be issued in place of any certificate theretofore issued by
the Corporation which is alleged to have been lost, destroyed or wrongfully
taken upon: (a) the execution and delivery to the Corporation by the person
claiming the certificate to have been lost, destroyed or wrongfully taken of an
affidavit of that fact in form satisfactory to the Corporation, specifying
whether or not the certificate was endorsed at the time of such alleged loss,
destruction or taking and (b) the receipt by the Corporation of a surety bond,
indemnity agreement or any other assurances satisfactory to the Corporation and
to all transfer agents and registrars of the class of shares of stock
represented by the certificate against any and all losses, damages, costs,
expenses, liabilities or claims to which they or any of them may be subjected by
reason of the issue and delivery of such new certificate or certificates or with
respect to the original certificate.
ARTICLE 6
Indemnification and Insurance
-----------------------------
Section 6.1 INDEMNIFICATION IN NONDERIVATIVE ACTIONS. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party, to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by or in the right of the Corporation, by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
Section 6.2 INDEMNIFICATION IN DERIVATIVE ACTIONS. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses,
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including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless, and only to the extent that,
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability,
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses as the Court of Chancery
or such other court shall deem proper.
Section 6.3 INDEMNIFICATION AS MATTER OF RIGHT. To the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection therewith.
Section 6.4 DETERMINATION OF CONDUCT. Any indemnification under
Sections 6.1 and 6.2, unless ordered by a court, shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 6.1 and 6.2. Such determination shall be made (a) by the Board of
Directors by a majority vote of a quorum consisting of directors of the
Corporation who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (c)
by the stockholders.
Section 6.5 ADVANCE PAYMENT OF EXPENSES. Expenses, including attorneys'
fees, incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately shall be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article 6.
Such expenses, including attorneys' fees, incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
Section 6.6 NONEXCLUSIVITY. The indemnification and advancement of
expenses provided by or granted pursuant to this Article 6 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Section 6.7 LIABILITY INSURANCE. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him
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<PAGE> 14
against such liability under the provisions of this Article 6 or of Section 145
of the Delaware General Corporation Law.
Section 6.8 CONSOLIDATIONS OR MERGERS. For purposes of this Article 6,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article 6
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
Section 6.9 MEANING OF CERTAIN TERMS. For purposes of this Article 6,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article 6.
Section 6.10 SUCCESSORS. The indemnification and advancement of
expenses provided by or granted pursuant to this Article 6 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
ARTICLE 7
Securities Held by the Corporation
Section 7.1 TRANSFER OF SECURITIES OWNED BY THE CORPORATION. All
endorsements, assignments, transfers, share powers or other instruments of
transfer of securities standing in the name of the Corporation shall be executed
for and in the name of the Corporation by the chairman of the board or by the
president or by any vice president or by the secretary or treasurer or by any
additional person or persons as may be thereunto authorized by the Board of
Directors.
Section 7.2 VOTING SECURITIES HELD BY THE CORPORATION. The chairman of
the board, the president, any vice president or the secretary or treasurer, in
person or by another person thereunto authorized by the Board of Directors, in
person or by proxy or proxies appointed by him, shall have full power and
authority on behalf of the Corporation to vote, act and execute consents,
waivers and releases with respect to any securities issued by other corporations
which the Corporation may own.
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ARTICLE 8
Miscellaneous
-------------
Section 8.1 EXAMINATION OF BOOKS BY STOCKHOLDERS. Any stockholder, in
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during usual business hours to
inspect for any proper purpose the Corporation's stock ledger, a list of its
stockholders and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent shall be the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office in the State of Delaware or at its principal place of business.
Section 8.2 SEAL. The Board of Directors may adopt and alter a
corporate seal and use the same or a facsimile thereof, but failure to affix the
corporate seal, if any, shall not affect the validity of any instrument.
Section 8.3 FISCAL YEAR. The fiscal year of the Corporation shall be
designated and may be changed from time to time by the Board of Directors. In
the absence of any such designation the fixed year of the Corporation shall
commence on January 1 of each year.
Section 8.4 AMENDMENT OF BY-LAWS. The By-laws may be amended or
repealed and new by-laws adopted at any meeting of the Board of Directors;
provided that notwithstanding anything in the By-laws to the contrary, the
provisions set forth in this Section, Article 6, and Sections 1.2, 2.2, 2.3, 2.5
and 2.6 may not be amended or repealed in any respect, except as follows: (a) by
the affirmative vote of the holders of shares of stock entitling them to
exercise a majority of the voting power on such proposal, if such proposal was
previously approved by at least two-thirds of the directors; or (b) by the
affirmative vote of the holders of shares of stock entitling them to exercise at
least two-thirds of the voting power on such proposal. If any amendment or new
by-laws are adopted without a meeting of the stockholders, the secretary shall
mail a copy of the amendment or new by-laws to each stockholder who would have
been entitled to vote on the proposal but who did not participate in the
adoption of the amendment or new by-laws.
Section 8.5 INCONSISTENT PROVISIONS. In the event that any provision of
the By-laws is or becomes inconsistent with any provision of the Certificate of
Incorporation, the Delaware General Corporation Law or any other applicable law,
the provision of the By-laws shall not be given any effect to the extent of such
inconsistency, but shall otherwise be given full force and effect.
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<PAGE> 1
Exhibit 4.1
NARRATIVE DESCRIPTION OF THE MRC GROUP INC.'S STOCK CERTIFICATE
Decorative engraving covers approximately 1" around the entire
border of the stock certificate (the "Certificate"). The upper right and
left-hand corners of the Certificate contain additional decorative engraving
that extends about 1/2" beyond the border.
Centered about 1-1/2" below the top edge of the Certificate is
the Company's logo with the words just below the logo in large type "The MRC
Group, Inc." Approximately 1/2" below the logo and the name are the words
"INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE." Centered in the top
third of the Certificate to the left of the logo is an engaged box approximately
2" across and 1" high with the word "NUMBER" on the top edge of the box.
Immediately below the box are the words "COMMON STOCK, $.01 PAR VALUE." Centered
in the top third of the Certificate to the right of the logo is an engaged box
approximately 2" across and 1" high with the word "SHARES" on the top edge of
the box. Immediately below the box are the words "CUSIP 55345N 10 7" and "SEE
REVERSE FOR CERTAIN DEFINITIONS."
Centered in the middle on the face of the Certificate is a
larger shaded box (approximately 3" x 8-1/2") and the text "THIS CERTIFIES THAT"
in the top right corner of the shaded box and the text "is the record holder of"
in the bottom right corner of the shaded box.
Below the shaded box is the following text:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
THE MRC GROUP, INC. (the "Corporation"), a Delaware corporation. The shares
represented by this certificate are transferable only on the stock transfer
books of the Corporation by the holder of record hereof, or by the holder's duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. The Corporation has more than one class of stock
authorized for issuance. This certificate and the shares represented hereby are
issued and held subject to each of the laws of the State of Delaware, the
certificate of incorporation of the Corporation and the by-laws of the
Corporation, as each may from time to time be amended, modified or supplemented.
This certificate is not valid until countersigned and registered by the
Corporation's Transfer Agent and Registrar. IN WITNESS WHEREOF, the Corporation
has caused this certificate to be executed by the facsimile signatures of its
duly authorized officers and has caused a facsimile of its corporate seal to be
hereunto affixed.
Dated [blank]
/s/ STEVEN BELL /s/ EDWARD L SAMEK
--------------------- ---------------------------
Secretary Chairman of the Board of Directors
Centered in the bottom of the Certificate (approximately
1-1/2" in diameter) is the circular corporate seal of Company containing the
text: "The MRC Group, Inc." "Corporate Seal" "Delaware" and "1998."
On the bottom half of the Certificate just off the right hand
edge of the Certificate in small letters the following words appear vertically:
"Countersigned and Registered:" "National City Bank (Cleveland, Ohio)" "Transfer
Agent and Registrar," and "Authorized Signature".
<PAGE> 2
The back of the Certificate contains the following text:
The MRC Group, Inc.
A statement of the powers, rights, preferences, privileges and
restrictions granted to or imposed upon the respective classes or series of
shares of stock of the Corporation, and upon the holders thereof as established
by the certificate of incorporation or by any certificate of designations, and
the number of shares constituting each series or class and the designations
thereof, may be obtained by any stockholder of the Corporation upon request and
without charge from the Secretary of the Corporation at the principal office of
the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- _____ Custodian _____
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act ______________________.
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
- --------------------------------------------------------------------------------
(PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE)
- --------------------------------------------------------------------------------
(PLEASE PRINT TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _______________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _______________________________
-----------------------------
NOTICE: THE SIGNATURES TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE,
IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By _______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
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<PAGE> 1
Exhibit 10.1
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
By and Between
MEDIFAX, INC.,
MEDICAL RECORDS CORP.
and
SUMMIT BANK
-----------------------------------
Dated: July ___, 1996
-----------------------------------
<PAGE> 2
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
-------------------------------------------------------
THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("AGREEMENT") is made effective the day of July, 1996, by and between
MEDIFAX, INC., a Missouri corporation ("MEDIFAX"), MEDICAL RECORDS CORPORATION,
an Ohio corporation ("MRC"), and SUMMIT BANK, as successor in interest to First
Valley Bank ("BANK"). Medifax and MRC are sometimes collectively referred to
herein as the "BORROWERS" and each individually as "BORROWER".
Capitalized terms used herein without separate definition will have the
respective meanings specified therefor in ARTICLE 14 of this Agreement.
BACKGROUND
----------
A. By an Amended and Restated Loan and Security Agreement dated
December 23, 1994, by and between Medifax, Secrephone, Ltd. ("SECREPHONE") and
Bank, as amended by a First Amendment dated August 24, 1995 (collectively, the
"EXISTING LOAN AGREEMENT"), Bank agreed to extend to Medifax and Secrephone,
INTER ALIA, (i) a $5,000,000.00 line of credit (the "EXISTING LINE") as
evidenced by Medifax's and Secrephone's amended and restated promissory note
dated August 24, 1995 (the "EXISTING LINE NOTE") and (ii) a $5,000,000.00 term
loan (the "EXISTING TERM LOAN") evidenced by Medifax's and Secrephone's
promissory note dated August 24, 1995 (the "EXISTING TERM NOTE").
B. Medifax's and Secrephone's obligations under the Existing Loan
Agreement, the Existing Line Note and the Existing Term Note are secured, inter
alia, by a lien on and security interest in all Medifax's and Secrephone's
present and future tangible and intangible assets.
C. For purposes of this Agreement, the term "EXISTING LOAN DOCUMENTS"
means the Existing Loan Agreement, the Existing Line Note, the Existing Term
Note, a certain Subordination Agreement dated December 2, 1994, by and between
Medifax, Secrephone, Edward L. Samek and Bank (the "SUBORDINATION AGREEMENT")
and any and all documents related thereto, as the same have been amended,
supplemented and/or modified.
D. On December 31, 1995, Secrephone and Medifax merged, with Medifax as
the surviving corporation. Medifax continues to do business under the trade name
"Secrephone."
E. On July 19, 1996, Medifax purchased all the issued and outstanding
capital stock of MRC pursuant to the terms and conditions of a certain Transfer
Agreement and Plan of Section 351 Exchange (the "PURCHASE AGREEMENT").
F. At Borrowers' request, Bank has agreed to amend and restate the
Existing Loan Documents, INTER ALIA, to (i) make MRC a co-borrower, (ii)
increase the amount of the Existing
<PAGE> 3
Line and the Existing Term Loan, (iii) amend certain covenants including the
financial covenants, and (iv) extend the maturity of the Existing Line.
TERMS
-----
In consideration of the terms and conditions contained herein, and of
any loans or extensions of credit now or hereafter made to or for the benefit of
Borrowers by Bank, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. GENERAL ACKNOWLEDGMENTS.
1.1. CONFIRMATION OF BACKGROUND. Medifax hereby ratifies, confirms and
acknowledges that the statements contained in the foregoing Background are true
and complete in all material respects and that the Existing Loan Documents are
valid, binding and in full force and effect as of the date hereof and fully
enforceable against Medifax and its assets in accordance with the terms thereof.
1.2. VALIDITY OF LIENS. All liens, security interests, rights and
remedies granted to Bank in the Existing Loan Documents are hereby renewed,
confirmed and continued, and shall also secure the performance by Borrowers of
their respective obligations hereunder.
1.3. CHALLENGE TO ENFORCEMENT. Medifax acknowledges and agrees that it
has no defense, set-off, counterclaim or challenge against the payment of any
sums owing under the Existing Loan Documents.
1.4. NO SATISFACTION. Borrowers acknowledge and agree that, except as
expressly provided herein, neither this Agreement nor any other agreement
entered in connection herewith or pursuant to the terms hereof shall be deemed
or construed to be a compromise, satisfaction, reinstatement, accord and
satisfaction, novation or release of any of the Existing Loan Documents, or any
rights or obligations thereunder, or a waiver by Bank of any of its rights under
the Existing Loan Documents or at law or in equity.
2. THE LINE; TERM LOAN; USE OF PROCEEDS. Subject to the terms and conditions of
this Agreement, Bank will make the following credit facilities available to
Borrowers:
2.1. LINE OF CREDIT. Bank will establish for Borrowers for and during
the period following the Closing and until June 30, 1998 (the "CONTRACT
PERIOD"), subject to the terms and conditions hereof, a line of credit (the
"LINE") pursuant to which Bank will from time to time make loans or extensions
of credit to Borrowers in an outstanding principal amount of up to the lesser
of: (a) an amount up to eighty percent (80%) of the amount of Borrowers'
Eligible Receivables, or (b) Ten Million Dollars ($10,000,000.00). Within the
limitations set forth above, Borrowers may borrow, repay and reborrow under the
Line. The Line shall be subject to all terms and conditions set forth in all of
the Loan Documents (as hereafter defined) which
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terms and conditions are incorporated herein. Maintenance of the Line shall be
conditioned on Borrowers' continued compliance with the terms and conditions
hereof and of the Loan Documents. Borrowers' obligation to repay the sums
advanced under the Line shall be evidenced by Borrowers' second amended and
restated promissory note (the "LINE NOTE") in the face amount of Ten Million
Dollars ($10,000,000.00) which shall be in the form attached hereto as EXHIBIT
"A". The Line Note amends and restates, but does not satisfy or repay, Medifax's
and Secrephone's obligations under the Existing Line Note. The Line shall be
subject to review and renewal for a term beyond the stated Contract Period, at
the sole discretion of Bank. In the event the Bank elects not to renew the Line,
Bank shall give Borrowers at least one hundred twenty (120) days written notice
of such election. If the Bank elects not to renew the Line, the Line shall
expire at the end of the Contract Period.
2.2. TERM LOAN. Bank will lend to Borrowers and Borrowers will borrow
from Bank Seven Million Dollars ($7,000,000.00) (the "TERM LOAN"). Borrowers'
obligation to repay the Term Loan shall be evidenced by Borrowers' amended and
restated promissory note in the face amount of Seven Million Dollars
($7,000,000.00) (the "TERM NOTE"), which shall be in the form attached hereto as
EXHIBIT "B", with the blanks appropriately filled in. The Term Note amends and
restates, but does not repay or satisfy, Borrowers' obligations under the
Existing Term Note. Hereunder, the Line Note and the Term Note are sometimes
collectively referred to as the "NOTES" and the Line and the Term Loan are
sometimes collectively referred to as the "LOANS".
2.3. USE OF PROCEEDS.
(a) LINE PROCEEDS. Borrowers agree to use the proceeds of the Line
for working capital purposes of Borrowers. Except as otherwise provided
hereunder, the Line proceeds may not be utilized to make loans, advance funds as
debt or equity to any Subsidiary, or purchase stock or a substantial portion of
the assets of any corporation, partnership or other business entity or any
division thereof. Notwithstanding the foregoing, nothing contained in the
Section shall be deemed to prohibit any inter-company advances and payments
between the Borrowers.
(b) TERM LOAN PROCEEDS. Borrowers agree to use the proceeds of the
Term Loan to (i) refinance existing indebtedness of MRC to The Huntington
National Bank and (ii) restate certain term indebtedness of Medifax to Bank.
(c) NO ADVANCES FOR MARGIN SECURITY. Borrowers shall not carry or
purchase with the proceeds of the Line or the Term Loan any "MARGIN SECURITY"
within the meaning of Regulations U, G, T or X of the Board of Governors of the
Federal Reserve System.
2.4. METHOD OF ADVANCES. Bank may make proceeds of the Line available
to a Borrower by (a) crediting such proceeds to that Borrower's deposit account
with Bank, or (b) upon receipt of written instructions from the Borrowers, by
wiring transfer to a deposit account
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maintained by any Borrower at another financial institution. Bank's records
relating to such deposit account together with Bank's records showing other
advances made to Borrowers pursuant to this Agreement (including all wire
transfers made pursuant to this Section) and all repayments hereunder shall be
conclusive evidence of the balance due under the Line, absent manifest error.
2.5. CLOSING. Execution and delivery of this Agreement and all
documents and agreements required hereunder will take place on or before July
31, 1996 or on such later date as Borrowers and Bank may agree (the "CLOSING").
2.6. INTEREST ON THE LINE. Interest will accrue on cash advances under
the Line from date of advance until final payment thereof at one or more of the
following rates as selected by Borrowers from time to time:
(a) LINE BASE RATE. The Line Base Rate in effect from time to time
(such interest rate to change immediately upon any change in the Base Rate); or
(b) LIBOR. By giving Notification, Borrowers may request to have
all or a portion of the outstanding principal of the Line as hereinafter
permitted accrue interest at a rate equal to the Line LIBOR Rate as follows: (i)
with respect to the principal amount of any advance under the Line, from the
date of such advance until the end of the Line Rate Period specified in the
Notification; and/or (ii) with respect to the principal amount of any portion of
the Line outstanding and earning interest at a Line LIBOR Rate at the time of
the Notification related to such principal amount, from the expiration of the
then current Line Rate Period related to such principal amount until the end of
the Line Rate Period specified in the Notification; and/or (iii) with respect to
all or any portion of the principal amount of the Line outstanding and earning
interest at the Line Base Rate at the time of Notification, from the date set
forth in the Notification until the end of the Line Rate Period specified in the
Notification.
(c) MULTIPLE RATES. Borrowers understand and agree that: (i)
subject to the provisions of this Agreement, the Line Base Rate and the Line
LIBOR Rate may apply simultaneously to different parts of the outstanding
principal balance of the Line, (ii) the Line LIBOR Rate applicable to any
portion of outstanding principal of the Line may be different from the Line
LIBOR Rate applicable to any other portion of outstanding principal of the Line,
(iii) portions of the Line bearing interest at the Line LIBOR Rate must be in a
minimum increment of Five Hundred Thousand Dollars ($500,000.00) and multiples
of One Hundred Thousand Dollars ($100,000.00), (iv) as of any one time or from
time to time, there will be no more than four (4) different rates of interest
applicable to advances and loans made under the Line (for example, three (3)
Line LIBOR Loans bearing different Line LIBOR Rates and all remaining
outstandings bearing interest at the Line Base Rate); and (v) Bank shall have
the right to terminate any Line Rate Period and the Line LIBOR Rate applicable
thereto, prior to maturity of such Line Rate Period (without any prepayment
penalty payable by Borrowers as a result of such termination), if Bank
determines in good faith (which determination shall be conclusive)
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<PAGE> 6
that continuance of such interest rate has been made unlawful by any law,
statute, rule or regulation, to which Bank may be subject, in which event the
principal to which such terminated Line Rate Period relates thereafter shall
earn interest at the Line Base Rate.
2.7. INTEREST ON THE TERM LOAN. Interest will accrue on the outstanding
principal balance of the Term Loan from date of advance until final payment
thereof at one of the following rates as selected by Borrowers from time to
time:
(a) TERM BASE RATE. The Term Base Rate in effect from time to time
(such interest rate to change immediately upon any change in the Base Rate); or
(b) LIBOR. By giving Notification, Borrowers may request to have
the outstanding principal balance of the Term Loan as hereinafter permitted
accrue interest at a rate equal to the Term LIBOR Rate as follows: (i) with
respect to the initial advance of funds under the Term Loan, from the date of
such advance until the end of the Term Rate Period specified in the
Notification; and/or (ii) if the Term Loan is accruing interest at a Term LIBOR
Rate, from the expiration of the then current Term Rate Period until the end of
the Term Rate Period specified in the Notification; and/or (iii) if the Term
Loan is accruing interest at the Term Base Rate, from the date set forth in the
Notification until the end of the Term Rate Period specified in the
Notification.
(c) TERMINATION OF LIBOR. Bank shall have the right to terminate
any Term Rate Period and the Term LIBOR Rate applicable thereto, prior to
maturity of such Term Rate Period (without any prepayment penalty payable by
Borrowers as a result of such termination), if Bank determines in good faith
(which determination shall be conclusive) that continuance of such interest rate
has been made unlawful by any law, statute, rule or regulation, to which Bank
may be subject, in which event the principal to which such terminated Term Rate
Period relates thereafter shall earn interest at the Term Base Rate.
2.8. DEFAULT INTEREST. Interest will accrue on the principal balance of
the Loans after the occurrence of an Event of Default at a rate which is two and
one-half percent (2 1/2%) in excess of the applicable non-default rate otherwise
set forth above for the Line or the Term Loan.
2.9. POST JUDGMENT INTEREST. Any judgment obtained for sums due
hereunder or under the Loan Documents will accrue interest at the applicable
default rate set forth above until paid.
2.10. CALCULATION. Interest will be computed on the basis of a year of
365 days and paid for the actual number of days elapsed.
2.11. LIMITATION OF INTEREST TO MAXIMUM LAWFUL RATE. In no event will
the rate of interest payable hereunder exceed the maximum rate of interest
permitted to be charged by
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<PAGE> 7
applicable law (including the choice of law rules) and any interest paid in
excess of the permitted rate will be refunded to Borrowers. Such refund will be
made by application of the excessive amount of interest paid against any sums
outstanding hereunder and will be applied in such order as Bank may determine.
If the excessive amount of interest paid exceeds the sums outstanding, the
portion exceeding the sums outstanding will be refunded in cash by Bank. Any
such crediting or refunding will not cure or waive any default by Borrowers.
Borrowers agree, however, that in determining whether or not any interest
payable hereunder exceeds the highest rate permitted by law, any non-principal
payment, including without limitation prepayment fees and late charges, will be
deemed to the extent permitted by law to be an expense, fee, premium or penalty
rather than interest.
2.12. LETTER OF CREDIT ADVANCES. Advances may be made under the Line,
at the discretion of Bank, by the issuance of stand-by letters of credit in form
and content satisfactory to Bank, at its sole discretion, with a term not to
exceed twelve (12) months. Notwithstanding the foregoing, (a) at no time shall
the aggregate face amount of all outstanding stand-by letters of credit issued
under the Line exceed the amount of Three Hundred Thousand Dollars
($300,000.00); and (b) at no time shall the amount advanced under the Line plus
the aggregate face amount of all outstanding stand-by letters of credit issued
under the Line exceed the amount of Ten Million Dollars ($10,000,000.00).
Borrowers shall execute a letter of credit agreement and such other documents as
may be required by the Bank in connection with the issuance of stand-by letters
of credit pursuant to the terms hereof. Issuance or renewal of standby letters
of credit pursuant to the terms hereof shall constitute an advance under the
Line.
In the event that the Line is terminated for any reason (including
the expiration of the Line) or demand is made thereunder, Borrowers shall be
obligated to deposit with Bank an amount equal to the face amount of all
stand-by letters of credit then outstanding which have been issued hereunder
plus all fees to accrue thereunder. Such funds will be held by Bank as cash
collateral in a money market account at Bank (such account shall bear interest
at the Bank's prevailing rate of interest which rate may not be the highest or
best rate of interest paid by the Bank) to secure Borrowers' obligation to
reimburse to Bank all payments made pursuant to any draws made under such
stand-by letters of credit plus all fees to accrue thereunder. In the event such
stand-by letters of credit (a) expire, or (b) are replaced and the originals
thereof returned to Bank, Bank will release the cash collateral related to such
expired or replaced letters of credit
3. PAYMENTS AND FEES.
3.1. INTEREST PAYMENTS ON THE LINE. Borrowers will pay interest on the
principal balance of the Line as follows:
(a) for advances bearing interest based on the Line Base Rate,
interest will be payable on the first day of each calendar month as billed by
Bank, and
(b) for advances bearing interest based on the Line LIBOR Rate,
interest will
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be payable at the end of the applicable Line Rate Period.
3.2. PRINCIPAL PAYMENTS ON THE LINE. Borrowers will pay the outstanding
principal balance of the Line, together with any accrued and unpaid interest
thereon, and any other sums due pursuant to the terms hereof, ON DEMAND;
provided, that no demand for payment may be made by Bank unless (a) an Event of
Default has occurred hereunder or under any of the Loan Documents; or (b) the
Line has expired. If any overadvance arises under the Line for any reason
whatsoever, including accounts becoming ineligible, Borrowers will repay such
overadvances, ON DEMAND.
3.3. INTEREST PAYMENTS ON THE TERM LOAN. Borrowers will pay interest on
the principal balance of the Term Loan as follows:
(a) while the Term Loan bears interest based on the Term Base
Rate, interest will be payable on the first day of each calendar month as billed
by Bank, and
(b) while the Term Loan bears interest based on the Term LIBOR
Rate, interest will be payable at the end of the applicable Term Rate Period.
3.4. PRINCIPAL PAYMENTS ON THE TERM LOAN. Borrowers will pay the
principal of the Term Loan in (a) fifty-nine (59) equal and consecutive monthly
installments each in the amount of One Hundred Sixteen Thousand Six Hundred
Sixty-Six Dollars and Sixty-Seven Cents ($116,666.67), commencing on October 1,
1996 and continuing on the first day of each calendar month thereafter, and (b)
one final installment of all remaining principal and accrued interest due
thereon, together with all fees and charges due hereunder, payable on September
1, 2001.
3.5. APPLICATION OF PAYMENTS. Any and all payments on account of the
Line or the Term Loan shall be applied, at the option of Bank, to accrued and
unpaid interest, outstanding principal and other sums due hereunder or under the
Loan Documents, in such order as Bank, in its sole discretion, elects. Borrowers
agree that, to the extent any Borrower makes a payment or payments and such
payment or payments, or any part thereof, are subsequently invalidated, declared
to be fraudulent or preferential, set aside or are required to be repaid to a
trustee, receiver, or any other party under any bankruptcy act, state or federal
law, common law or equitable cause, then to the extent of such payment or
payments, the obligations or part thereof hereunder intended to be satisfied
shall be revived and continued in full force and effect as if said payment or
payments had not been made.
3.6. LETTER OF CREDIT FEE. For each advance under the Line made in the
form of the issuance or renewal of a stand-by letter of credit, Borrowers shall
pay to Bank an issuance or renewal fee in an amount equal to one percent (1%) of
the face amount of such stand-by letter of credit, payable coincident with and
as a condition of the issuance or renewal of such stand-by letter of credit. In
addition, Borrowers shall pay such other fees and charges in connection with the
issuance, renewal and maintenance of such stand-by letter of credit as may be
required by
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<PAGE> 9
Bank.
3.7. COMMITMENT FEE. Contemporaneously with the execution and delivery
of this Agreement, Borrowers shall pay to Bank a commitment fee equal to Eleven
Thousand Two Hundred Fifty Thousand Dollars ($11,250.00).
3.8. LATE CHARGE. In the event that Borrowers fail to pay any principal
or interest due under the Loans for a period of at least fifteen (15) days, in
addition to paying such sums, Borrowers will pay to Bank a late charge equal to
the greater of (a) four percent (4%), of such past due payment as compensation
for the expenses incident to such past due payment, or (b) Five Dollars ($5.00).
3.9. PREPAYMENT. Except as provided in SECTIONS 2.6(c)(v) AND 2.7(c),
Borrowers may not prepay all or any part of any LIBOR Loan prior to the end of
the applicable Rate Period. The Borrowers may prepay any Base Rate Loan, in
whole or in part, at any time without penalty or premium.
3.10. PAYMENT METHOD. Unless revoked by Borrowers in writing, Borrowers
authorize Bank to debit all payments required to be made by Borrowers hereunder
or under the Loans (for which invoices have been delivered to Borrowers, whether
by telecopier or otherwise), on the date due, from any deposit account
maintained by any Borrower with Bank. Otherwise, Borrowers will be obligated to
make such payments directly to Bank. All payments are to be made in immediately
available funds. If Bank accepts payment in any other form, such payment shall
not be deemed to have been made until the funds comprising such payment have
actually been received by or made available to Bank.
3.11. LOAN ACCOUNT. Bank will open and maintain on its books a loan
account (the "LOAN ACCOUNT") with respect to advances made, repayments,
prepayments, the computation and payment of interest and fees and the
computation and final payment of all other amounts due and sums paid to Bank
under this Agreement. Except in the case of manifest error in computation, the
Loan Account will be conclusive evidence as to the amount at any time due to
Bank from Borrower under this Agreement or the Notes.
3.12. LIBOR INDEMNITY. Borrowers will indemnify Bank against any loss
or expense which Bank actually sustains or incurs as a consequence of any
prepayment by Borrowers of a LIBOR Loan prior to the end of the applicable Rate
Period. If Bank actually sustains or incurs any such loss or expense it will
within ninety (90) days of such loss or expense notify Borrowers in writing of
the amount determined in good faith by the Bank to be necessary to indemnify
Bank for the loss or expense. Such amount will be due and payable by Borrowers
to Bank within ten (10) days after presentation by Bank of a statement setting
forth a brief explanation of and Bank's calculation of such amount, which
statement shall be presumptively deemed correct absent manifest error. Any
amount payable to the Bank under this Section will bear interest at the
applicable default rate from the due date until paid, both before and after
judgment.
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4. SECURITY.
4.1. SECURITY FOR INDEBTEDNESS. As security for the payment of all
Indebtedness of Borrowers to Bank, whether now or hereafter owing or existing
including, without limitation, all obligations hereunder and under the Loan
Documents, under the Loans, and for the payment, performance and discharge of
all other obligations or undertakings now or hereafter made by or for the
benefit of any Borrower to or for the benefit of Bank, under this Agreement or
under any other agreement, promissory note or undertaking now existing or
hereafter entered into by any Borrower with or to Bank, including any guaranty
or surety obligations of any Borrower to Bank and the undertakings of any
Borrower to immediately pay to Bank the amount of any overdraft on any deposit
account maintained with Bank (all such obligations, indebtedness and
undertakings being sometimes hereinafter referred to as the "BANK
INDEBTEDNESS"), Borrowers hereby grant, or shall cause to be granted, to Bank a
security interest in all of the following:
(a) All of Borrowers' existing and future accounts, contract
rights, chattel paper, instruments and documents and all other rights to the
payment of money whether or not yet earned, for services rendered or goods sold,
consigned, leased or furnished by Borrowers or otherwise, together with (i) all
goods (including any returned, rejected, repossessed or consigned goods), the
sale, consignment, lease or other furnishings of which shall be given or may
give rise to any of the foregoing, (ii) all of Borrowers' rights as a consignor,
consignee, unpaid vendor or other lienor in connection therewith, including
stoppage in transit, setoff, detinue, replevy and reclamation, (iii) all general
intangibles related thereto, (iv) all guaranties, mortgages, security interest,
assignments, and other encumbrances on real or personal property, leases and
other agreements or property securing or relating to any of Borrowers' accounts,
(v) choses-in-action, claims and judgments, (vi) any return or unearned
premiums, which may be due upon cancellation of any insurance policies, and
(vii) all products and proceeds of any of the foregoing.
(b) All of Borrowers' present and future inventory (including but
not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in Borrowers' business) whether owned, consigned or held
on consignment, together with all merchandise, component materials, supplies,
packing, packaging and shipping materials, and all returned, rejected or
repossessed goods sold, consigned, leased or otherwise furnished by Borrowers
and all products and proceeds of any of the foregoing.
(c) All of Borrowers' present and future general intangibles
(including but not limited to manufacturing and processing rights, designs,
patent rights and applications therefor, trademarks and registration or
applications therefor, tradenames, brand names, logos, inventions, copyrights
and all applications and registrations therefor, software and computer programs,
license rights, royalties, trade secrets, methods, processes, knowhow, formulas,
drawings, specifications, descriptions, label designs, plans, blueprints,
patterns and all memoranda, notes and records with respect to any research and
development, and all products and proceeds of any
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of the foregoing.
(d) All of Borrowers' present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles
of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, and all manuals of operation, maintenance
or repair, and all products and proceeds of any of the foregoing.
(e) All of Borrowers' present and future general ledger sheets,
files, records, books of account, invoices, bills, certificates or documents of
ownership, bills of sale, business papers, correspondence, credit files, tapes,
cards, computer runs and all other data and data storage systems whether in the
possession of Borrowers or any service bureau.
(f) All letters of credit now existing or hereafter issued naming
a Borrower as a beneficiary or assigned to a Borrower, including the right to
receive payments thereafter, and all documents and records associated
thereunder.
(g) All deposits, funds, instruments, documents, policies and
certificates of insurance, securities, chattel paper and other assets of
Borrowers or in which any Borrower has an interest and all proceeds thereof, now
or at any time hereafter on deposit with or in the possession or control of Bank
or owing by Bank to any Borrower or in transit by mail or carrier to Bank or in
the possession of any other Person acting on Bank's behalf, without regard to
whether Bank received the same in pledge, for safekeeping, as agent for
collection or otherwise, or whether Bank has conditionally released the same,
and in all assets of Borrowers in which Bank now has or may at any time
hereafter obtain a lien, mortgage, or security interest for any reason.
4.2. GENERAL. The collateral described above in SECTION 4.1 and in the
Existing Loan Documents is collectively referred to herein as the "COLLATERAL".
The above-described security interests, assignments, liens shall not be rendered
void by the fact that no Bank Indebtedness exists as of any particular date, but
shall continue in full force and effect until (a) the Bank Indebtedness has been
repaid and Bank has no agreement or commitment outstanding pursuant to which
Bank may extend credit to or on behalf of Borrowers, or (b) Bank has executed
termination statements or releases with respect thereto. IT IS THE EXPRESS
INTENT OF THE BORROWERS THAT ALL OF THE COLLATERAL SHALL SECURE NOT ONLY THE
OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE
OBLIGATIONS OF BORROWERS TO BANK.
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS. Borrowers represent and warrant
as follows:
5.1. VALID ORGANIZATION, GOOD STANDING AND QUALIFICATION OF MRC. MRC is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State
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of Ohio, has full power and authority to carry on its business as it is now
being conducted and is duly licensed or qualified as a foreign corporation in
good standing under the laws of each jurisdiction in which the character or
location of the properties owned by it or the business transacted by it requires
such licensing or qualification, except where the failure to be so licensed or
qualified would not have a material adverse effect on the Collateral, assets,
business, operations or financial condition of the Borrowers, taken as a whole,
or the ability of MRC to perform its obligations under the Loan Documents.
5.2. VALID ORGANIZATION, GOOD STANDING AND QUALIFICATION OF MEDIFAX.
Medifax is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Missouri, has full power and authority
to carry on its business as it is now being conducted and is duly licensed or
qualified as a foreign corporation in good standing under the laws of each
jurisdiction in which the character or location of the properties owned by it or
the business transacted by it requires such licensing or qualification, except
where the failure to be so licensed or qualified would not have a material
adverse effect on the Collateral, assets, business, operations or financial
condition of the Borrowers, taken as a whole, or the ability of Medifax to
perform its obligations under the Loan Documents.
5.3. LICENSES. Each Borrower and its employees, servants and agents
have all licenses, registrations and other authority as may be necessary to
enable them to perform all services and business which they have agreed to
perform in any state, municipality or other jurisdiction, except where the
failure to be so licensed would not have a material adverse effect on the
Collateral, assets, business, operations or financial condition of the
Borrowers, taken as a whole.
5.4. OWNERSHIP INTERESTS. Medifax owns all of the issued and
outstanding stock of MRC.
5.5. SUBSIDIARIES. Except as set forth on SCHEDULE 5.5 attached hereto,
no Borrower owns any shares of stock or other equity interests in any Person,
directly or indirectly (by any Subsidiary or otherwise).
5.6. FINANCIAL STATEMENTS. Borrowers have furnished to Bank the
financial statements as described on SCHEDULE 5.6. Such financial statements of
Borrowers fairly present the financial condition and the assets and liabilities
of the applicable Borrower at such date and the results of their operations as
of the end of the period and have been prepared in accordance with GAAP
consistently applied and maintained.
5.7. NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. There has been
no material adverse change in the financial condition of Borrowers, taken as a
whole, since December 31, 1995.
5.8. PENDING LITIGATION OR PROCEEDINGS. Except as set forth on SCHEDULE
5.8 attached
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hereto, there are no judgments outstanding or actions, suits or proceedings
pending or, to the best of any Borrower's knowledge, threatened against or
affecting any Borrower, at law or in equity or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
5.9. DUE AUTHORIZATION; NO LEGAL RESTRICTIONS. The execution and
delivery by Borrowers of the Loan Documents, the consummation of the
transactions contemplated by the Loan Documents and the fulfillment and
compliance with the respective terms, conditions and provisions of the Loan
Documents: (i) have been duly authorized by all requisite corporate action of
each Borrower, (ii) will not conflict with or result in a breach of, or
constitute a default (or might, upon the passage of time or the giving of notice
or both, constitute a default) under, any of the terms, conditions or provisions
of any applicable statute, law, rule, regulation or ordinance or any Borrower's
Certificate or Articles of Incorporation or By-Laws, or any indenture, mortgage,
loan or credit agreement or instrument to which any Borrower is a party or by
which any of them may be bound or affected, or any judgment or order of any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and (iii) will not result in the creation
or imposition of any lien, charge or encumbrance of any nature whatsoever upon
any of the property or assets of any Borrower under the terms or provisions of
any such agreement or instrument, except liens in favor of Bank or the Permitted
Liens.
5.10. ENFORCEABILITY. The Loan Documents when executed by Borrowers
will constitute valid and binding obligations of Borrowers, enforceable in
accordance with their terms, except as enforceability may be limited by any
bankruptcy, insolvency, reorganization, moratorium or other laws or equitable
principles affecting creditors' rights generally.
5.11. NO DEFAULT UNDER OTHER OBLIGATIONS, ORDERS OR GOVERNMENTAL
REGULATIONS. No Borrower is in violation of its Certificate or Articles of
Incorporation or in default in the performance or observance of any of its
obligations, covenants or conditions contained in any indenture or other
agreement creating, evidencing or securing any Indebtedness or pursuant to which
any such Indebtedness is issued and no Borrower is in violation of or in default
under any other agreement or instrument or any judgment, decree, order, statute,
rule or governmental regulation, applicable to any of them or by which their
properties may be bound or affected.
5.12. GOVERNMENTAL CONSENTS. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of any Borrower is required in connection with the execution, delivery or
performance by any Borrower of the Loan Documents or the consummation of the
transactions contemplated thereby.
5.13. TAX STATUS. Except as set forth on SCHEDULE 15.13, each Borrower
has filed all tax returns which it is required to file and has paid, or made
provision for the payment of, all taxes which have or may have become due
pursuant to such returns or pursuant to any assessment received by it, except
such taxes, if any, as are being contested in good faith and as
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to which adequate reserves have been provided. Such tax returns are complete and
accurate in all material respects. No Borrower knows of any proposed assessment
or basis for any assessment of additional taxes.
5.14. TITLE TO COLLATERAL. The Collateral is and will be owned by
Borrowers, free and clear of all liens and other encumbrances of any kind,
excepting only the rights and interests permitted under SECTION 6.6 below.
5.15. ADDRESSES. During the past five (5) years, no Borrower has been
known by any names other than those set forth in SCHEDULE 5.15 attached hereto
and has not been located at any addresses other than those set forth on SCHEDULE
5.15 attached hereto. The portions of the Collateral which are tangible property
and Borrowers' books and records pertaining thereto will at all times be located
at the addresses set forth on SCHEDULE 5.15; or such other location determined
by Borrower after prior notice to Bank and delivery to Bank of any items
requested by Bank to maintain perfection and priority of Bank's security
interests and access to Borrowers' books and records.
5.16. CURRENT COMPLIANCE. Borrowers are currently in compliance with
all of the terms and conditions of the Loan Documents.
5.17. ELIGIBLE ACCOUNT WARRANTIES. With respect to all Eligible
Receivables from time to time scheduled, listed or referred to in any
certificate, statement or report prepared by or for Borrowers and delivered to
Bank and upon which Borrowers are basing availability under the Line, Borrowers
warrant and represent that (a) the accounts are genuine, are in all respects
what they purport to be, and are not evidenced by any chattel paper, note,
instrument or judgment; (b) Borrowers have absolute title to such accounts and
the accounts represent undisputed, bona fide transactions completed in
accordance with the terms thereof and as represented to Bank; (c) there are no
material setoffs, counterclaims or disputes existing or asserted with respect
thereto and Borrowers have not made any agreement with any account debtor for
any deduction therefrom; (d) to the best of Borrowers' knowledge, there are no
facts, events or occurrences which impair the validity or enforcement thereof or
tend to reduce the amount payable thereunder as shown on any certificates,
statements or reports, prepared by or for any Borrower and delivered to Bank,
Borrowers' books and records and all invoices and statements delivered to Bank
with respect thereto; (e) to the best of Borrowers' knowledge, all account
debtors have the capacity to contract and are solvent; (f) the goods sold giving
rise thereto are not subject to any lien, claim, encumbrance or security
interest except that of Bank and the Permitted Liens; (g) to the best of
Borrowers' knowledge, there are no proceedings or actions which are threatened
or pending against any account debtor which might result in the uncollectibility
of any accounts due from that account debtor; (h) the account is not an account
with respect to which the account debtor is an affiliate of any Borrower or a
director, officer or employee of any Borrower or its affiliates; (i) the account
does not arise with respect to goods which have not been shipped or arise with
respect to services which have not been fully performed and accepted as
satisfactory by the account debtor; (j) the account is not an account with
respect to which the
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account debtor's obligation to pay the account is conditional upon the account
debtor's approval or is otherwise subject to any repurchase obligation or return
right, as with sales made on a bill- and-hold, guaranteed sale, sale-and-return,
or sale on approval basis; (k) the amounts shown on the applicable certificates,
statements, on Borrowers' books and records and all invoices and statements
which may be delivered to Bank with respect to such accounts are actually and
absolutely owing to Borrowers and are not in any way contingent; and (l) the
accounts have not been sold, assigned or transferred to any other Person and no
Person except Borrowers has any claim thereto or (with the exception of the
applicable account debtor) any claims to the goods sold, except as provided in
the Samek Security Agreement or the Marcus Security Agreements.
5.18. PENSION PLANS. Except as disclosed on SCHEDULE 5.18 hereto, (a)
no Borrower has any obligations with respect to any employee pension benefit
plan ("PLAN") (as such term is defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), (b) no events, including, without
limitation, any "Reportable Event" or "Prohibited Transaction" (as those terms
are defined under ERISA), have occurred in connection with any Plan of any
Borrower which would constitute grounds for the termination of any such Plan by
the Pension Benefit Guaranty Corporation ("PBGC") or for the appointment by any
United States District Court of a trustee to administer any such Plan, (c) all
of the Borrowers' Plans meet with the minimum funding standards of Section 302
of ERISA, and (d) no Borrower has any existing liability to the PBGC. No
Borrower is subject to or bound to make contributions to any "multi-employer
plan" as such term is defined in Section 4001(a)(3) of ERISA.
5.19. LEASES AND CONTRACTS. Borrowers have complied in all material
respects with the provisions of all material leases, contracts or commitments of
any kind (such as employment agreements, collective bargaining agreements,
powers of attorney, distribution agreements, patent license agreements,
contracts for future purchase or delivery of goods or rendering of services,
bonus, pension and retirement plans or accrued vacation pay, insurance and
welfare agreements) to which it is a party and is not in default thereunder. No
other party is in default under any such leases, contracts or other commitments
and no event has occurred which, but for the giving of notice or the passage of
time or both, would constitute an event of default thereunder.
5.20. INTELLECTUAL PROPERTY. Borrowers own or possess the irrevocable
right to use all of the patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing necessary to own and operate the Borrowers' properties and to carry on
their businesses as presently conducted and presently planned to be conducted
without conflict with the rights of others. SCHEDULE 5.20 sets forth an accurate
list and description of each registered patent, trademark, service mark, trade
name and copyright owned or possessed by any Borrower.
5.21. BUSINESS INTERRUPTIONS. Within five (5) years prior to the date
hereof, neither the business, Collateral nor operations of any Borrower have
been materially and adversely affected in any way by any casualty, strike,
lockout, combination of workers, order of the
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United States of America, or any state or local government, or any political
subdivision or agency thereof, directed against such Borrower. There are no
pending or threatened labor disputes, strikes, lockouts or similar occurrences
or grievances against the business being operated by Borrowers.
5.22. CONSUMMATION OF PURCHASE TRANSACTION AND STOCK OFFERING. All
material aspects of the transactions contemplated under the Purchase Agreement
have been consummated. Medifax has completed a secondary public offering of its
capital stock, which offering raised additional equity for Medifax of not less
than Thirty Million Dollars ($30,000,000.00).
5.23. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation or
warranty by any Borrower contained herein or in any certificate or other
document furnished by any Borrower pursuant hereto or in connection herewith
fails to contain any statement of material fact necessary to make such
representation or warranty not misleading in light of the circumstances under
which it was made. There is no fact which any Borrower knows or should know and
has not disclosed to Bank, which does or may materially and adversely affect the
business or financial condition of Borrowers, taken as a whole.
6. GENERAL COVENANTS. Except with the prior written consent of Bank, Borrowers
will comply with the following:
6.1. PAYMENT OF PRINCIPAL, INTEREST AND OTHER AMOUNTS DUE. Borrowers
will pay when due all amounts of principal and interest on the Notes and all
other amounts payable by them hereunder.
6.2. LIMITATION ON SALE AND LEASEBACK. No Borrower will enter into any
arrangement whereby it will sell or transfer any real property or improvements
thereon or other fixed assets owned by it (other than automobiles) and then or
thereafter rent or lease as lessee such property, improvements or assets or any
part thereof, or other property which that Borrower shall intend to use for
substantially the same purposes as the property sold or transferred.
6.3. DISPOSITION OF ASSETS. No Borrower will sell, lease, transfer or
otherwise dispose of all, substantially all, or any material portion of its
property or assets, except for sales of inventory and equipment (including any
surplus or obsolete inventory or equipment) in the ordinary course for fair
consideration.
6.4. MERGER; CONSOLIDATION; BUSINESS ACQUISITIONS; SUBSIDIARIES. No
Borrower will merge into or consolidate with any Person, acquire any material
portion of the stock or assets or business of any Person, permit any Person to
merge into it, or form any new Subsidiaries. Notwithstanding the foregoing,
Borrowers may make acquisitions of stock and/or assets, provided the purchase
price (including cash, the market value of stock or other assets and assumption
of liabilities) of any such acquisition does not exceed Two Million Five Hundred
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Thousand Dollars ($2,500,000.00) and the aggregate purchase price (including
cash, the market value of all stock and other assets and assumption of
liabilities) for all such acquisitions does not exceed Ten Million Dollars
($10,000,000.00). Additionally, MRC may merge into Medifax, provided reasonable
notice of such merger is given to Bank. At least once in each calendar year,
Medifax shall deliver to Bank a list of its five (5) largest shareholders (by
number of voting shares held). Medifax will also promptly notify Bank if Welsh,
Carson, Anderson & Stowe VI, L.P.'s interest in Medifax is reduced or terminated
for any reason whatsoever other than as a result of the exercise of existing
stock options.
6.5. PAYMENT OF TAXES, CLAIMS FOR LABOR AND MATERIALS. Each Borrower
will pay or cause to be paid when due all taxes, assessments, governmental
charges or levies imposed upon it or its income, profits, payroll or any
property belonging to it, including without limitation all withholding taxes,
and all claims for labor, materials and supplies which, if unpaid, might become
a lien or charge upon any of its properties or assets; provided that it shall
not be required to pay any such tax, assessment, charge, levy or claim so long
as the validity thereof shall be contested in good faith by appropriate
proceedings promptly initiated and diligently conducted by it, and neither
execution nor foreclosure sale or similar proceedings shall have been commenced
in respect thereof (or such proceedings shall have been stayed pending the
disposition of such contest of validity), and it shall have set aside on its
books adequate reserves with respect thereto.
6.6. LIENS. No Borrower will create, incur or permit to exist any
mortgage, pledge, encumbrance, lien, security interest or charge of any kind
(including liens or charges upon properties acquired or to be acquired under
conditional sales agreements or other title retention devices) on its property
or assets, whether now owned or hereafter acquired, or upon any income or
profits therefrom, except:
(a) Security interests held by Bank to secure Bank Indebtedness;
(b) Liens incurred or deposits made in the ordinary course of
business (i) in connection with worker's compensation, unemployment insurance,
social security and other like laws or (ii) to secure the performance of
statutory obligations, not incurred in connection with the borrowing of money;
(c) Encumbrances consisting of zoning restrictions, easements,
restrictions on the use of real property or minor irregularities of title
thereto, none of which materially impairs the use of such property by Borrower
in the operation of its business; or
(d) The Permitted Liens.
6.7. EXISTENCE; COMPLIANCE WITH LAWS. Except as otherwise permitted
under SECTION 6.4, each Borrower (a) will obtain, preserve and keep in full
force and effect its separate corporate existence and all rights, licenses,
registrations and franchises necessary to the proper
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conduct of its business or affairs; (b) will continue to operate its business as
presently operated; and (c) will comply with the requirements of all applicable
laws and all rules, regulations (including environmental regulations) and orders
of regulatory agencies and authorities having jurisdiction over it.
6.8. INSURANCE. Each Borrower will carry adequate insurance issued by
responsible insurers in amounts (at least adequate to comply with any
coinsurance provisions) and against all such liability and hazards as are
usually carried by entities engaged in the same or a similar business similarly
situated and in the case of insurance on any of the Collateral shall carry
insurance in the full insurable value thereof and cause Bank to be named as loss
payee and additional insured thereunder, as its interests may appear with thirty
(30) days' notice to be given Bank by the insurance carrier prior to
cancellation of such insurance coverage. Each Borrower shall cause to be
delivered to Bank the insurance policies therefor and at least thirty (30)
business days prior to the expiration of any such insurance, additional policies
or duplicates thereof evidencing the renewal of such insurance and payment of
the premiums therefor. Borrowers shall direct all insurers that in the event of
any loss thereunder or the cancellation of any insurance policy, the insurers
shall make payments for such loss and pay all return or unearned premiums
directly to Bank and not to Borrowers, or either of them, and Bank jointly;
provided, however, that any payments (including unearned premiums) by insurers
for losses sustained by Borrowers may be paid directly to Borrowers if the
aggregate amount of all such losses occurring in any one year does not exceed
(x) Two Hundred Fifty Thousand Dollars ($250,000.00), and (y) no Event of
Default exists hereunder. If any insurance losses are paid by check, draft or
other instrument payable to a Borrower and Bank jointly, Bank may endorse that
Borrower's name thereon and do such other things as Bank may deem advisable to
reduce the same to cash. In the event of loss, Bank, at its option, may (i)
retain and apply all or any part of the insurance proceeds to reduce, in such
order and amounts as Bank may elect the Bank Indebtedness, or (ii) disburse all
or any part of such insurance proceeds to or for the benefit of Borrowers for
the purpose of repairing or replacing Collateral after receiving proof
satisfactory to Bank of such repair or replacement, in either case without
waiving or impairing the Bank Indebtedness or any provision of this Agreement.
Any deficiency thereon shall be paid by Borrowers to Bank upon demand. No
Borrower shall take out any insurance without having Bank named as loss payee or
additional insured thereon. Borrowers shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral, except as may
result from the gross negligence or wilful misconduct of the Bank.
6.9. INSPECTIONS; AUDITS. If (a) within thirty (30) days after written
request from Bank to Borrowers, Borrowers fail to provide to Bank the financial
information specifically requested by Bank in such notice and such information
is available to Borrower, or (b) an Event of Default has occurred and is
continuing, Borrowers hereby irrevocably authorize and direct all accountants
and auditors employed by Borrowers at any time to exhibit and deliver to Bank
(x) in the case of (a) above, the specific financial information required by
Bank in its written notice, and (b) in the case of an Event of Default, copies
of any and all of Borrowers' financial statements, trial balances or other
accounting records of any sort in the accountant's or auditor's
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possession and to disclose to Bank any information they may have concerning
Borrowers' financial status and business operations. Borrowers further authorize
all federal, state and municipal authorities to furnish to Bank copies of
reports or examinations relating to Borrowers, whether made by Borrowers or
otherwise.
The officers of Bank, or such persons as any of them may
designate, may visit and inspect any of the properties of any Borrower, examine
(either by Bank's employees or by independent accountants) any of the Collateral
or other assets of Borrowers, including the books of account of Borrowers, and
discuss the affairs, finances and accounts of Borrowers with their officers and
with their independent accountants, at such times as Bank may desire. Prior to
the occurrence of an Event of Default hereunder or under any of the Loan
Documents, Bank agrees to conduct such examinations and inspections only during
normal business hours and upon reasonable notice.
6.10. CAPITAL STOCK; DIVIDENDS. Medifax will not redeem, repurchase or
otherwise make any payment or distribution to acquire any of its capital stock,
except as provided herein. Medifax will not pay dividends or make other
distributions on account of its capital stock. Notwithstanding the foregoing,
Bank hereby agrees to permit Medifax to pay dividends on account of its capital
stock; provided that (a) no Event of Default has occurred hereunder or under any
of the Loan Documents, (b) the payment of such dividend(s) shall not result in
the occurrence of any event which with the passage of time or giving of notice,
if applicable, would constitute an Event of Default hereunder or under any of
the Loan Documents, and (c) such dividends shall not exceed forty percent (40%)
in any fiscal year of Medifax's consolidated net income for that year (as
determined in accordance with GAAP). The Bank hereby agrees to permit Medifax to
redeem thirty-five thousand (35,000) shares of its capital stock from Dr. John
Dayani at Four Dollars and Twenty-Three Cents ($4.23) per share on or before
November 30, 1996.
6.11. TRANSACTIONS WITH AFFILIATES. From the date of this Agreement, no
Borrower shall enter into or conduct any transaction with any Affiliate except
on terms that would be usual and customary in a similar transaction between
persons not affiliated with each other and except as disclosed to Bank. No
Borrower will make any loans or extensions of credit to any of its Affiliates,
shareholders, directors or officers, except for the existing loans described in
SCHEDULE 6.11 attached hereto. Notwithstanding the foregoing, nothing contained
herein shall be deemed to prohibit (a) any inter-company advances and payments
between the Borrowers, or (b) advances for moving or other similar allowances
extended by Borrowers, or either of them, in the ordinary course, provided that
such advances and allowances shall not at any time exceed in the aggregate One
Hundred Fifty Thousand Dollars ($150,000.00).
6.12. RESTRICTION ON STOCK TRANSFER. MRC shall not directly or
indirectly issue, transfer, sell or otherwise dispose of, or part with control
of, or permit the transfer of, any shares of its capital stock.
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<PAGE> 20
6.13. NAME OR ADDRESS CHANGE. No Borrower shall change its name or
address except upon thirty (30) days prior written notice to Bank and delivery
to Bank of any items reasonably requested by Bank to maintain perfection and
priority of Bank's security interests and access to that Borrower's books and
records.
6.14. NOTICES. Borrowers will promptly notify Bank of (i) any action or
proceeding brought against any Borrower wherein such action or proceeding would,
if determined adversely to that Borrower result in liability of that Borrower in
excess of One Hundred Thousand Dollars ($100,000.00), (ii) the occurrence of any
Event of Default, (iii) any fact, condition or event which, with the giving of
notice or the passage of time or both, could become an Event of Default, or (iv)
the failure of any Borrower to observe any of its undertakings under the Loan
Documents.
6.15. ADDITIONAL DOCUMENTS AND FUTURE ACTIONS. Borrowers will provide
Bank from time to time on request by Bank with such agreements, financing
statements and additional instruments, documents or information as the Bank may
in its discretion reasonably deem necessary or advisable to perfect, protect and
maintain the security interests in the collateral, to permit Bank to protect its
interest in the Collateral or to carry out the terms of the Loan Documents. Each
Borrower hereby irrevocably authorizes and appoints Bank as its
attorney-in-fact, with full power of substitution, to execute on that Borrower's
behalf and file at Bank's expense financing statements, and amendments thereto,
in those public offices deemed necessary or appropriate by Bank to establish,
maintain and protect a continuously perfected security interest in the
Collateral. Borrowers irrevocably authorize the filing of a carbon, photographic
or other copy of this Agreement, or of a financing statement, as a financing
statement and agree that such filing is sufficient as a financing statement.
6.16. ACCOUNTS RECEIVABLE. Unless Bank notifies Borrowers in writing
that it dispenses with any one or more of the following requirements, Borrowers
will (a) inform Bank immediately of the rejection of goods, claims made or delay
in delivery or performance in regard to any account or contract right upon which
Borrowers have based availability for advances under the Line, the disputed
amount of which account or contract right exceeds One Hundred Thousand Dollars
($100,000.00) or the aggregate amount of all such accounts or contract rights
exceeds Two Hundred Fifty Thousand Dollars ($250,000.00) at any time or from
time to time; and (b) immediately notify Bank if any of its accounts arise out
of contracts with the United States or any department, agency or instrumentality
thereof, and execute any instruments and take any steps required by Bank in
order that all monies due and to become due under such contract shall be
assigned to Bank and notice thereof given to the Government under the Federal
Assignment of Claims Act.
Borrowers will (i) upon the occurrence and during the continuation of
an Event of Default, segregate cash proceeds of Collateral so that they may be
identified readily, and deliver the same to the Bank at such time or times and
in such manner and form as the Bank may direct; (ii) use their best efforts to
obtain from any owner, encumbrancer or other person having an
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interest in the property where any Collateral is located, written consent to
Bank's removal of the Collateral therefrom, without liability on the part of the
Bank to such owner, encumbrancer or other person, or from any such owner,
encumbrancer or other person such waivers of any interest in the Collateral as
the Bank may require; and (iii) immediately pay to Bank any overadvance arising
under the Line.
6.17. SUBORDINATED INDEBTEDNESS.
(a) OWED TO SAMEK. Borrowers will not prepay or accelerate
payment of that certain note payable having an original principal balance of not
more than $3,500,000.00 from Medifax to Edward L. Samek, except as permitted in
the Samek Subordination Agreement. Borrowers agree to comply with all terms of
the Samek Subordination Agreement.
(b) OWED TO THE MARCUSES. Borrowers will not prepay or accelerate
payment of those certain notes payable having an original principal balance of
not more than $2,000,000.00, in the aggregate, from Medifax to the Marcuses,
except as permitted in the Marcus Subordination Agreements. Borrowers agree to
comply with all terms of the Marcus Subordination Agreements.
7. FINANCIAL COVENANTS. Except with the prior written consent of Bank, Borrowers
will comply with the following:
7.1. TANGIBLE NET WORTH. Borrowers shall maintain on a consolidated
basis Tangible Net Worth plus Subordinated Indebtedness of not less than
$12,500,000.00 as of the date hereof and at all times thereafter.
7.2. INDEBTEDNESS TO TANGIBLE NET WORTH RATIO. Borrowers shall maintain
on a consolidated basis a ratio of Indebtedness (not including Subordinated
Indebtedness) to Tangible Net Worth plus Subordinated Indebtedness of not more
than 1.65 to 1.0 as of the date hereof and at all times thereafter.
7.3. CURRENT RATIO. Borrowers shall maintain on a consolidated basis a
ratio of Current Assets to Current Liabilities of not less than 1.40 to 1.0 as
of the date hereof and at all times thereafter.
7.4. NET INCOME. Borrowers shall realize on a consolidated basis net
income after taxes of not less than One Million Dollars ($1,000,000.00) for each
fiscal year commencing with the fiscal year ending December 31, 1996.
8. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. Borrowers
shall keep proper books of record and account in which full and correct entries
will be made of all of its dealings, business and affairs, and Borrowers will
deliver or cause to be delivered to Bank the following:
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8.1. ANNUAL STATEMENTS. As soon as available and in any event within
one hundred twenty (120) days after the end of each fiscal year of Borrowers:
(a) the audited consolidated and consolidating income and retained
earnings statements of Borrowers for such fiscal year,
(b) the audited consolidated and consolidating balance sheet of
Borrowers as at the end of such fiscal year, and
(c) the audited consolidated and consolidating statement of cash
flow of Borrowers for such fiscal year,
setting forth in comparative form the corresponding figures as at the end of the
previous fiscal year, all in reasonable detail, including all supporting
schedules and comments. The foregoing statements and balance sheets shall be
prepared in accordance with GAAP and shall be audited by independent certified
public accountants of recognized standing acceptable to Bank in the reasonable
exercise of its discretion (the "ACCOUNTANT").
8.2. QUARTERLY STATEMENTS. As soon as available and in any event within
sixty (60) days after the close of each of the first three (3) fiscal quarters
of Borrowers during each fiscal year;
(a) the consolidated income and retained earnings statements of
Borrowers for such quarter,
(b) the consolidated balance sheet of Borrowers as of the end of
such quarter,
(c) the consolidated statement of cash flow of Borrowers for such
quarter,
setting forth in comparative form the corresponding figures as at the end of the
corresponding quarter of the previous fiscal year (if applicable), all in
reasonable detail, subject to year end adjustments. The foregoing statements and
balance sheets shall be internally prepared in accordance with GAAP and shall be
certified by the Chief Financial Officer of the Borrowers to be true and
complete.
8.3. ACCOUNTS RECEIVABLE STATEMENTS. As soon as available and in any
event within twenty (20) days after the end of each fiscal quarter, a schedule
of the Borrowers' accounts receivable as of the last day of the preceding fiscal
quarter, identifying all Eligible Receivables, and the aging by open invoice of
each customer of Borrowers, all certified as to accuracy by the Chief Financial
Officer of Borrowers. Borrowers shall also provide Bank with all information
requested by Bank with respect to any account debtor.
8.4. AUDIT REPORTS. Promptly upon receipt thereof, one copy of each
other report
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submitted to any Borrower, by independent accountants, including management
letters, "comment" letters, in connection with any annual, interim or special
audit report made by them of the books of that Borrower.
8.5. REQUESTED INFORMATION. With reasonable promptness, all such other
data and information in respect of the condition, operation and affairs of any
Borrower as Bank may reasonably request from time to time.
9. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS.
9.1. REPRESENTATIONS. Borrowers represent and warrant to Bank that (a)
they own no real property, and (b) to the best of their knowledge, there are no
Special Materials, as hereinafter defined, presently located on any real
property leased by any Borrowers (collectively, "BORROWERS' REAL PROPERTY").
Borrowers further represent and warrant to Bank that the Borrowers' Real
Property is not now being used nor, to the best of their knowledge, has it ever
been used in the past for activities involving Special Materials, including but
not limited to the use, generation, collection, storage, treatment, or disposal
of any Special Materials. Without limiting the generality of the foregoing, the
Borrowers' Real Property is not being used nor, to the best of Borrowers'
knowledge, has it ever been used in the past for a landfill, surface impoundment
or other area for the treatment, storage or disposal of solid waste (including
solid waste such as sludge).
9.2. DEFINITIONS. For purposes of the foregoing (i) "ENVIRONMENTAL
REQUIREMENTS" means any and all federal, state or local laws, statutes,
ordinances, regulations or standards, or administrative or court orders or
decrees, or private agreements, and (ii) "SPECIAL MATERIALS" means any and all
materials which, under Environmental Requirements, require special handling in
use, generation, collection, storage, treatment or disposal, or payment of costs
associated with responding to the lawful directives of any court or agency of
competent jurisdiction or for similar economic loss. Without limiting the
foregoing, Special Materials shall include any materials which violate any
national or local contingency plan or the release or threatened release of which
may violate or create liability under any Environmental Requirement. Special
Materials shall also include, without limitation: (i) asbestos in any form; (ii)
urea formaldehyde foam insulation; (iii) paint containing lead; and (iv)
transformers or other equipment which contains dielectric fluid containing
polychlorinated biphenyls (commonly referred to as "PCB'S").
10. CONDITIONS OF CLOSING. The obligation of Bank to make available the Loans is
subject to the performance at or prior to the Closing by Borrowers of all of its
agreements theretofore to be performed by it hereunder and to the following
further conditions (any of which may be waived by Bank):
10.1. LOAN DOCUMENTS. Borrowers will have executed and delivered to
Bank the Loan Documents.
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10.2. REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Borrowers set forth in the Loan Documents will be true at and as
of the date of Closing.
10.3. NO DEFAULT. No condition or event shall exist or have occurred
which would constitute an Event of Default hereunder (or would, upon the giving
of notice or the passage of time or both, constitute such an Event of Default).
10.4. PROCEEDINGS AND DOCUMENTS. All proceedings taken by Borrowers in
connection with the transactions contemplated by this Agreement and all
documents incident to such transactions shall be satisfactory in form and
substance to Bank, and Bank shall have received all documents or other evidence
which it reasonably may request in connection with such proceedings and
transactions.
10.5. DELIVERY OF OTHER DOCUMENTS. The following documents shall have
been delivered by or on behalf of Borrowers to Bank:
(a) AUTHORIZATION DOCUMENTS. Evidence of authorization of
Borrowers' execution and full performance of this Agreement, the Loan Documents
and all other documents and actions required hereunder.
(b) INSURANCE. Evidence of the insurance coverage required under
SECTION 6.8.
(c) OTHER DOCUMENTS. Such other documents as may be reasonably
required to be submitted to Bank by the terms hereof or of any Loan Document.
11. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES. Without limiting Bank's
discretion to make advances under the Line subsequent to Closing, such advances
shall be conditioned upon the following conditions and each request by Borrowers
for an advance shall constitute a representation by Borrowers to Bank that each
condition has been met or satisfied:
11.1. REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Borrowers contained herein or in the Loan Documents shall be true
at and as of the date of such advance as if made on such date, and each request
for an advance shall constitute reaffirmation by Borrowers that such
representations and warranties are then true.
11.2. NO DEFAULT. No condition or event shall exist or have occurred at
or as of the date such advance which would constitute an Event of Default
hereunder (or would, upon the giving of notice or the passage of time or both,
constitute such an Event of Default).
11.3. OTHER REQUIREMENTS. Bank shall have received all certificates,
authorizations, affidavits, schedules and other documents which are provided for
hereunder or under the Loan Documents, or which Bank may reasonably request.
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12. DEFAULT AND REMEDIES.
12.1. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrowers to pay any amount of principal or
interest on the Line Note, the Term Notes, the Existing Term Notes or any other
Bank Indebtedness on the date on which such payment is due, whether, on demand,
at the stated maturity, or due date, thereof or by reason of any requirement for
the prepayment thereof, by acceleration or otherwise.
(b) The failure of Borrowers to duly perform or observe any
obligation, covenant or agreement on its part contained herein or in any other
Loan Document.
(c) The failure of Borrowers to pay or perform any other
obligation to Bank under any other agreement or note or otherwise arising,
whether or not related to this Agreement, after the expiration of any notice
and/or grace periods permitted in such documents;
(d) The adjudication of any Borrower as a bankrupt or insolvent,
or the entry of an Order for Relief against any Borrower or the entry of an
order appointing a receiver or trustee for any Borrower of any of their property
or approving a petition seeking reorganization of it or other similar relief
under the bankruptcy or other similar laws of the United States or any state or
any other competent jurisdiction;
(e) A proceeding under any bankruptcy, reorganization,
arrangement of debt, insolvency, readjustment of debt or receivership law is
filed by or (unless dismissed within 60 days) against any Borrower or any
Borrower makes an assignment for the benefit of creditors, or any Borrower takes
any action to authorize any of the foregoing;
(f) The entry of a final judgment(s) for the payment of money in
excess of $1,000,000.00 or $2,000,000.00, in the aggregate, against any Borrower
which, within thirty (30) days after such entry, shall not have been discharged
or execution thereof stayed pending appeal or shall not have been discharged
within thirty (30) days after the expiration of any such stay; or
(g) Any representation or warranty of Borrowers in any of the
Loan Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by any Borrower pursuant hereto is
discovered to be untrue in any material respect as of the date as of which the
facts therein set forth are stated or certified.
Notwithstanding anything to the contrary contained herein, none of the
foregoing shall constitute an Event of Default hereunder unless and until Bank
shall have given Borrowers notice of the occurrence of such event and Borrowers
shall fail to remedy such event within ten (10) days after the giving of such
notice; provided, however, that if such event is incapable of
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remedy Borrowers shall not be entitled to any notice or grace hereunder.
12.2. REMEDIES. At the option of the Bank, upon the occurrence of an
Event of Default, or at any time thereafter.
(a) The entire unpaid principal of the Line, the Term Loan, all
other Bank Indebtedness, or any part thereof, all interest accrued thereon, all
fees due hereunder and all other obligations of Borrowers, or either of them, to
Bank hereunder or under any other agreement, note or otherwise arising shall
become immediately due and payable without any further demand or notice;
(b) The Line shall immediately terminate;
(c) Bank may enter the premises occupied by Borrowers and take
possession of the Collateral and any records relating thereto; and/or
(d) Bank may exercise each and every right and remedy granted to
it under the Loan Documents, under the Uniform Commercial Code and under any
other applicable law or at equity.
12.3. SALE OR OTHER DISPOSITION OF COLLATERAL. The sale, lease or other
disposition of the Collateral, or any part thereof, by Bank after an Event of
Default may be for cash, credit or any combination thereof, and Bank may
purchase all or any part of the Collateral at public or, if permitted by law,
private sale, and in lieu of actual payment of such purchase price, may set-off
the amount of such purchase price against the Bank Indebtedness then owing. Any
sales of the Collateral may be adjourned from time to time with or without
notice. The Bank may cause the Collateral to remain on any Borrower's premises
or otherwise or to be removed and stored at premises owned by other persons, at
Borrowers' expense, pending sale or other disposition of the Collateral.
Borrowers, at Bank's request, shall assemble the Collateral consisting of
inventory and tangible assets and make such assets available to Bank at a place
to be designated by Bank. Bank shall have the right to conduct such sales on any
Borrower's premises, at Borrowers' expense, or elsewhere, on such occasion or
occasions as Bank may see fit. Any notice required to be given by Bank of a
sale, lease or other disposition or other intended action by Bank with respect
to any of the Collateral which is deposited in the United States mail, postage
prepaid and duly addressed to Borrowers at the address specified in SECTION 13.1
below, at least five (5) business days prior to such proposed action, shall
constitute fair and reasonable notice to Borrowers of any such action. The net
proceeds realized by Bank upon any such sale or other disposition, after
deduction for the expenses of retaking, holding, storing, transporting,
preparing for sale, selling or otherwise disposing of the Collateral incurred by
Bank in connection therewith and all other costs and expenses related thereto
including reasonable attorney fees, shall be applied in such order as Bank, in
its sole discretion, elects, toward satisfaction of the Bank Indebtedness. Bank
shall account to Borrowers for any surplus realized upon such sale or other
disposition, and Borrowers shall remain liable for any deficiency. The
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commencement of any action, legal or equitable, or the rendering of any judgment
or decree for any deficiency shall not affect Bank's security interest in the
Collateral. Borrowers agree that Bank has no obligation to preserve rights to
the Collateral against any other parties. Bank is hereby granted a license or
other right to use, after an Event of Default, without charge, Borrowers'
labels, general intangibles, intellectual property, equipment, real estate,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale and selling any inventory or other Collateral and
Borrowers' rights under all contracts, licenses, leases and franchise agreements
shall inure to Bank's benefit. Bank shall be under no obligation to marshall any
assets in favor of any Borrower or any other party or against or in payment of
any or all of the Bank Indebtedness.
12.4. ACTIONS WITH RESPECT TO ACCOUNTS. Borrowers hereby jointly and
severally irrevocably make, constitute and appoint Bank (and any of Bank's
designated officers, employees or agents) as their true and lawful
attorney-in-fact with power to sign their names and to take any of the following
actions, in their names or the name of Bank, as Bank may determine, without
notice to Borrowers and at Borrowers' expense:
(a) Verify the validity and amount of or any other matter
relating to the Collateral by mail, telephone, telegraph or otherwise;
(b) Upon the occurrence of and during the continuance of an Event
of Default, notify all account debtors that the accounts have been assigned to
Bank and that Bank has a security interest therein (provided that Bank shall
have the right to notify account debtors prior to an Event of Default if such
notification is required to perfect the Bank's security interests and/or right
to collect such accounts);
(c) Upon the occurrence and during the continuance of an Event of
Default, direct all account debtors to make payment of all accounts directly to
Bank and forward invoices directly to such account debtors;
(d) Upon the occurrence and during the continuance of an Event of
Default, take control in any manner of any cash or non-cash items of payment or
proceeds of accounts;
(e) Upon the occurrence and during the continuance of an Event of
Default, notify the United States Postal Service to change the address for
delivery of mail addressed to any Borrower to such address as Bank may
designate;
(f) Upon the occurrence and during the continuance of an Event of
Default, have access to any lockbox or postal boxes into which any Borrower's
mail is deposited and receive, open and dispose of all mail addressed to any
Borrower;
(g) Upon the occurrence and during the continuance of an Event of
Default,
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take control in any manner of any rejected, returned, stopped in transit or
repossessed goods relating to accounts;
(h) Upon the occurrence of and during the continuance of an Event
of Default, enforce payment of and collect any accounts, by legal proceedings or
otherwise, and for such purpose Bank may:
(1) Demand payment of any accounts or direct any account
debtors to make payment of accounts directly to Bank;
(2) Receive and collect all monies due or to become due to
any Borrower;
(3) Exercise all of Borrowers' rights and remedies with
respect to the collection of accounts;
(4) Settle, adjust, compromise, extend, renew, discharge or
release the accounts;
(5) Sell or assign the accounts on such terms, for such
amount and at such times as Bank deems advisable;
(6) Prepare, file and sign Borrowers' name or names on any
Proof of Claim or similar document in any proceeding filed under federal or
state bankruptcy, insolvency, reorganization or other similar law as to any
account debtor;
(7) Prepare, file and sign Borrowers' name or names on any
Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of Lien or
Mechanic's Lien or similar document in connection with the Collateral;
(8) Endorse the name of Borrowers upon any chattel papers,
documents, instruments, invoices, freight bills, bills of lading or similar
documents or agreements relating to the accounts or goods pertaining thereto or
upon any checks or other media of payment or evidences of a security interest
that may come into Bank's possession;
(9) Sign the name of Borrowers to verifications of accounts
and notices thereof sent by account debtors to Borrowers; or
(10) Take all other actions necessary or desirable to protect
Borrowers' or Bank's interest in the accounts.
All acts of said attorneys are hereby ratified and approved and said attorneys
shall not be liable for any acts of commission or omission, nor for any error of
judgment or mistake of fact or law,
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except willful misconduct. This power, being coupled with an interest, is
irrevocable as long as any Bank Indebtedness remains outstanding.
12.5. SET-OFF. Without limiting the rights of Bank under applicable
law, Bank has and may exercise a right of set-off, a lien against and a security
interest in all property of Borrowers now or at any time in Bank's possession in
any capacity whatsoever, including but not limited to any balance of any
deposit, trust or agency account, or any other bank account with Bank, as
security for all obligations of Borrowers to Bank under the Loan Documents or
otherwise. At any time and from time to time following the occurrence of an
Event of Default, or an event which with the giving of notice or passage of time
or both would constitute an Event of Default, Bank may without notice or demand,
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by Bank to or for the credit of Borrowers against any or all of the Bank
Indebtedness and the Borrowers' obligations under the Loan Documents.
12.6. DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay
on the part of Bank to exercise any right, remedy, power or privilege under the
Loan Documents upon the occurrence of any Event of Default or otherwise shall
operate as a waiver thereof or impair any such right, remedy, power or
privilege. No waiver of any Event of Default shall affect any later Event of
Default or shall impair any rights of Bank. No single, partial or full exercise
of any rights, remedies, powers and privileges by the Bank shall preclude
further or other exercise thereof. No course of dealing between Bank and
Borrowers shall operate as or be deemed to constitute a waiver of Bank's rights
under the Loan Documents or affect the duties or obligations of Borrowers.
12.7. REMEDIES CUMULATIVE. The rights, remedies, powers and privileges
provided for in shall not be deemed exclusive, but shall be cumulative and shall
be in addition to all other rights, remedies, powers and privileges in Bank's
favor at law or in equity.
12.8. CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Borrowers will
pay all of Bank's reasonable expenses, including without limitation reasonable
fees, disbursements, expenses and disbursements of counsel retained by Bank and
all fees related to filings, recording of documents, searches and title
insurance, in connection with (a) any subsequent amendments, modifications,
increases or extensions of the Line or the Term Loan, and (b) the enforcement,
protection and preservation of Bank's rights or remedies under the Loan
Documents or any documents collateral thereto. In the event Borrowers shall fail
to pay taxes, insurance, assessments, costs or expenses which they are required
to pay hereunder, or fails to keep the Collateral free from security interests
or lien (except as expressly permitted herein), or fails to maintain or repair
the Collateral as required hereby, Bank in its discretion, may make expenditures
for such purposes and the amount so expended (including legal fees and expenses,
filing fees and other charges) shall be payable by Borrowers on demand and shall
constitute part of the Bank Indebtedness.
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13. COMMUNICATIONS AND NOTICES.
13.1. COMMUNICATIONS AND NOTICES. All notices, requests and other
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested,
postage prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Borrowers:
Medifax, Inc.
6201 Powers Ferry Road, Suite 250
Atlanta, GA 30339
Attention: Mr. Edward L. Samek
Medical Records Corporation
3637 Green Road
Cleveland, Ohio 44122
Attention: Mr. Edward L. Samek
With a copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424
Attention: R. Gregory Brophy, Esquire
To Bank:
Summit Bank
One Bethlehem Plaza
Bethlehem, PA 18018
Attention: Edward T. Fitzgerald, Vice President
With a copy to:
Lesser & Kaplin, P.C.
350 Sentry Parkway, Building 640
Blue Bell, Pennsylvania 19422
Attention: Sara Lee Keller-Smith, Esquire
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14. DEFINITIONS. The following words and phrases as used in capitalized form in
this Agreement, whether in the singular or plural, shall have the meanings
indicated:
14.1. ACCOUNTING TERMS. As used in this Agreement, or any certificate,
report or other document made or delivered pursuant to this Agreement,
accounting terms not defined elsewhere in this Agreement and accounting terms
partly defined elsewhere in the Agreement to the extent not defined, shall have
the respective meanings given to them under GAAP.
14.2. "AFFILIATE", as to any Person, means each other Person that
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person in question.
14.3. "BASE RATE" means the annual interest rate established from time
to time by Bank and generally known by Bank as its "BASE RATE", whether
published by it publicly or only for the internal guidance of its loan officers.
The Base Rate is used merely as a pricing index and is not and should not be
considered to represent the lowest or best rate available to a borrower.
14.4. "BUSINESS DAY" means any day except a Saturday, Sunday or other
day on which commercial banks in Philadelphia, Pennsylvania are authorized by
law to close.
14.5. "CAPITALIZED LEASES" means all lease obligations which have been
or should be, in accordance with GAAP, capitalized on the books of the lessee.
14.6. "CAPITALIZED LEASE OBLIGATIONS" means all amounts payable with
respect to a Capitalized Lease.
14.7. "CONTRACT PERIOD" shall have the meaning set forth in SECTION
2.1.
14.8. "CORPORATION" means a corporation, partnership, trust,
unincorporated organization, association or joint stock company.
14.9. "CURRENT ASSETS" at a particular date, as applied to any
Borrower, means the assets, at such date, of that Borrower that would be
included as current assets on a balance sheet of that Borrower as determined in
accordance with GAAP.
14.10. "CURRENT LIABILITIES" at a particular date, as applied to any
Borrower, means the liabilities (including tax and other proper accruals) of
that Borrower which would be included as current liabilities on a balance sheet
of that Borrower at such date, in accordance with GAAP.
14.11. "ELIGIBLE RECEIVABLES" means accounts receivable of any Borrower
which have been due no more than ninety (90) days from the invoice date, are not
subject to offsets or deductions and comply with the representations set forth
in SECTION 5.17. Ineligible accounts receivable shall include, without
limitation: (a) non-trade receivables, (b) foreign accounts
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receivable; (c) contra-accounts; (d) inter-company accounts or accounts from
other affiliated corporations, organizations or individuals; (e) accounts
receivable from the United States government or any of its agencies which have
not been assigned to Bank under the Assignment of Claims Act; (f) finance
charges; (g) cross-aging reserves; (h) lease receivables; and (i) accounts
receivable owed by a Person if fifty percent (50%) or more of such Person's
accounts receivable owed to any Borrower are ninety (90) days or more past due.
Bank may require that certain reserves be established against certain accounts
receivable from time to time.
14.12. "EVENT OF DEFAULT" means each of the events specified in SECTION
12.1.
14.13. "GAAP" means generally accepted accounting principles in the
United States of America, in effect from time to time, consistently applied and
maintained.
14.14. "INDEBTEDNESS", as applied to a Person, means:
(a) all items (except items of capital stock or of surplus) which
in accordance with GAAP would be included in determining total liabilities as
shown on the liability side of a balance sheet of such Person as at the date as
of which Indebtedness is to be determined;
(b) to the extent not included in the foregoing, all
indebtedness, obligations, and liabilities secured by any mortgage, pledge,
lien, conditional sale or other title retention agreement or other security
interest to which any property or asset owned or held by such Person is subject,
whether or not the indebtedness, obligations or liabilities secured thereby
shall have been assumed by such Person; and
(c) to the extent not included in the foregoing, all
indebtedness, obligations and liabilities of others which such Person has
directly or indirectly guaranteed, endorsed (other than for collection or
deposit in the ordinary course of business), discounted, sold with recourse or
for less than face value or agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire or in respect of which such Person has agreed to
supply or advance funds (whether by way of loan, stock purchase, capital
contribution or otherwise) or otherwise to become directly or indirectly liable.
14.15. "LIBOR LOANS" means, at a particular date, all Line LIBOR Loans,
if any, and the Term LIBOR Loan, if any.
14.16. "LIBOR RATE" means the London Interbank Offered Rate (LIBOR) for
the Rate Period requested, as published in THE WALL STREET JOURNAL on the first
day of the Rate Period, or if such day is not a day on which THE WALL STREET
JOURNAL is published, then the last preceding Business Day before such date.
14.17. "LINE BASE RATE" means the Base Rate minus one percent (1%),
which rate shall change immediately upon any change in the Base Rate.
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14.18. "LINE LIBOR LOANS" means loans and advances extended by Bank to
Borrowers under the Line bearing interest at a Line LIBOR Rate.
14.19. "LINE LIBOR RATE" means for any day during each Line Rate Period
the per annum rate of interest (computed on a basis of a year of 365 days and
actual days elapsed) determined by Bank by adding (a) the LIBOR Rate, and (b)
one hundred twenty-five (125) basis points. In the event that the Line LIBOR
Rate is unavailable or cannot be ascertained, Bank shall have the right to
designate the Line LIBOR Rate on such basis as it shall reasonably determine.
14.20. "LINE RATE PERIOD" means for any portion of principal of the
Line for which Borrowers elect the Line LIBOR Rate, the period of time for which
such rate shall apply to such principal portion. Line Rate Periods for principal
earning interest at the Line LIBOR Rate shall be for periods of 30, 60 or 90
days, and for no other lengths of time, provided that, no Line Rate Period may
end after the Contract Period. If the last day of a Line Rate Period falls on a
day other than a Business Day, Bank, at its option, may contract or expand the
applicable Line Rate Period to cause such rate period to end on a Business Day.
14.21. "LOAN DOCUMENTS" means the Existing Loan Documents, the Line
Note, Term Notes, the Existing Term Notes and all other documents, executed or
delivered by Borrower pursuant to this Agreement.
14.22. "LONDON BUSINESS DAY" means any day except a Saturday, Sunday or
other day on which commercial banks in London, England are authorized by law to
close.
14.23. "MARCUSES" means Herbert L. Marcus, Martin H. Marcus, Philip M.
Cohen, Jeffrey S. Marcus, Lynne M. Cohen, Gregory A. Marcus, Steven I. Marcus
and Catherine R. Huser.
14.24. "MARCUS SECURITY AGREEMENT" means that certain Security
Agreement dated June 19, 1996, by and between Medifax and the Marcuses.
14.25. "MARCUS SUBORDINATION AGREEMENTS" means those certain
Subordination Agreements dated June 19, 1996, by and between the Marcuses,
Medifax, MRC and Bank.
14.26. "NOTIFICATION" means telephonic notice (which shall be
irrevocable) by Borrowers to Bank that Borrowers have requested that (a) a Line
LIBOR Rate shall apply to all or some portion of the principal amount of the
Line in accordance with the provisions of SECTION 2.6 hereof, or (b) a Term
LIBOR Rate shall apply to the outstanding principal balance of the Term Loan in
accordance with the provisions of SECTION 2.7 hereof which notice shall be given
no later than 10:00 a.m. Philadelphia time, on the day which at least two (2)
Business Days prior to the day (which shall be a day on which Bank is open for
business) on which such election is to become effective, which notice shall
specify (i) for a Line LIBOR Loan, (A) the principal
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amount of the Line to be subject to such rate; (B) whether such amount is a new
advance, a renewal of a previous request of such rate, a conversion from one
interest rate to another, or a combination thereof; and (C) the Line Rate Period
(if required) selected; and (ii) for any LIBOR Loan, the date on which such
request is to become effective.
14.27. "PERMITTED LIENS" means those liens described on SCHEDULE 14.23
attached hereto.
14.28. "PERSON" means an individual, a Corporation or a government or
any agency or subdivision thereof.
14.29. "RATE PERIOD" means either a Line Rate Period or a Term Rate
Period.
14.30. "SAMEK SECURITY AGREEMENT" means that certain Subordinated
Security Agreement dated December 6, 1994, between Borrowers, as debtors, and
Edward L. Samek, as secured party.
14.31. "SUBORDINATED INDEBTEDNESS" means the Indebtedness described in
SECTION 6.17 above.
14.32. "SUBSIDIARY" means a Corporation (a) which is organized under
the laws of the United States or any State thereof, (b) which conducts
substantially all of its business and has substantially all of its assets within
the United States, and (c) of which more than fifty percent (50%) of its
outstanding voting stock of every class (or other voting equity interest) is
owned by Borrowers or one or more of its Subsidiaries.
14.33. "TANGIBLE NET WORTH", as applied to any Borrower means the
remainder after deducting from the sum of all assets (net of reserve for
uncollectible accounts, depreciation, amortization, obsolescence and the like)
properly appearing on a balance sheet of that Borrowers prepared in accordance
with GAAP, the following:
(a) all Indebtedness of that Borrower; and
(b) to the extent reflected as an asset in such balance sheet,
(i) the book amount of all assets which would be treated as intangibles under
generally accepted accounting principles, including without limitation such
items as organizational costs (as currently reflected on that Borrower's
financial statements), good will, trademarks, trade names, service marks, brand
names, franchises, copyrights, patents, licenses, rights with respect to the
foregoing, leasehold improvements and unamortized debt discount and expense,
(ii) all deferred charges, (iii) any write-up in the book value of any asset
resulting from a re-evaluation thereof subsequent to the acquisition thereof
(except write-ups to actual value specifically approved by Bank), (iv) the
amount, if any, at which securities (other than indebtedness in good standing)
of any Person which is not readily marketable appear on the asset side of such
balance sheet, (v) the amount,
-33-
<PAGE> 35
if any, at which inventories or securities appearing on the asset side of such
balance sheet exceed the lower of cost or current market value thereof or the
price at which such Person has agreed to sell such inventories or securities,
(vi) the book amount of any asset which is subject to pledge, lien, encumbrance
or charge (including any escrow or similar deposit) to secure the payment of any
obligation or indemnity to the extent that the amount of such obligation or
indemnity does not constitute Indebtedness of that Borrower or to the extent
that the amount of such obligation or indemnity cannot be ascertained and (vii)
loans and notes payable due to that Borrower from affiliates, directors or
officers of that Borrower.
14.34. "TERM BASE RATE" means the Base Rate minus three-quarters of one
percent (3/4 of 1%), which rate shall change immediately upon any change in the
Base Rate.
14.35. "TERM LIBOR LOAN" means any loan extended by Bank to Borrowers
under the Term Loan bearing interest at a Term LIBOR Rate.
14.36. "TERM LIBOR RATE" means for any day during each Term Rate Period
the per annum rate of interest (computed on a basis of a year of 365 days and
actual days elapsed) determined by Bank by adding (a) the LIBOR Rate, and (b)
one hundred sixty-five (165) basis points. In the event that the Term LIBOR Rate
is unavailable or cannot be ascertained, Bank shall have the right to designate
the Term LIBOR Rate on such basis as it shall reasonably determine.
14.37. "TERM RATE PERIOD" means for any Term LIBOR Loan, the period of
time for which such rate shall apply to such loan. Term Rate Periods for
principal earning interest at the Term LIBOR Rate shall be for periods of 30, 60
or 90 days, and for no other lengths of time, provided that, no Term Rate Period
may end after the Contract Period.
15. WAIVERS.
15.1. WAIVERS. In connection with any proceedings under the Loan
Documents, including without limitation any action by Bank in replevin,
foreclosure or other court process or in connection with any other action
related to the Loan Documents or the transactions contemplated hereunder,
Borrowers waive:
(a) all errors, defects and imperfections in such proceedings;
(b) all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from attachment,
levy or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered under any of the Loan Documents or in any
replevin or foreclosure proceeding, or otherwise providing for any valuation,
appraisal or exemption;
(c) presentment for payment, demand, notice of demand, notice of
non-
-34-
<PAGE> 36
payment, protest and notice of protest of any of the Loan Documents, including
the Notes;
(d) any requirement for bonds, security or sureties required by
statute, court rule or otherwise; and
(e) any demand for possession of Collateral prior to commencement
of any suit.
15.2. FORBEARANCE. Bank may release, compromise, forbear with respect
to, waive, suspend, extend or renew any of the terms of the Loan Documents,
without notice to Borrowers.
15.3. LIMITATION ON LIABILITY. Borrowers shall be responsible for and
Bank is hereby released from any claim or liability in connection with:
(a) Safekeeping any Collateral;
(b) Any loss or damage to any Collateral;
(c) Any diminution in value of the Collateral; or
(d) Any act or default of another Person.
Bank shall only be liable for any act or omission on its part
constituting gross negligence or wilful misconduct. In the event that Bank
breaches its required standard of conduct, Borrowers agree that Bank's liability
shall be only for direct damages suffered and shall not extend to consequential
or incidental damages.
16. SUBMISSION TO JURISDICTION.
16.1. SUBMISSION TO JURISDICTION. Borrowers hereby jointly and
severally consent to the exclusive jurisdiction of any state or federal court
located within the Commonwealth of Pennsylvania, and irrevocably agree that,
subject to the Bank's election, all actions or proceedings relating to the Loan
Documents or the transactions contemplated hereunder shall be litigated in such
courts, and Borrowers jointly and severally waive any objection which they may
have based on improper venue or FORUM NON CONVENIENS to the conduct of any
proceeding in any such court and waive personal service of any and all process
upon them, and consent that all such service of process be made by mail or
messenger directed to them at the address set forth in SECTION 13.1 and that
service so made shall be deemed to be completed upon the earlier of actual
receipt or three (3) days after the same shall have been posted to the address
of Borrowers set forth below. Nothing contained in this SECTION 16.1 shall
affect the right of Bank to serve legal process in any other manner permitted by
law or affect the right of Bank to bring any action or proceeding against
Borrowers or their property in the courts of any other jurisdiction.
-35-
<PAGE> 37
17. MISCELLANEOUS.
17.1. SURVIVAL. All covenants, agreements, representations and
warranties made by Borrowers in the Loan Documents or made by or on their behalf
in connection with the transactions contemplated here shall be true at all times
this Agreement is in effect and shall survive the execution and delivery of the
Loan Documents, any investigation at any time made by Bank or on its behalf and
the making by Bank of the loans or advances to Borrowers. All statements
contained in any certificate, statement or other document delivered by or on
behalf of Borrowers pursuant hereto or in connection with the transactions
contemplated hereunder shall be deemed representations and warranties by
Borrowers.
17.2. NO ASSIGNMENT BY BORROWERS. No Borrower may assign any of its
rights hereunder without the prior written consent of Bank, and Bank shall not
be required to lend hereunder except to Borrowers as they presently exists.
17.3. ASSIGNMENT OR SALE BY BANK. Bank may sell or assign all or a
portion of its interest in the Loan Documents to any Affiliate of Bank and in
connection therewith may make available to any such prospective purchaser or
assignee any information relative to Borrowers in its possession.
17.4. BINDING EFFECT. This Agreement and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
17.5. SEVERABILITY. The provisions of this Agreement and all other Loan
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
17.6. NO THIRD PARTY BENEFICIARIES. The rights and benefits of this
Agreement and the Loan Documents shall not inure to the benefit of any third
party.
17.7. MODIFICATIONS. No modification of this Agreement or any of the
Loan Documents shall be binding or enforceable unless in writing and signed by
or on behalf of the party against whom enforcement is sought.
17.8. HOLIDAYS. If the day provided herein for the payment of any
amount or the taking of any action falls on a Saturday, Sunday or public holiday
at the place for payment or action, then the due date for such payment or action
will be the next succeeding business day.
17.9. LAW GOVERNING. This Agreement has been made, executed and
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth.
-36-
<PAGE> 38
17.10. INTEGRATION. The Loan Documents shall be construed as integrated
and complementary of each other, and as augmenting and not restricting Bank's
rights, powers, remedies and security. The Loan Documents contain the entire
understanding of the parties thereto with respect to the matters contained
therein and supersede all prior agreements and understandings between the
parties with respect to the subject matter thereof and do not require parol or
extrinsic evidence in order to reflect the intent of the parties. In the event
of any inconsistency between the terms of this Agreement and the terms of the
other Loan Documents, the terms of this Agreement shall prevail. Notwithstanding
the foregoing, the parties hereto acknowledge and agree that the terms and
conditions of their agreement are set forth herein and in the Line Note, the
Term Notes, the Assignment of Contracts and the Surety. Any other Loan Documents
existing as of the date hereof are specifically superseded hereby and thereby,
except that such supersession does not and shall not be deemed to terminate or
satisfy any such existing Loan Documents.
17.11. EXHIBITS AND SCHEDULES. All exhibits and schedules attached
hereto are hereby made a part of this Agreement.
17.12. HEADINGS. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
17.13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
17.14. WAIVER OF JURY TRIAL. BORROWERS AND BANK WAIVE ANY RIGHT TO
TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER
ANY OF THE LOAN DOCUMENTS OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF BORROWERS OR BANK WITH RESPECT TO ANY OF THE LOAN
DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWERS AND BANK AGREE AND CONSENT
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWERS AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
BORROWERS ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL
REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND
EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS
SECTION.
-37-
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MEDIFAX, INC.
By: /s/ HAINES HARGRETT
---------------------------------------
[CORPORATE SEAL] Name/Title: Treasurer
-------------------------------
MEDICAL RECORDS CORP.
By: /s/ HAINES HARGRETT
---------------------------------------
Name/Title: Treasurer
-------------------------------
[CORPORATE SEAL]
SUMMIT BANK
By: /s/ EDWARD T. FITZGERALD
---------------------------------------
Edward T. Fitzgerald, Vice President
-38-
<PAGE> 40
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medifax, Inc., a Missouri corporation, and that he as such
officer being authorized to do so, executed the foregoing Agreement for the
purposes therein contained by signing the name of the corporation by himself as
Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
------------------------------
Notary Public
My commission expires:
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medical Records Corp., an Ohio corporation, and that he as
such officer being authorized to do so, executed the foregoing Agreement for the
purposes therein contained by signing the name of the corporation by himself as
Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
------------------------------
Notary Public
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
-39-
<PAGE> 41
LINE NOTE
---------
(SEE ATTACHED)
EXHIBIT "A"
-----------
TO
AMENDED AND RESTATED LOAN
AND SECURITY AGREEMENT
-40-
<PAGE> 42
FORM OF TERM NOTE
-----------------
(SEE ATTACHED)
EXHIBIT "B"
-----------
TO
AMENDED AND RESTATED LOAN
AND SECURITY AGREEMENT
-41-
<PAGE> 43
SECOND AMENDED AND RESTATED NOTE
--------------------------------
Blue Bell, Pennsylvania
Made Effective July 30, 1996
$10,000,000.00
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the
undersigned (collectively, the "BORROWER"), hereby promises to pay to the order
of SUMMIT BANK, as successor-in-interest to First Valley Bank, ("BANK"), ON
DEMAND after the occurrence of an Event of Default or after June 30, 1998, the
principal sum of Ten Million Dollars ($10,000,000.00), or such greater or lesser
principal amount as may be outstanding from time to time under the line of
credit established by Bank for the benefit of Borrower pursuant to the terms of
that certain Second Amended and Restated Loan and Security Agreement dated July
__, 1996 between Borrower and Bank (such Second Amended and Restated Loan and
Security Agreement, as the same may be amended, supplemented or restated from
time to time, being the "LOAN AGREEMENT"), together with interest thereon, upon
the following terms:
1. LINE NOTE. This Note is the "LINE NOTE" as defined in the Loan
Agreement and, as such, shall be construed in accordance with all terms and
conditions thereof. Capitalized terms not defined herein shall have such meaning
as provided in the Loan Agreement. This Note is entitled to all the rights and
remedies provided in the Loan Agreement and the Loan Documents and is secured by
all collateral as described therein.
2. INTEREST RATE. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the applicable
rate(s) per annum as selected by Borrower from time to time in accordance with
the terms of the Loan Agreement.
3. LATE CHARGE. Bank shall be entitled to receive a late fee equal to
four percent (4%), but not less than Five Dollars ($5.00), of any amounts
hereunder not paid within fifteen (15) days of the applicable due date. Late
charges assessed by Bank shall be immediately due and payable.
4. DEFAULT INTEREST. Interest will accrue on the outstanding principal
amount hereof following the occurrence of an Event of Default or the expiration
of the Contract Period until paid at a rate per annum which is two and one-half
percent (2 1/2%) in excess of the rate payable under PARAGRAPH 2 above (the
"DEFAULT RATE").
5. POST JUDGMENT INTEREST. Any judgment obtained for sums due hereunder
or under the Loan Documents will accrue interest at the Default Rate until paid.
6. COMPUTATION. Interest will be computed on the basis of a year of
three hundred sixty-five (365) days and paid for the actual number of days
elapsed.
-1-
<PAGE> 44
7. INTEREST PAYMENTS. Interest which accrues on the outstanding
principal balance hereof at the applicable rate set forth above shall be due and
payable monthly, as billed by Bank, on the first day of each calendar month,
commencing on the first day of the first calendar month following the date
hereof.
8. PLACE OF PAYMENT. Principal and interest hereunder shall be payable
as provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
9. DEFAULT; REMEDIES. Upon the occurrence of an Event of Default or upon
demand as provided above, Bank, at its option and without notice to Borrower,
may declare immediately due and payable the entire unpaid balance of principal
and all other sums due by Borrower hereunder or under the Loan Documents,
together with interest accrued thereon at the applicable rate specified above.
Payment thereof may be enforced and recovered in whole or in part at any time
and from time to time by one or more of the remedies provided to Bank in this
Note or in the Loan Documents or as otherwise provided at law or in equity, all
of which remedies are cumulative and concurrent.
10. WAIVERS. BORROWER AND ALL ENDORSERS, JOINTLY AND SEVERALLY, WAIVE
PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF NONPAYMENT OR
DISHONOR, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALL OTHER NOTICES IN
CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT OF
THE PAYMENT OF THIS NOTE, EXCEPT FOR SUCH NOTICES, IF ANY, AS ARE EXPRESSLY
REQUIRED TO BE DELIVERED BY BANK TO BORROWER UNDER THE LOAN AGREEMENT.
11. MISCELLANEOUS. If any provisions of this Note shall be held invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Bank and its
successors and assigns. The prompt and faithful performance of all of Borrower's
obligations hereunder, including without limitation, time of payment, is of the
essence of this Note.
12. JOINT AND SEVERAL LIABILITY. If there is more than one Borrower
executing this Note, all agreements, conditions, covenants and provisions of
this Note shall be the joint and several obligation of each Borrower.
13. NO NOVATION. This Note amends and restates, but does not satisfy or
repay, the obligations of Borrowers, or either of them, to Bank under (a) an
Amended and Restated Note dated December 22, 1992, given by Secrephone, Ltd. in
the original principal amount of $2,000,000.00, (b) a Note dated June 30, 1994
given by Secrephone, Ltd. in the original principal amount of $500,000.00, (c) a
Note dated December 23, 1994 given by Borrower in the original principal amount
of $3,500,000.00, and (d) an Amended and Restated Note dated August 24, 1995
given by Medifax, Inc. and Secrephone, Ltd. in the original principal amount of
$5,000,000.00.
-2-
<PAGE> 45
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
MEDIFAX, INC.
(CORPORATE SEAL) By: /s/ HAINES H. HARGRETT
----------------------------------
Name/Title: Treasurer
--------------------------
MEDICAL RECORDS CORP.
(CORPORATE SEAL) By: /s/ HAINES H. HARGRETT
----------------------------------
Name/Title: Treasurer
--------------------------
THIS NOTE IS HEREBY ACCEPTED AND THE TRANSACTIONS CONTEMPLATED
HEREIN ARE DEEMED CLOSED AS OF THIS 30TH DAY OF JULY, 1996 AT BLUE BELL,
PENNSYLVANIA.
SUMMIT BANK
By: /s/ EDWARD T. FITZGERALD
-----------------------------------------------
Edward T. Fitzgerald, Vice President
-3-
<PAGE> 46
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medifax, Inc., a Missouri corporation, and that he as such officer
being authorized to do so, executed the foregoing instrument for the purposes
therein contained by signing the name of the corporation by himself as
Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
----------------------------------
Notary Public
My commission expires:
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medical Records Corp., an Ohio corporation, and that
he as such officer being authorized to do so, executed the foregoing instrument
for the purposes therein contained by signing the name of the corporation by
himself as Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
----------------------------------
Notary Public
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
-4-
<PAGE> 47
AMENDED AND RESTATED TERM NOTE
------------------------------
Blue Bell, Pennsylvania
Made Effective July 30, 1996
$7,000,000.00
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the
undersigned (collectively, the "BORROWER") hereby promises to pay to the order
of SUMMIT BANK, as successor-in-interest to First Valley Bank, ("BANK"), the
principal sum of Seven Million Dollars ($7,000,000.00), together with interest
thereon upon the following terms:
1. TERM NOTE. This Note is a "TERM NOTE" as defined in that certain
Second Amended and Restated Loan and Security Agreement of even date herewith
among Borrower and Bank (such Second Amended and Restated Loan and Security
Agreement, as the same may be further amended, supplemented or restated from
time to time, being the "LOAN AGREEMENT") and, as such, shall be construed in
accordance with all terms and conditions thereof. Capitalized terms not defined
herein shall have such meaning as provided in the Loan Agreement. This Note is
entitled to all the rights and remedies provided in the Loan Agreement and the
Loan Documents and is secured by all collateral as described therein.
2. INTEREST RATE. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the applicable
rate(s) per annum as selected by Borrower from time to time in accordance with
the terms of the Loan Agreement.
3. LATE CHARGE. Bank shall be entitled to receive a late fee equal to
four percent (4%), but not less than Five Dollars ($5.00), of any amounts
hereunder not paid within fifteen (15) days of the applicable due date. Late
charges assessed by Bank shall be immediately due and payable.
4. DEFAULT INTEREST. Interest will accrue on the outstanding principal
amount hereof following the occurrence of an Event of Default or the final
maturity date hereof, until paid at a rate per annum which is two and one-half
percent (2 1/2%) in excess of the rate payable under PARAGRAPH 2 above (the
"DEFAULT RATE").
5. POST JUDGMENT INTEREST. Any judgment obtained for sums due hereunder
or under the Loan Documents will accrue interest at the Default Rate until paid.
6. COMPUTATION. Interest will be computed on the basis of a year of
three hundred sixty-five (365) days and paid for the actual number of days
elapsed.
7. INTEREST PAYMENTS. Borrowers will pay interest on the principal
balance of this Note as follows:
(a) for advances bearing interest based on the Term Base Rate,
interest will be payable on the first day of each calendar month as billed by
Bank, and
1
<PAGE> 48
(b) for advances bearing interest based on the Term LIBOR Rate,
interest will be payable at the end of the applicable Term Rate Period.
8. PRINCIPAL PAYMENTS. Principal is due and payable in (a) fifty-nine
(59) consecutive monthly payments each in the amount of One Hundred Sixteen
Thousand Six Hundred Sixty-Six Dollars and Sixty-Seven Cents ($116,666.67) on
the 1st day of each calendar month commencing on October 1, 1996, and (b) one
final payment of the remaining principal balance hereof plus all accrued and
unpaid interest thereon, together with all fees and charges due hereunder and
under the Loan Agreement on September 1, 2001.
9. PLACE OF PAYMENT. Principal and interest hereunder shall be payable
as provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
10. DEFAULT; REMEDIES. Upon the occurrence of an Event of Default,
Bank, at its option and without notice to Borrower, may declare immediately due
and payable the entire unpaid balance of principal and all other sums due by
Borrower hereunder and under the other Loan Documents, together with interest
accrued thereon at the applicable rate specified above to the date of the Event
of Default and thereafter at the Default Rate. Payment thereof may be enforced
and recovered in whole or in part at any time and from time to time by one or
more of the remedies provided to Bank in this Note or in the Loan Documents or
as otherwise provided at law or in equity, all of which remedies are cumulative
and concurrent.
11. WAIVERS. BORROWER AND ALL ENDORSERS HEREBY, JOINTLY AND SEVERALLY,
WAIVE PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF NONPAYMENT OR
DISHONOR, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALL OTHER NOTICES IN
CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT OF
THE PAYMENT OF THIS NOTE.
12. MISCELLANEOUS. If any provisions of this Note shall be held invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Bank and its
successors and assigns. The prompt and faithful performance of all of Borrower's
obligations hereunder, including without limitation, time of payment, is of the
essence of this Note.
13. JOINT AND SEVERAL LIABILITY. If there is more than one Borrower
executing this Note, all agreements, conditions, covenants and provisions of
this Note shall be the joint and several obligation of each Borrower.
14. NO NOVATION. This Note amends and restates, but does not satisfy or
repay, Borrower's obligations under a certain Term Note dated August 24, 1995
given by Medifax, Inc. and Secrephone, Ltd. in the original principal amount of
$5,000,000.00.
2
<PAGE> 49
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
MEDIFAX, INC.
(CORPORATE SEAL)
By: /s/ HAINES H. HARGRETT
---------------------------------
Name/Title: Treasurer
-------------------------
MEDICAL RECORDS CORP.
(CORPORATE SEAL)
By: /s/ HAINES H. HARGRETT
---------------------------------
Name/Title: Treasurer
-------------------------
THIS NOTE IS HEREBY ACCEPTED AND THE TRANSACTIONS CONTEMPLATED
HEREIN ARE DEEMED CLOSED AS OF THIS 30TH DAY OF JULY, 1996 AT BLUE BELL,
PENNSYLVANIA.
SUMMIT BANK
By: /s/ EDWARD T. FITZGERALD
---------------------------------
Edward T. Fitzgerald, Vice President
3
<PAGE> 50
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medifax, Inc., a Missouri corporation, and that he as such officer
being authorized to do so, executed the foregoing instrument for the purposes
therein contained by signing the name of the corporation by himself as
Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
---------------------------------
Notary Public
My commission expires:
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
STATE OF Georgia :
: SS.
COUNTY OF Cobb :
On this, the 30th day of July, 1996, before me, a Notary Public,
personally appeared Haines Hargrett, who acknowledged himself to be the
Treasurer of Medical Records Corp., an Ohio corporation, and that he as such
officer being authorized to do so, executed the foregoing instrument for the
purposes therein contained by signing the name of the corporation by himself as
Treasurer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ ANGELA M. BIGGICA
---------------------------------
Notary Public
Notary Public, Cobb County, Georgia
My commission expires: December 3, 1999
4
<PAGE> 1
Exhibit 10.3
THE MRC GROUP, INC.
AMENDED AND RESTATED
1992 EMPLOYEE STOCK OPTION PLAN
1. Purpose. The purpose of this plan (the "Plan") is to secure
for The MRC Group, Inc. (the "Company"), and its shareholders the benefits
arising from capital stock ownership by certain key advisors, consultants,
employees and members of the Board of Directors ("Directors") of the Company and
its subsidiary (as defined in Section 17 hereof), if any, who are expected to
contribute to the Company's future growth and success.
2. Types of Awards and Administration.
a. Types of Awards. Options granted pursuant to the
Plan shall be as specified herein and authorized by action of the Board of
Directors of the Company (or a Committee designated by the Board of Directors)
and may be either incentive stock options ("Incentive Stock Options") meeting
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") or non-qualified stock options which are not intended to meet the
requirements of Section 422.
b. Administration. The Plan will be administered by
the Board of Directors of the Company, whose construction and interpretation of
the terms and provisions of the Plan shall be final and conclusive. The Board of
Directors may in its sole discretion, subject to the terms of this Plan, grant
options to purchase shares of the Company's Common Stock and issue shares upon
exercise of such options, as provided in the Plan. The Board shall have
authority, subject to the express provisions of the Plan and all applicable
securities laws, rules and regulations, to construe the respective option
agreements and the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine the terms and provisions of the respective
option agreements (which need not be identical), to advance the lapse of any
waiting or installment periods and exercise dates, and to make all other
determinations in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable
<PAGE> 2
for any action or determination made in good faith. The Board of Directors may,
to the full extent permitted by law, delegate any or all of its powers under the
Plan to a committee (the "Committee") appointed by the Board of Directors, and
if the Committee is so appointed all references to the Board of Directors in the
Plan shall mean and relate to such Committee.
c. Indemnification. In addition to such other rights
of indemnification as they may have as Directors or as members of the Committee,
members of the Board of Directors and of the Committee shall be indemnified by
the Company against reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any option (and/or related right) granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company), or paid by them in satisfaction of a judgment of any such action, suit
or proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such person is liable for negligence or
misconduct in his duties; provided that within sixty (60) days after the
institution of such action, suit or proceeding, such person shall offer the
Company, in writing, the opportunity at its own expense, to handle and defend
the same.
3. Eligibility. Incentive Stock options shall be granted only
to persons who are, at the time of grant, full-time employees of the Company or
Subsidiary, if any. No person shall be granted an Incentive Stock Option under
the Plan who, at the time such option is granted, owns, directly or indirectly,
Common Stock of the Company possessing more than 10% of the total combined
voting power of all classes of stock of the Company or Subsidiary, unless the
requirements of paragraph (b) of Section 11 are satisfied. Non-qualified options
may be granted to officers, full-time employees, Directors and consultants to
the Company or any subsidiary. A person who has been granted an option under the
Plan ("Optionee") may, if he or she is otherwise eligible, be granted additional
options if the Board of Directors shall so determine.
4. Stock Subject to Plan. Subject to adjustment as provided in
Section 13 and 14 below, the maximum number of shares of Common Stock of the
Company which may be issued and
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<PAGE> 3
sold under the Plan is 5,714,286 shares. Such shares may be authorized and
unissued shares or may be shares issued and thereafter acquired by the Company.
If an option granted under the Plan shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares subject to such
option shall again be available for subsequent option grants under the Plan.
Stock issuable upon exercise of an option granted under the Plan may be subject
to such restrictions on transfer, repurchase rights or other restrictions as
shall be determined by the Board of Directors.
5. Forms of Options. As a condition to the grant of an option
under the Plan, each recipient of an option shall execute an option agreement,
in such form not inconsistent with the Plan as shall be specified by the Board
of Directors at the time such option is granted.
6. Purchase Price.
a. General. The purchase price per share of stock
deliverable upon the exercise of an option shall be determined by the Board of
Directors, provided, however, that in the case of an Incentive Stock Option, the
exercise price shall not be less than 100% of the fair market value of such
stock on the date of grant of such option, or less than 110% of such fair market
value in the case of options described in paragraph (b) of Section 11. In the
case of a non-qualified stock option, the exercise price shall be determined by
the Board of Directors in their discretion on the date of grant of such option.
As used herein, "fair market value" on a given date shall mean the average of
the highest and lowest selling price per share on the principal securities
exchange (or the Nasdaq National Market) if the Common Stock is so traded; or if
not so traded, "fair market value" shall mean the average of closing "bid" and
"ask" prices for one share of the Common Stock of the Company as quoted on
Nasdaq or a successor quotation system, or on such other public market system as
the Common Stock of the Company is then-listed, or in the event such quotations
are not available, "fair market value" shall be determined in the good faith
discretion of the Board of Directors.
b. Payment of Purchase Price. Options granted under
the Plan may provide for the payment of the exercise price by delivery of
(i) cash, (ii) a check to the order of the Company in an amount equal to the
exercise price of such options, (iii) shares of Common Stock of the Company
already owned by the Optionee for at least six (6) months prior to the date the
Optionee tenders such shares, having a fair market value equal in amount to the
exercise price of the options being exercised, or (iv) by any combination of
such methods of payment, as permitted by applicable law. The fair market value
of any shares of the Company's Common Stock which may be delivered upon exercise
of an option shall be determined in the manner specified above.
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<PAGE> 4
7. Option Period. Each option and all rights thereunder shall
be expressed to expire on such date as the Board of Directors shall determine,
but in no event after the expiration of ten (10) years from the day on which the
option is granted (subject to the special limitations set forth in paragraph (b)
of Section 11), and shall be subject to earlier termination as provided in the
Plan.
8. Exercise of Options. Each option may be exercisable, in
part or in full, at any time and from time to time, and subject to such
conditions and restrictions as determined by the Board of Directors and as set
forth herein or in the agreement evidencing such option, during a ten (10) year
period following the date of grant thereof (subject to the special limitations
set forth in paragraph (b) of Section 11). To the extent that an option to
purchase shares is not exercised by an Optionee when it becomes initially
exercisable, it shall not expire but shall be carried forward and shall be
exercisable, on a cumulative basis, until the expiration of the exercise period.
9. Nontransferability of Options. No option granted under the
Plan shall be assignable or transferable by the person to whom it is granted,
either voluntarily or by operation of law, except by will or the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
by the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, or the rules thereunder; provided, however, that
if so provided in the instrument evidencing the option, the Board of Directors,
or the Committee, as the case may be, may permit any Optionee to transfer the
option during his lifetime to one or more members of his family, to one or more
trusts for the benefit of one or more members of his family or to one or more
entities owned solely by family members, provided that no consideration is paid
for the transfer and that such transfer would not result in the loss of any
exemption under Rule 16b-3 promulgated under the Securities Act of 1933, as
amended, for any option that the Board of Directors or the Committee, as the
case may be, does not permit to be so transferred. The transferee of an option
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<PAGE> 5
shall be subject to all restrictions, terms, and conditions applicable to the
option prior to its transfer, except that the option shall not be further
transferable inter vivos by the transferee. The Board of Directors or the
Committee, as the case may be, may impose on any transferable option and on the
Common Stock to be issued upon the exercise of the option such limitations and
conditions as the Board of Directors or the Committee, as the case may be, deems
appropriate.
10. Effect of Termination of Employment. For all purposes of
the Plan and any option or purchase right granted hereunder, "employment" shall
be defined in accordance with the provisions of Section 1.421-7(h) of the Income
Tax Regulations (or any successor regulations). No option may be exercised
unless, at the time of such exercise, the Optionee is, and has been continuously
since the date of grant of his or her option, employed by the Company or a
subsidiary, except that if and to the extent the option agreement so provides:
a. The option may be exercised within the period of
three months after the date the Optionee ceases to be an employee of any of the
foregoing entities (or within such shorter or longer period as may be specified
or provided for in the option agreement; provided, however, that the exercise of
the option shall not be less than thirty (30) days after the termination of
employment of the Optionee); provided, however, that in no event may an option
be exercised after the expiration date of the option.
b. If the Optionee dies while in the employ of the
Company, a Parent Corporation or a Subsidiary or within three months after the
Optionee ceases to be such an employee, the option may be exercised by the
person to whom it is transferred by will or the laws of descent and distribution
within the period of one year after the date of death (or within such shorter or
longer period as may be specified or provided for in the option agreement or
instrument, but in no event shall the period be less than six (6) months after
the date of death); provided, however, that in no event may an option be
exercised after the expiration date of the option.
c. If the Optionee becomes "disabled" while in the
employ of the Company, a Parent Corporation or a Subsidiary, the option may be
exercised within the period of one year after the date the Optionee ceases to be
an employee of any of the foregoing entities because of such disability (or
within such shorter or longer period as may be specified or provided for in
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<PAGE> 6
the option agreement or instrument but in no event shall the period be less than
six (6) months after the date the Optionee ceases to be an employee because of
such disability); provided, however, that in no event may any option be
exercised after the expiration date of the option. For purposes of this Plan,
the Optionee shall be considered "disabled" if he or she is unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment, which can be expected to result in death or which
has lasted, or can be expected to last, for a continuous period of not less than
twelve (12) months.
11. Incentive Stock Options. Options granted under the Plan
which are intended to be Incentive Stock Options shall be specifically
designated as Incentive Stock Options and shall be subject to the following
additional terms and conditions:
a. Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock
which may be made the subject of Incentive Stock Options granted under the Plan
(and under any other stock option plans of the Company, and any Parent
Corporation and Subsidiary) to any employee, which first become exercisable in
any one calendar year shall not exceed the sum of $100,000 or such greater
amount as may be permitted under subsequent amendments to the Code.
b. 10% Shareholder. If an employee to whom an
Incentive Stock Option is to be granted under the Plan is at the time of the
grant of such option the owner of stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of any Parent
corporation or any Subsidiary, then the purchase price per share of the Common
Stock subject to such Incentive Stock Option shall not be less than one hundred
ten percent (110%) of the fair market value of one share of Common Stock of the
Company at the time of grant and the Incentive Stock Option shall have a maximum
term of five years.
c. Maximum Grant. No individual may be granted
options in any calendar year, whether an Incentive Stock Option or a
nonqualified stock option, to purchase more than 714,286 shares of Common Stock.
Except as modified by the preceding provisions of
this Section 11, all the provisions of the Plan
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<PAGE> 7
shall be applicable to Incentive Stock Options granted hereunder.
12. Rights as a Shareholder. The holder of an option shall
have no rights as a shareholder with respect to any shares covered by the option
until the date of issue of a stock certificate to him or her for such shares.
Except as otherwise expressly provided in the Plan, no adjustment shall be made
for dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
13. Recapitalization. In the event that the outstanding shares
of Common Stock of the Company are changed into or exchanged for a different
number or kind of shares or other securities of the Company by reason of any
recapitalization, reclassification, stock split, stock dividend, combination or
subdivision, appropriate adjustment shall be made in the number and kind of
shares available under the Plan and under any options granted under the Plan.
Such adjustment to outstanding options shall be made without change in the total
price applicable to the unexercised portion of such options, and a corresponding
adjustment in the applicable option price per share shall be made. No such
adjustment shall be made which would, within the meaning of any applicable
provisions of the Code, constitute a modification, extension or renewal of any
option or a grant of additional benefits to the holder of an option.
14. Reorganization. In case the Company is merged or
consolidated with another corporation and the Company is not the surviving
corporation, or in case the acquiring corporation is not assuming the
obligations of the Company with respect to its outstanding options, or in the
case all or substantially all of the assets or more than fifty percent (50%) of
the outstanding voting stock of the Company is acquired by another corporation
(unless all voting stock acquired by said corporation is acquired directly from
the Company), or in the case of a reorganization or liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, shall, as to outstanding
options, either (i) make appropriate provision for the protection of any such
outstanding options by the substitution on an equitable basis of appropriate
stock of the Company, or of the merged, consolidated or otherwise reorganized
corporation which will be issuable in respect to the shares of Common Stock of
the Company, provided that no additional benefits shall be conferred upon
Optionees or offerees as a
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<PAGE> 8
result of such substitution, and the excess of the aggregate fair market value
of the shares subject to the options immediately after such substitution over
the purchase price thereof is not more than the excess of the aggregate fair
market value of the shares subject to such options immediately before such
substitution over the purchase price thereof, or (ii) upon written notice to
the Optionees or offerees, provide that all unexercised non-expired options
granted under the Plan shall immediately accelerate the Exercisability Date(s)
to the date of written notice and further all said options must be exercised
within a specified number of days (which shall not be less than thirty) of the
date of such notice or they will be terminated. In any such case, the Board of
Directors may, in its discretion, accelerate the Exercisability Date(s) of
outstanding options.
15. No Special Employment Rights. Nothing contained in the
Plan or in any option granted under the Plan shall confer upon any option holder
any right with respect to the continuation of his or her employment by the
Company (or any Parent Corporation or Subsidiary) or interfere in any way with
the right of the Company (or any Parent Corporation or Subsidiary), subject to
the terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
option holder from the rate in existence at the time of the grant of an option.
Whether an authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined by the
Board of Directors at the time.
16. Other Employee Benefits. The amount of any compensation
deemed to be received by an employee as a result of the exercise of an option,
or the sale of shares received upon such exercise will not constitute "earnings"
with respect to which any other employee benefits of such employee are
determined, including without limitation benefits under any pension, profit
sharing, life insurance or salary continuation plan.
17. Definition of Subsidiary. The term "Subsidiary" as used in
the Plan shall mean any corporation in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
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<PAGE> 9
18. Amendment of the Plan. The Board of Directors may at any
time and from time to time modify or amend the Plan in any respect, except that
without the approval of the shareholders of the Company, the Board of Directors
may not (a) materially increase the benefits accruing to individuals who
participate in the Plan, (b) materially increase the maximum number of shares
which may be issued under the Plan (except for permissible adjustments provided
in the Plan), (c) materially modify the requirements as to eligibility for
participation in the Plan or (d) modify or amend the Plan if shareholder
approval is required under Section 162(m) of the Code in order for any
compensation related to options granted under the Plan to not be subject to the
limitation on deductibility of Section 162(m). The termination or any
modification or amendment of the Plan shall not, without the consent of an
Optionee, affect his or her rights under an option previously granted to him or
her. With the consent of the Optionee affected, the Board of Directors may
amend outstanding option agreements in a manner not inconsistent with the Plan.
The Board of Directors shall have the right to amend or modify the terms and
provisions of the Plan and of any outstanding Incentive Stock Options granted
under the Plan to the extent necessary to qualify any or all such options for
such favorable federal income tax treatment (including deferral of taxation
upon exercise) as may be afforded incentive stock options under Section 422 of
the Code.
19. Withholding. The Company's obligation to deliver shares
upon the exercise of any option granted under the Plan shall be subject to the
option holder's satisfaction of all applicable federal, state and local income
and employment tax withholding requirements.
20. Effective Date and Duration of the Plan.
a. Effective Date. The Plan shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option granted under
the Plan shall become exercisable unless and until the Plan shall have been
approved by the Company's shareholders. If such shareholder approval is not
obtained within twelve months after the date of the Board's adoption of the
Plan, any Incentive Stock Options previously granted under the Plan shall
terminate and no further Incentive Stock Options shall be granted. Subject to
this limitation, options may be granted under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
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<PAGE> 10
b. Termination. Unless sooner terminated in accordance with
Section 13, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of
adoption by the Board of Directors of this Amended and Restated 1992 Stock
Option Plan, or (ii) the date on which all shares available for issuance under
the Plan shall have been issued pursuant to the exercise or cancellation of
options granted under the Plan. If the date of termination is determined under
(i) above, then options outstanding on such date shall continue to have force
and effect in accordance with the provisions of the instruments evidencing such
options.
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<PAGE> 1
Exhibit 10.4
EXHIBIT A
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Amended and Restated Registration Rights Agreement, dated as
of July 19, 1996 ("Agreement"), among Medifax, Inc., a Missouri corporation (the
"Company"), and the persons listed on the signature pages hereto (the
"Purchasers").
On the date hereof the Company is consummating the
transactions contemplated by (i) a Transfer Agreement and Plan of Section 351
Exchange (the "Exchange Agreement") with the stockholders (the "MRC Holders") of
Medical Records Corp., an Ohio corporation ("MRC"), pursuant to which an
aggregate 4,077,547 shares of Common Stock, $.01 par value ("Common Stock"), of
the Company, will be issued to the MRC Holders, and (ii) a Stock Purchase
Agreement, dated as of July 19, 1996 (the "Series VI Purchase Agreement"), among
the Company and certain of the Purchasers, which Purchasers are listed on
Schedule I thereto, pursuant to which such Purchasers are purchasing from the
Company an aggregate 261,050 shares (the "First Closing Series VI Shares") of
Series VI Preferred Stock, $1.00 par value (the "Series VI Preferred Stock"), of
the Company. The Company proposes to issue an additional 38,950 shares (the
"Second Closing Series VI Shares"; and together with the First Closing Series VI
Shares, the "Series VI Shares") of Series VI Preferred Stock to certain of the
Purchasers, which Purchasers are listed on Schedule II to the Series VI Purchase
Agreement, pursuant to such Agreement.
Medifax and certain of the Purchasers (the "Original
Purchasers") entered into a Registration Rights Agreement, dated July 7, 1993,
which was amended by an Amendment to Registration Rights Agreement, dated as of
December 2, 1994 (such agreement, as so amended, being herein called the
"Original Agreement"), among Medifax, the Original Purchasers and Edward L.
Samek (who also shall be deemed an "Original Purchaser" hereunder); the Original
Agreement provides, among other things, for certain restrictions on the transfer
of Restricted Stock (as such term is defined therein) and for the registration,
under certain circumstances, of such Restricted Stock under the Securities Act
of 1933, as amended.
The Company and the Purchasers desire to amend the
<PAGE> 2
Original Agreement to include all of the Series VI Preferred Stock in the
definition of "Restricted Stock" and to provide that (i) the holders from time
to time of the shares of Common Stock issuable upon conversion of the Series VI
Shares and (ii) the MRC Holders shall have certain of the same rights and
obligations as the other holders of Restricted Stock under the Original
Agreement, as amended and restated hereby.
In consideration of the foregoing, the parties agree as
follows:
1. This will confirm that (a) in respect of Derace L.
Schaffer, M.D., IASD Health Services, Inc., FBL Ventures of South Dakota, N.F.
Nordiska Fondkommission A.B., Alfred Berg Fondkommission A.B., Edgewater Private
Equity Fund, L.P., Ventana Partnership III, L.P, Andex, Theodore Chafoulias,
James A. Chafoulias, Hoegh Invest A/S and Fredrik Schreuder (collectively, the
"Series IV Holders"), that in consideration of your agreement to accept the
provisions of this Agreement in complete satisfaction of the requirements of the
letter dated February 5, 1993 to each of you with respect to an aggregate 10,362
shares of Series IV Preferred Stock, $1.00 par value ("Series IV Preferred
Stock"), of Medifax, Inc., a Missouri corporation (the "Company"), (b) in
respect of Antone Lazos, Derace L. Schaffer, M.D. and John Pappajohn
(collectively, the "1991 Warrantholders"), that in consideration of your
agreement to accept the provisions of this Agreement in complete satisfaction of
the registration requirements of the Warrants (the "1991 Warrants") to purchase
up to an aggregate 229,775 shares of Common Stock, $1.00 par value ("Common
Stock"), of the Company, (c) in respect of the several purchasers (the "1993
Purchasers") named in Annex I to the Securities Purchase Agreement, dated as of
July 7, 1993 (the "1993 Purchase Agreement"), among the Company and the 1993
Purchasers, in consideration of the purchase by you of (i) an aggregate 45,902
shares of Series V Preferred Stock, $1.00 par value ("Series V Preferred
Stock"), of the Company, and (ii) stock purchase warrants (the "1993 Warrants"
and, collectively with the 1991 Warrants, the "Warrants") to purchase up to an
aggregate 270,187 shares of Common Stock of the Company, and as an inducement to
you to consummate the transactions contemplated by the 1993 Purchase Agreement,
(d) in respect of Douglas H. Riddell, M.D., Ben J. Alper, M.D., Benjamin Fisher,
M.D., John W. Rich, Rich Investments, Robert B. Faber, M.D., Lewis H. Conner,
Jr., Mary Ann F. Robbins, Laurence A. Grossman, M.D., Dorothy Grossman, John M.
Tudor, M.D., Thomas F. Frist, Sr., Frist Family Partners, Stanley Bernard, Jr.,
M.D., Karl E. Hofammann, M.D., Jeffrey L. Hymes, M.D., John L. Seigenthaler,
William C. Weaver, III, Anthony M. and Pamela H. Iannacio, Dr. and Mrs. Stanley
2
<PAGE> 3
Bernard, Sr., Stan E. and Elisabeth Litchman and John Hassenfeld (collectively,
the "Post-1991 Founders"), as owners of up to an aggregate 331,590 shares of
Common Stock ("Post-1991 Founders Stock"), (e) in respect of John H. Dayani,
Ph.D., as owner of up to an aggregate 964,530 shares of Common Stock (said
shares of Common Stock and Post-1991 Founders Stock being collectively referred
to herein as "Founders Stock"), in consideration of the covenants and agreements
made by Dr. Dayani in Section 5.02 of the 1993 Purchase Agreement, and as an
inducement to Dr. Dayani to consummate the transactions contemplated thereby,
(f) in respect of Edward L. Samek, in consideration of the sale by you of all of
the outstanding capital stock of SecrePhone Ltd. and as an inducement to you to
consummate the transactions contemplated by the Securities Purchase Agreement,
dated as of December 2, 1994, between the Company and you, (g) in respect of the
MRC Holders, in consideration of the transfer by you of the MRC Stock and as an
inducement to you to consummate the transactions contemplated by the Exchange
Agreement, and (h) in respect of the purchasers of the Series VI Shares, in
consideration of the purchase by you of the Series VI Shares and as an
inducement to you to consummate the transactions contemplated by the Series VI
Purchase Agreement, the Company hereby covenants and agrees with each of you,
and with each subsequent holder of Restricted Stock (as such term is defined
herein), as follows:
2. CERTAIN DEFINITIONS. As used herein, the following terms
shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
"COMMON STOCK" shall mean the Common Stock, $0.01 par value,
of the Company, as constituted as of the date of this Agreement,
subject to adjustment pursuant to the provisions of Section 11 hereof.
"CONVERSION SHARES" shall mean shares of Common Stock issued
upon conversion of the Preferred Stock.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934
or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"PREFERRED STOCK" shall mean the Series IV Preferred
Stock, the Series V Preferred Stock and the Series VI Pre-
ferred Stock.
3
<PAGE> 4
"REGISTRATION EXPENSES" shall mean the expenses so
described in Section 9 hereof.
"RESTRICTED 1991 STOCK" shall mean the 1991 Warrants and the
Warrant Shares issued upon exercise of the 1991 Warrants.
"RESTRICTED 1992 STOCK" shall mean all shares of Series IV
Preferred Stock and the Conversion Shares issued upon the conversion
thereof.
"RESTRICTED 1993 STOCK" shall mean all shares of Series V
Preferred Stock, Conversion Shares issued upon conversion of the Series
V Preferred Stock, the 1993 Warrants and Warrant Shares issued upon
exercise of the 1993 Warrants.
"RESTRICTED STOCK" shall mean any shares of capital stock of
the Company, the certificates for which are required to bear the legend
set forth in Section 3 hereof.
"SAMEK OPTIONS" shall mean the options of Edward L. Samek to
acquire Common Stock of the Company as such options exist on the date
hereof.
"SAMEK OPTION SHARES" shall mean those shares of Common Stock
issuable to Mr. Samek upon the exercise of the Samek Options.
"SAMEK SHARES" shall mean those shares of Common Stock held by
Edward L. Samek on the date hereof as well as the Samek Option Shares.
"SECURITIES ACT" shall mean the Securities Act of 1933 or any
similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean the expenses so described
in Section 9 hereof.
"SPECIAL RESTRICTED STOCK" shall mean all shares of Series V
and Series VI Preferred Stock, Conversion Shares issued upon conversion
of the Series V and Series VI Preferred Stock, the 1993 Warrants and
Warrant Shares issued
upon exercise of the 1993 Warrants.
"WARRANT SHARES" shall mean shares of Common Stock
4
<PAGE> 5
issued upon exercise of the Warrants.
3. RESTRICTIVE LEGEND. Each certificate representing the
Common Stock (including, without limitation, Founders Stock, Samek Shares and
the shares of Common Stock held by the MRC Holders), or Preferred Stock, each
certificate issued upon exchange or transfer of any Common Stock or Preferred
Stock, each certificate representing Conversion Shares or Warrant Shares or
Samek Option Shares and each certificate issued upon exchange or transfer of any
Conversion Shares or Warrant Shares or Samek Option Shares, other than in a
public sale or as otherwise permitted by the last paragraph of paragraph 3
hereof, shall be stamped or otherwise imprinted with a legend substantially in
the following form:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE."
4. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer
of any Restricted Stock (other than under the circumstances described in Section
5, 6 or 7 hereof), the holder thereof shall give written notice to the Company
of its intention to effect such transfer. Each such notice shall describe the
manner of the proposed transfer and, if requested by the Company, shall be
accompanied by an opinion of counsel reasonably satisfactory to the Company (it
being agreed that Reboul, MacMurray, Hewitt, Maynard & Kristol or Kirkland &
Ellis shall be satisfactory) to the effect that the proposed transfer of the
Restricted Stock may be effected without registration under the Securities Act,
whereupon the holder of such Restricted Stock shall be entitled to transfer such
Restricted Stock in accordance with the terms of its notice; PROVIDED, HOWEVER,
that no such opinion or other documentation shall be required if such notice
shall cover a distribution by Welsh, Carson, Anderson & Stowe VI, L.P., WCAS
Healthcare Partners, L.P. or William Blair Capital Partners V, L.P. to their
respective partners. Each certificate for Restricted Stock transferred as above
provided shall bear the legend set forth in Section 3, unless (i) such transfer
is in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee (other than an affiliate of the Company) would be
entitled to transfer such securities in a public sale without registration
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<PAGE> 6
under the Securities Act.
The foregoing restrictions on transferability of Restricted
Stock shall terminate as to any particular shares of Restricted Stock when such
shares shall have been effectively registered under the Securities Act and sold
or otherwise disposed of in accordance with the intended method of disposition
by the seller or sellers thereof set forth in the registration statement
concerning such shares. Whenever a holder of Restricted Stock is able to
demonstrate to the Company (and its counsel) that the provisions of Rule 144(k)
of the Securities Act are available to such holder without limitation, such
holder of Restricted Stock shall be entitled to receive from the Company,
without expense, a new certificate not bearing the restrictive legend set forth
in Section 3.
5. REQUIRED REGISTRATION.
(a) At any time the holders of Special Restricted Stock
constituting at least a majority of the total Special Restricted Stock
outstanding at such time (treating for the purpose of such computation the
holders of Series V and Series VI Preferred Stock as the holders of the
Conversion Shares then issuable upon conversion of such Preferred Stock and the
holders of 1993 Warrants as holders of the Warrant Shares then issuable upon
exercise of the 1993 Warrants), may request the Company to register under the
Securities Act all or any portion of the Special Restricted Stock held by such
requesting holder or holders for sale in the manner specified in such notice;
PROVIDED, HOWEVER, that the only securities which the Company shall be required
to register pursuant hereto shall be shares of Common Stock.
(b) Promptly following receipt of any notice under this
Section 5, the Company shall immediately notify any holders of Special
Restricted Stock from whom notice has not been received and shall use its best
efforts to register under the Securities Act, for public sale in accordance with
the method of disposition specified in such notice from requesting holders, the
number of shares of Special Restricted Stock specified in such notice (and in
any notices received from other holders within 20 days after their receipt of
such notice from the Company); PROVIDED, HOWEVER, that if the proposed method of
disposition specified by the requesting holders shall be an underwritten public
offering, the number of shares of Special Restricted Stock to be included in
such an offering may be reduced, PRO RATA among the requesting holders of
Special Restricted Stock, based on the number of shares of Special Restricted
Stock requested to be
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<PAGE> 7
registered, if and to the extent that the managing underwriter shall be of the
opinion that such inclusion would adversely affect the marketing of the Special
Restricted Stock to be sold. If such method of disposition shall be an
underwritten public offering, the Company may designate the managing underwriter
of such offering, subject to the approval of the selling holders of a majority
of the Special Restricted Stock included in the offering, which approval shall
not be unreasonably withheld. The Company shall be obligated to register Special
Restricted Stock pursuant to this Section 5 on two occasions only.
Notwithstanding anything to the contrary contained herein, the obligation of the
Company under this Section 5 shall be deemed satisfied only when a registration
statement covering all shares of Special Restricted Stock specified in notices
received as aforesaid, for sale in accordance with the method of disposition
specified by the requesting holder, shall have become effective and, if such
method of disposition is a firm commitment underwritten public offering, all
such shares shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any
registration statement referred to in this Section 5, for sale in accordance
with the method of disposition specified by the requesting holders, shares of
Common Stock to be sold by the Company for its own account, except as and to the
extent that, in the opinion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such inclusion would
adversely affect the marketing of the Special Restricted Stock to be sold.
Except as provided in this paragraph (c), the Company will not effect any other
registration of its Common Stock, whether for its own account or that of other
holders, from the date of receipt of a notice from requesting holders pursuant
to this Section 5 until such time as the managing underwriter shall reasonably
request. In the event that there is a firm commitment underwritten public
offering of securities of the Company pursuant to this Section 5, each holder of
Restricted Stock who shall not be selling its Restricted Stock to the
underwriters in connection with such offering shall refrain from selling such
Restricted Stock so registered for such time as the managing underwriter shall
reasonably request; PROVIDED, HOWEVER, that such holder shall, in any event, be
entitled to sell its Restricted Stock commencing on the 180th day after the
effective date of such registration statement.
6. FORM S-3 REGISTRATION.
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<PAGE> 8
(a) If the Company shall receive from any holder or holders of
Restricted Stock, a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to Restricted Stock owned by such holder or holders, the reasonably
anticipated aggregate price to the public of which would exceed $2,000,000, the
Company will:
(i) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other holders of
Restricted Stock; and
(ii) as soon as practicable, effect such registration (including,
without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualifications under applicable
blue sky or other state securities laws and appropriate compliance with
applicable regulations issued under the Securities Act and any other
government requirements or regulations) as may be so requested and as
would permit or facilitate the sale and distribution of all or such
portion of such holder's or holders' Restricted Stock as are specified
in such request, together with all or such portion of the Restricted
Stock of any holder or holders joining in such request as are specified
in a written request given within thirty (30) days after receipt of
such written notice from the Company, provided that the Company
shall not be obligated to effect any such registration, qualification
or compliance pursuant to this Section 6 (A) more than once in any
180-day period, or (B) if the Company is not entitled to use Form S-3.
Subject to the foregoing, the Company shall file a registration
statement covering the Restricted Stock so requested to be registered
as soon as practicable after receipt of the request or requests of the
holders of the Restricted Stock.
(b) Registrations effected pursuant to this Section 6 shall
not be counted as requests for registration effected pursuant to Section 5.
Except as provided in the foregoing paragraph (a), the Company will not effect
any other registration of its Common Stock, whether for its own account or that
of other holders, from the date of receipt of a notice from requesting holders
pursuant to this Section 6 until such time as the managing underwriter shall
reasonably request. In the event that there is a firm commitment underwritten
public offering of securities of the Company pursuant to this Section 6, each
holder of Restricted Stock who shall not be selling its Restricted Stock to the
underwriters in connection with such offering shall refrain from selling such
Restricted Stock so registered for such
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<PAGE> 9
time as the managing underwriter shall reasonably request; PROVIDED, HOWEVER,
that such holder shall, in any event, be entitled to sell its Restricted Stock
commencing on the 180th day after the effective date of such registration
statement.
7. INCIDENTAL REGISTRATION. (a) If the Company at any time
(other than pursuant to Section 5 or 6 hereof) proposes to register any of its
Common Stock under the Securities Act for sale to the public, whether for its
own account or for the account of other securityholders or both (except with
respect to registration statements on Form S-4 or S-8 or another form not
available for registering the Restricted Stock for sale to the public), it will
give written notice at such time to all holders of outstanding Restricted Stock
of its intention to do so. Upon the written request of any such holder, given
within 30 days after receipt of any such notice by the Company, to register any
of its Restricted Stock (which request shall state the intended method of
disposition thereof), the Company will use its best efforts to cause the
Restricted Stock as to which registration shall have been so requested, to be
included in the securities to be covered by the registration statement proposed
to be filed by the Company, all to the extent requisite to permit the sale or
other disposition by the holder (in accordance with its written request) of such
Restricted Stock so registered; PROVIDED that nothing herein shall prevent the
Company from abandoning or delaying such registration at any time. In the event
that any registration pursuant to this Section 7 shall be, in whole or in part,
an underwritten public offering of Common Stock, any request by a holder
pursuant to this Section 7 to register Restricted Stock shall specify that
either (i) such Restricted Stock is to be included in the underwriting on the
same terms and conditions as the shares of Common Stock otherwise being sold
through underwriters under such registration or (ii) such Restricted Stock is to
be sold in the open market without any underwriting, on terms and conditions
comparable to those normally applicable to offerings of common stock in
reasonably similar circumstances. The number of shares of Restricted Stock to be
included in such an underwriting may be reduced (PRO RATA among the requesting
holders of Restricted Stock based upon the number of shares of Restricted Stock
so requested to be registered) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely affect
the marketing of the securities to be sold by the Company therein; PROVIDED,
HOWEVER, that the number of shares to be registered shall be reduced (i) first,
by the Company, if and only if such registration is being effected pursuant to
Section 6 hereof, (ii) then PRO RATA among the requesting holders of Founders
Stock, (iii) then PRO RATA among the requesting holders of Restricted
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<PAGE> 10
1991 Stock, (iv) then PRO RATA among the requesting holders of Restricted 1992
Stock, (v) then PRO RATA among the requesting holders of Samek Shares, (vi) then
PRO RATA among the requesting MRC Holders and (vii) then PRO RATA among the
holders of Special Restricted Stock; PROVIDED FURTHER, HOWEVER, that such number
of shares of Restricted Stock shall not be reduced if any shares are to be
included in such underwriting for the account of any person other than the
Company or other than a holder of Restricted Stock.
(b) Notwithstanding anything to the contrary contained in this
Section 7, in the event that there is a firm commitment underwritten public
offering of securities of the Company pursuant to a registration covering
Restricted Stock and a holder of Restricted Stock does not elect to sell his
Restricted Stock to the underwriters of the Company's securities in connection
with such offering, such holder shall refrain from selling such Restricted Stock
so registered pursuant to this Section 7 for such time as the managing
underwriter shall reasonably request; PROVIDED, HOWEVER, that such holder shall,
in any event, be entitled to sell its Restricted Stock commencing on the 180th
day after the effective date of such registration statement. Except as provided
in this Section 7, the Company will not effect any other registration of its
Common Stock, whether for its own account or that of other holders, from the
date of receipt of a notice from requesting holders pursuant to this Section 7
until such time as the managing underwriter shall reasonably request.
8. REGISTRATION PROCEDURES AND EXPENSES. If and whenever the
Company is required by the provisions of Section 5, 6 or 7 hereof to use its
best efforts to effect the registration of any of the Restricted Stock under the
Securities Act, the Company will, as expeditiously as possible:
(a) prepare (and afford counsel for the selling holders
reasonable opportunity to review and comment thereon) and file with the
Commission a registration statement (which, in the case of an
underwritten public offering pursuant to Section 5 hereof, shall be on
Form S-1 or another form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration
statement to become and remain effective for the period of the
distribution contemplated thereby (determined as hereinafter provided);
(b) prepare (and afford counsel for the selling holders
reasonable opportunity to review and comment thereon)
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<PAGE> 11
and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and as comply with the
provisions of the Securities Act with respect to the disposition of all
Restricted Stock covered by such registration statement in accordance
with the sellers' intended method of disposition set forth in such
registration statement for such period;
(c) furnish to each seller and to each underwriter such number
of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons may
reasonably request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration
statement;
(d) use its best efforts to register or qualify the Restricted
Stock covered by such registration statement under the securities or
blue sky laws of such jurisdictions as the sellers of Restricted Stock
or, in the case of an underwritten public offering, the managing
underwriter, shall reasonably request (provided that the Company will
not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but
for this paragraph (d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any
jurisdiction);
(e) immediately notify each seller under such registration
statement and each underwriter, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus contained in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
(f) use its best efforts (if the offering is underwritten) to
furnish, at the request of any seller, on the date that Restricted
Stock is delivered to the underwriters for sale pursuant to such
registration: (i) an opinion dated such date of counsel representing
the Company for the purposes of such registration, addressed to the
underwriters and to such seller, stating that such registration
statement has become effective under the Securities Act and that (A) to
the best knowledge of such counsel, no stop order suspending the
effectiveness thereof
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<PAGE> 12
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act, (B)
the registration statement, the related prospectus, and each amendment
or supplement thereof, comply as to form in all material respects with
the requirements of the Securities Act and the applicable rules and
regulations of the Commission thereunder (except that such counsel need
express no opinion as to financial statements, the notes thereto, and
the financial schedules and other financial and statistical data
contained therein) and (C) to such other effects as may reasonably be
requested by counsel for the underwriters or by such seller or its
counsel, and (ii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters,
stating that they are independent public accountants within the meaning
of the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the registration
statement or the prospectus, or any amendment or supplement thereof,
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information
as to the period ending no more than five business days prior to the
date of such letter) with respect to the registration in respect of
which such letter is being given as such underwriters or seller may
reasonably request; and
(g) make available for inspection by each seller, any
underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent
retained by such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement and permit such seller, attorney, accountant or agent to
participate in the preparation of such registration statement.
For purposes of paragraphs (a) and (b) above and of Section 5(c) hereof, the
period of distribution of Restricted Stock in a firm commitment underwritten
public offering shall be deemed to extend until each underwriter has completed
the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby or
six months after the effective date thereof.
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In connection with each registration hereunder, the selling
holders of Restricted Stock will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them as
shall be reasonably necessary in order to assure compliance with federal and
applicable state securities laws.
In connection with each registration pursuant to Sections 5, 6
and 7 hereof covering an underwritten public offering, the Company agrees to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between major
underwriters and companies of the Company's size and investment stature,
PROVIDED, HOWEVER, that such agreement shall not contain any such provision
applicable to the Company which is inconsistent with the provisions hereof and
PROVIDED, FURTHER, HOWEVER, that the time and place of the closing under said
agreement shall be as mutually agreed upon among the Company, such managing
underwriter and the selling holders of Restricted Stock.
9. EXPENSES. All expenses incurred by the Company in complying
with Sections 5, 6 and 7 hereof, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees of the National Association
of Securities Dealers, Inc., transfer taxes, fees of transfer agents and
registrars and fees and expenses of counsel for the sellers of Restricted Stock
but excluding any Selling Expenses, are herein called "Registration Expenses".
All underwriting discounts and selling commissions applicable to the sale of
Restricted Stock are herein called "Selling Expenses".
The Company will pay all Registration Expenses in connection
with each registration statement filed pursuant to Section 5, 6 or 7 hereof. All
Selling Expenses in connection with any registration statement filed pursuant to
Section 5, 6 or 7 hereof shall be borne by the participating sellers in
proportion to the number of shares sold by each, or by such persons other than
the Company (except to the extent the Company shall be a seller) as they may
agree.
10. INDEMNIFICATION. In the event of a registration of any of
the Restricted Stock under the Securities Act pursuant to Section 5, 6 or 7
hereof, the Company will indemnify and hold harmless each seller of such
Restricted Stock thereunder and each underwriter of Restricted Stock thereunder
and each other person, if any, who controls such seller or underwriter within
the
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<PAGE> 14
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Section 5, 6 or 7, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, 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 seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by such seller, such underwriter or such controlling person in writing
specifically for use in such registration statement or prospectus.
In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Section 5, 6 or 7 hereof, each seller of
such Restricted Stock thereunder, severally and not jointly, will indemnify and
hold harmless the Company and each person, if any, who controls the Company
within the meaning of the Securities Act, each officer of the Company who signs
the registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the Securities
Act, against all losses, claims, damages or liabilities, joint or several, to
which the Company or such officer or director or underwriter or controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Restricted Stock was registered under the Securities Act pursuant to Section 5,
6 or 7, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, 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 mislead-
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<PAGE> 15
ing, and will reimburse the Company and each such officer, director, underwriter
and controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that such seller will be liable
hereunder in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus; PROVIDED, FURTHER, HOWEVER, that the
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not to exceed the proceeds (net of underwriting
discounts and commissions) received by such seller from the sale of Restricted
Stock covered by such registration statement.
Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party other than under this Section 10. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section 10 for
any legal expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected; PROVIDED, HOWEVER, that, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party, or if the interests of the
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<PAGE> 16
indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
Notwithstanding the foregoing, any indemnified party shall
have the right to retain its own counsel in any such action, but the fees and
disbursements of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party shall have failed to retain counsel for the
indemnified person as aforesaid or (ii) the indemnifying party and such
indemnified party shall have mutually agreed to the retention of such counsel.
It is understood that the indemnifying party shall not, in connection with any
action or related actions in the same jurisdiction, be liable for the fees and
disbursements of more than one separate firm qualified in such jurisdiction to
act as counsel for the indemnified party. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
If the indemnification provided for in the first two
paragraphs of this Section 10 is unavailable or insufficient to hold harmless an
indemnified party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in respect thereof referred to therein, then
each indemnifying party shall in lieu of indemnifying such indemnified party
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the sellers of such Restricted Stock, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any notice under the third
paragraph of this Section 10. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact relates to information supplied by the Company, on the one
hand, or the underwriters and the sellers of such Restricted Stock, on the
other, and to the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each other party hereto agrees that it would not be just and
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<PAGE> 17
equitable if contributions pursuant to this paragraph were determined by PRO
RATA allocation (even if all of the sellers of such Restricted Stock were
treated as one entity for such purpose) or by any other method of allocation
which did not take account of the equitable considerations referred to above in
this paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or action in respect
thereof, referred to above in this paragraph, shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph, the sellers of such Restricted
Stock shall not be required to contribute any amount in excess of the amount, if
any, by which the total price at which the Common Stock sold by each of them was
offered to the public exceeds the amount of any damages which they would have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission. No person guilty of fraudulent misrepresentations (within
the meaning of Section 11(f) of the Securities Act), shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
The indemnification of underwriters provided for in this
Section 10 shall be on such other terms and conditions as are at the time
customary and reasonably required by such underwriters. In that event the
indemnification of the sellers of Restricted Stock in such underwriting shall at
the sellers' request be modified to conform to such terms and conditions.
11. CHANGES IN COMMON STOCK. If, and as often as, there are
any changes in the Common Stock by way of stock split, stock dividend,
combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof, as may be required, so that
the rights and privileges granted hereby shall continue with respect to the
Common Stock as so changed.
12. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each holder of Restricted Stock as follows:
(a) The execution, delivery and performance of this Agreement
by the Company have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation
or By-laws of the Company, or any provision of any indenture, agreement
or
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other instrument to which it or any of its properties or assets is
bound, or conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture,
agreement or other instrument, or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of
the properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and
binding obligation of the Company, enforceable in accordance with its
terms, subject to considerations of public policy in the case of the
indemnification provisions hereof.
13. RULE 144 REPORTING. The Company agrees with each holder of
Restricted Stock as follows:
(a) The Company shall make and keep public information
available, as those terms are understood and defined in Rule 144 under
the Securities Act, at all times from and after the date it is first
required to do so.
(b) The Company shall file with the Commission in a timely
manner all reports and other documents as the Commission may prescribe
under Section 13(a) or 15(d) of the Exchange Act at any time after the
Company has become subject to such reporting requirements of the
Exchange Act.
(c) The Company shall furnish to such holder of Restricted
Stock forthwith upon request (i) a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 (at any
time from and after the date it first becomes subject to such reporting
requirements, and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), (ii)
a copy of the most recent annual or quarterly report of the Company,
and (iii) such other reports and documents so filed as a holder may
reasonably request to avail itself of any rule or regulation of the
Commission allowing a holder of Restricted Stock to sell any such
securities without registration.
14. MISCELLANEOUS.
(a) All covenants and agreements contained in this Agreement
by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties
hereto whether so expressed or
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not. Without limiting the generality of the foregoing, the registration
rights conferred herein on the holders of Restricted Stock shall inure
to the benefit of any and all subsequent holders from time to time of
the Restricted Stock for so long as the certificates representing the
Restricted Stock shall be required to bear the legend specified in
Section 3 hereof.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by first class
registered mail, postage prepaid, addressed as follows:
if to the Company or to any holder of Restricted Stock, to it
at the address as set forth on Annex I hereto;
if to any subsequent holder of Restricted Stock, to it
at such address as may have been furnished to the Company in
writing by such holder;
or, in any case, at such other address or addresses as shall have been
furnished in writing to the Company (in the case of a holder of
Restricted Stock) or to the holders of Restricted Stock (in the case of
the Company).
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(d) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and may not be
modified or amended except by an instrument in writing executed by (i)
the holders of a majority of the Founders Stock, (ii) the holders of a
majority of the Restricted 1991 Stock, (iii) the holders of a majority
of the Restricted 1992 Stock, (iv) the holders of a majority of the
Restricted 1993 Stock, (v) the holders of a majority of the Samek
Shares, (vi) the holders of 75% of the outstanding shares of Series VI
Preferred Stock and (vii) a majority of the MRC Holders, in each such
case, outstanding at such time (treating for the purpose of such
computations the holders of Preferred Stock as the holders of the
Conversion Shares then issuable upon conversion of such Preferred Stock
and the holders of Warrants as the holders of Warrant Shares issuable
upon exercise thereof).
(e) The provisions of this Agreement pertaining to the holders
of the Founders Stock, other than John Dayani, are subject, with
respect to each such party, to the execution
19
<PAGE> 20
and delivery by such party of a counterpart to this Agreement and until
such time this Agreement shall not include (i) each such party as a
party to this Agreement and (ii) to the extent that such party has
purchased shares of Restricted Stock, such party as a holder of
Restricted Stock hereunder, but this Agreement shall in all other
respects be a binding agreement of each of the other parties hereto.
(f) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(g) Upon the execution and delivery of this Agreement by the
holders of (i) 85% of the Founders Stock, (ii) a majority of the
Restricted 1991 Stock, (iii) a majority of the Restricted 1992 Stock,
(iv) a majority of the Restricted 1993 Stock and (v) a majority of the
Samek Shares, in each such case, outstanding at such time (treating for
the purpose of such computations the holders of Preferred Stock as the
holders of the Conversion Shares then issuable upon conversion of such
Preferred Stock, the holders of Warrants as the holders of Warrant
Shares issuable upon exercise thereof, and the holder of the Samek
Options as the holder of the shares of Common Stock issuable upon the
exercise thereof), the Original Agreement shall be terminated and be of
no further force or effect.
(h) Any provision of this Agreement to the contrary
notwithstanding, this Agreement shall be effective as among the Company
and the holders of Restricted Stock who have executed and delivered
this Agreement upon execution and delivery of this Agreement by the
Company and any such holder. Upon the execution and delivery of this
Agreement by the holders of Restricted Stock under the Original
Agreement, the rights and obligations of such holders under the
Original Agreement shall be terminated and discharged.
20
<PAGE> 21
IN WITNESS WHEREOF, the undersigned have executed this
Registration Rights Agreement as of the date first above written.
MEDIFAX, INC.
By /s/ EDWARD L. SAMEK
----------------------------------
Edward L. Samek, President
AGREED TO AND ACCEPTED as of the date first above written.
WELSH, CARSON, ANDERSON & STOWE VI, L.P.
By WCAS VI Partners, L.P., General Partner
By /s/ LAURA VAN BUREN
--------------------------------
General Partner
WCAS HEALTHCARE PARTNERS, L.P.
By WCAS HP Partners, General Partner
By /s/ RUSSELL L. CARSON
--------------------------------
General Partner
/s/ PATRICK J. WELSH
- ----------------------------------
Patrick J. Welsh
/s/ RUSSELL L. CARSON
- ----------------------------------
Russell L. Carson
/s/ LAURA VAN BUREN
- ----------------------------------
Bruce K. Anderson
21
<PAGE> 22
DE CHARTER TRUST CO., AS TRUSTEE
FBO THE IRA/ROLLOVER OF RICHARD H. STOWE
By /s/ RICHARD H. STOWE
--------------------------------
/s/ ANDREW M. PAUL
- ----------------------------------
Andrew M. Paul
/s/ THOMAS E. McINERNEY
- ----------------------------------
Thomas E. McInerney
/s/ LAURA VANBUREN
- ----------------------------------
Laura M. VanBuren
/s/ JAMES B. HOOVER
- ----------------------------------
James B. Hoover
MSTC, CUSTODIAN FBO
THE IRA/ROLLOVER OF JAMES B. HOOVER
By /s/ JAMES B. HOOVER
--------------------------------
/s/ DAVID F. BELLET
- ----------------------------------
David F. Bellet
22
<PAGE> 23
IASD HEALTH SERVICES, INC.
By /s/ JOSEPH R. DUBLINS II
--------------------------------
IB. MANAGER, Investment Services
FBL VENTURES OF SOUTH DAKOTA
By /s/ [Illegible]
--------------------------------
N.F. NORDISKA FONDKOMMISSION A.B.
By
--------------------------------
ALFRED BERG FONDKOMMISSION A.B
By
--------------------------------
EDGEWATER PRIVATE EQUITY FUND, L.P.
By /s/ [Illegible]
--------------------------------
VENTANA PARTNERSHIP III, L.P.
By /s/ F.D. TOWNSEN
--------------------------------
F.D. Townsen, Managing G.P.
ANDEX
By
--------------------------------
/s/ THEODORE CHAFOULIAS
- ----------------------------------
Theodore Chafoulias
23
<PAGE> 24
/s/ JAMES A. CHAFOULIAS
- ----------------------------------
James A. Chafoulias
HOEGH INVEST A/S
By /s/ CARL PARKER HOEGH
--------------------------------
Carl Parker Hoegh
- ----------------------------------
Fredrik Schreuder
/s/ ANTONE LAZOS
- ----------------------------------
Antone Lazos
/s/ DERACE L. SCHAFFER
- ----------------------------------
Derace L. Schaffer, M.D.
/s/ JOHN PAPPAJOHN
- ----------------------------------
John Pappajohn
/s/ JOHN H. DAYANI
- ----------------------------------
John H. Dayani, Ph.D.
- ----------------------------------
Douglas H. Riddell, M.D.
/s/ BEN J. ALPER, M.D.
- ----------------------------------
Ben J. Alper, M.D.
- ----------------------------------
Benjamin Fisher, M.D.
24
<PAGE> 25
/s/ JOHN W. RICH
- ----------------------------------
John W. Rich
- ----------------------------------
Rich Investments
- ----------------------------------
Robert B. Faber, M.D.
- ----------------------------------
Lewis H. Conner, Jr.
/s/ MARY ANN F. ROBBINS
- ----------------------------------
Mary Ann F. Robbins
- ----------------------------------
Laurence A. Grossman, M.D.
- ----------------------------------
Dorothy Grossman
/s/ JOHN M. TUDOR, M.D.
- ----------------------------------
John M. Tudor, M.D. 12 July 96
- ----------------------------------
Thomas F. Frist, Sr.
25
<PAGE> 26
/s/ ROBERT A. FRIST, M.D., General Partner
- ------------------------------------------
Frist Family Partners July 16, 1996
/s/ STANLEY BERNARD, JR.
- ----------------------------------
Stanley Bernard, Jr., M.D.
/s/ KARL E. HOFAMMANN III
- ----------------------------------
Karl E. Hofammann, M.D.
- ----------------------------------
Jeffrey L. Hymes, M.D.
- ----------------------------------
John L. Seigenthaler
/s/ WILLIAM C. WEAVER, III
- ----------------------------------
William C. Weaver, III
/s/ ANTHONY M. IANNACIO/PAMELA H. IANNACIO
- ------------------------------------------
Anthony M. and Pamela H. Iannacio
/s/ STANLEY BERNARD, M.D. and MRS. STANLEY BERNARD (Adell)
- ----------------------------------------------------------
Dr. and Mrs. Stanley Bernard, Sr.
- ----------------------------------
Stan E. and Elisabeth Litchman
/s/ JOHN HASSENFELD
- ----------------------------------
John Hassenfeld
26
<PAGE> 27
/s/ EDWARD L. SAMEK
- ----------------------------------
Edward L. Samek
WILLIAM BLAIR CAPITAL PARTNERS V, L.P.
By: William Blair Capital Partners,
L.L.C., General Partner
By /s/ TIMOTHY M. MURRAY
--------------------------------
Timothy M. Murray, Managing Director
- ----------------------------------
Randolf G. Brown
NATIONAL CITY CAPITAL CORPORATION
By /s/ WILLIAM SCHECHTER
--------------------------------
President
/s/ MARTIN MARCUS
- ----------------------------------
Martin H. Marcus
/s/ HERBERT MARCUS
- ----------------------------------
Herbert L. Marcus
/s/ PHILIP M. COHEN
- ----------------------------------
Philip M. Cohen
- ----------------------------------
Gregory A. Marcus
/s/ JEFFREY MARCUS
- ----------------------------------
Jeffrey S. Marcus
/s/ LYNNE M. COHEN
- ----------------------------------
Lynne M. Cohen
27
<PAGE> 28
/s/ STEVEN I. MARCUS
- ----------------------------------
Steven I. Marcus
/s/ DANIEL H. MARCUS
- ----------------------------------
Daniel H. Marcus
/s/ CATHERINE HUSER
- ----------------------------------
Catherine R. Huser
/s/ KEVIN HUSER
- ----------------------------------
Kevin Huser
/s/ JASON GREEN
- ----------------------------------
Jason E. Green
28
<PAGE> 29
ANNEX I
[addresses omitted]
SERIES IV PREFERRED STOCKHOLDERS
- --------------------------------
Alfred Berg Fondkommission AB
Andex
James A. Chafoulias
Theodore A. Chafoulias
Edgewater Private Equity Fund LP
FBL Ventures of South Dakota, Inc.
Hoegh Invest A/S
IASD Health Services Corporation
N.F. Nordiska Fondkommission AB
Fredrik Schreuder
Ventana Partnership III, L.P.
John Pappajohn
SERIES V PREFERRED STOCKHOLDERS
- -------------------------------
Welsh, Carson, Anderson & Stowe VI, L.P.
Patrick J. Welsh*
Russell L. Carson
Bruce K. Anderson
Richard H. Stowe
DE Charter Trust Co., as Trustee
FBO the IRA/Rollover of Richard H. Stowe
Andrew M. Paul
Thomas E. McInerney
Laura M. VanBuren
James B. Hoover
DE Charter Trust Co., as Trustee
FBO the IRA/Rollover of James B. Hoover
David F. Bellet
Jason E. Green
- ----------------------------
<PAGE> 30
SERIES VI PREFERRED STOCKHOLDERS
- --------------------------------
Welsh, Carson, Anderson & Stowe VI, L.P.
WCAS Healthcare Partners, L.P.
Patrick J. Welsh
Russell L. Carson
Bruce K. Anderson
Richard H. Stowe
DE Charter Trust Co., as Trustee
FBO the IRA/Rollover of Richard H. Stowe
Andrew M. Paul
Thomas E. McInerney
Laura M. VanBuren
James B. Hoover
MSTC, Custodian
FBO the IRA/Rollover of James B. Hoover
William Blair Capital Partners V, L.P.
IRA of Ann D. Brown
J.C. Bradford & Co., Custodian
National City Capital Corporation
Edward L. Samek
John H. Dayani, Ph.D.
Derace L. Schaffer, M.D.
Antone Lazos
Dr. and Mrs. (Adell) Stanley Bernard, Sr.
Ben J. Alper, M.D.
Edgewater Private Equity Fund LP
HOLDERS OF RESTRICTED 1991 STOCK
- --------------------------------
Antone Lazos
John Pappajohn
Derace L. Schaffer, M.D.
HOLDERS OF FOUNDERS STOCK
- -------------------------
Ben J. Alper, M.D.
Dr. and Mrs. (Adell) Stanley Bernard, Sr.
Stanley Bernard, Jr., M.D.
Lewis H. Conner, Jr.
Robert B. Faber, M.D.
Benjamin Fisher, M.D.
Frist Family Partners
Thomas F. Frist, Sr., M.D.
Dorothy R. Grossman
Lawrence A. Grossman, M.D.
2
<PAGE> 31
John E. Hassenfeld
Karl E. Hofammann, M.D.
Jeffrey L. Hymes, M.D.
Anthony M. and Pamela H. Iannacio
Stan E. and Elisabeth Litchman
John W. Rich
Rich Investments
Douglas H. Riddell, M.D.
Mary Ann F. Robbins
John L. Seigenthaler
John M. Tudor, M.D.
William C. Weaver, III
John H. Dayani, Ph.D.
SAMEK SHAREHOLDER
- -----------------
Edward L. Samek
MRC HOLDERS
- -----------
Martin H. Marcus
Herbert L. Marcus
Philip M. Cohen
Gregory A. Marcus
Jeffrey S. Marcus
Lynne M. Cohen
Steven I. Marcus
Daniel H. Marcus
Catherine R. Huser
Kevin Huser
3
<PAGE> 1
Exhibit 10.16
CONTRACT FOR LICENSE OF MEDRITE SOFTWARE AND
--------------------------------------------
SUPPORT ARRANGEMENTS
--------------------
THIS AGREEMENT, shall be effective on the lst day of February,
1994, by and between MEDICAL RECORDS CORP, a OHIO corporation with its principal
place of business at 3637 Green Road, Cleveland Ohio, 44122, (hereinafter
referred to as "MRC") and CRESCENDO SYSTEMS CORPORATION, a Canadian corporation
with its principal place of business at 5305 Notre Dame West, Suite 206, Laval,
Quebec, H7W 4T8, (hereinafter referred to as "CRESCENDO").
WITNESSETH:
WHEREAS, MRC is in the business of providing transcription
services for the medical industry; and
WHEREAS, CRESCENDO has developed certain software copyrighted
under the name "MEDRite(R)" which MRC has proven to be of significant use to
MRC's business; and
WHEREAS, MRC wishes to license the MEDRite(R) software from
CRESCENDO under the terms of this Contract and CRESCENDO is willing to grant a
license on such terms; and
WHEREAS, the parties acknowledge that MEDRite(R) software is
currently in use by MRC, other transcription services and hospitals and that it
meets the intended purpose; and
WHEREAS, CRESCENDO's corporate strategy is to continually
develop and enhance MEDRite(R) so that it gains wider acceptance; and
WHEREAS, CRESCENDO is willing to provide support services
necessary to modify and update the MedRite(R) software to maximize its
effectiveness for MRC's business; and
WHEREAS, MRC is willing to assist CRESCENDO in the further
development of the MEDRite(R) software providing marketing input, offering
suggestions and comments for further improvement and providing resources to test
and evaluate new developments; and
WHEREAS, both parties wish to make certain arrangements to
protect CRESCENDO's ownership rights to MEDRite(R) as well as to protect
confidential business information and trade secrets of both companies and their
clients;
<PAGE> 2
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and
promises contained in this Contract, the parties hereto agree and contract as
follows:
ARTICLE I
---------
DEFINITIONS
-----------
1. DEFINITIONS. The following definitions apply to this Contract:
A. "Copyright Notice" means certain notices which are
reflected on all registered copies of the subject software. The copyright notice
specifies that CRESCENDO has copyrighted the MEDRite(R) software and that all
rights not expressly granted under this Contract are reserved by CRESCENDO.
Unauthorized copying of the MEDRite(R) software, including MEDRite(R) software
that has been modified, merged or included with other software, or of the
accompanying written materials, is expressly forbidden.
B. "Registered Copy" means the original MEDRite(R) disks
transferred to MRC and all copies made of those disks pursuant to this Contract.
C. "Software" refers to the MEDRite(R) program developed by
CRESCENDO and all modifications, updates and extensions of that program.
D. "Transcription Station" means any of office MRC and any
home occupied by an employee or independent contractor of MRC used for the
purpose of transcribing medical data and related services. The term shall
further include stations for network file servers print servers, communication
servers, fax servers, management and supervisor's stations and client facilities
(hospitals, clinics, doctor's offices and the like) operated or supervised by
MRC.
ARTICLE II
----------
LICENSE AGREEMENT
-----------------
1. LICENSE FOR USE. CRESCENDO hereby grants MRC, and its
successors and subsidiaries (listed herein), a non-exclusive license to use the
MEDRite(R) software, together with any and all modifications, updates and
extensions of that software that have been or may hereafter be created, as they
relate to Medical Transcription, including but not limited to electronic
signature, HL7 interfacing and optical archival. MRC specifically acknowledges
that CRESCENDO may market the software and any modifications and updates thereof
to other businesses, including business that may compete against MRC. CRESCENDO
covenants and agrees that it will not market the software or any modifications
or updates in such a manner as to place MRC at a competitive disadvantage.
Nothing herein shall limit the right of MRC to utilize software,
materials or procedures offered by competitors of CRESCENDO; provided, however
that
- -------------------------------------------------------------------------------
Page 2
<PAGE> 3
CRESCENDO makes no warranty that such competitor's programs will be compatible
with the software licensed hereunder.
2. USE AT TRANSCRIPTION STATIONS. MRC agrees that only its
employees and independent contractor's shall be permitted to use MEDRite(R) for
the purpose of transcribing reports. MRC further agrees that each client
facility at which MRC installs a copy of MEDRite(R) is to be registered with
MRC. It is further agreed between the parties that any MRC Client having access
to use MEDRite(R) shall be required, as a prerequisite thereof, to have signed
and delivered to MRC a non-disclosure agreement, which clearly states that the
software is only to be used to manage those files completed by MRC for the
Client within the scope of its retainer.
MRC and its employees and independent contractors may use the
MEDRite(R) software at any of its transcription stations.
3. COPIES OF SOFTWARE; RESTRICTION ON USE. Unauthorized
copying of the software, including forms of the software that may have been
modified, merged or included with other software, is expressly forbidden. MRC
may not modify the software in any way without the expressed written permission
of CRESCENDO. MRC may not allow any other person or entity to copy the
MEDRite(R) software or accompanying documentation. MRC may not give, sell or
otherwise distribute the MEDRite(R) software or accompanying documentation to
any other person or entity.
CRESCENDO shall supply MRC with diskettes at its own cost,
excluding shipping, duties and taxes, for each MRC office covered by this
agreement. Each set of diskettes shall include the MEDRite(R) program, including
the FAX interface, in an "Unlimited Network User Version", "Remote User Version"
and "Standalone Version", in addition to the "Medical Word List" and "Main Frame
Download Program" diskette. Each set shall contain five diskettes, serialized to
reflect the MRC office number destined to install the program. Each MRC office
must only make use of MEDRite(R) software which correctly reflects their office
number. MRC shall be permitted to copy or download the software for use by
authorized remote users and Clients.
4. INSTALLATION. CRESCENDO is responsible for providing the
initial medium (floppy diskette) for transfer of the software. The risk of loss
or failure of the transfer medium is on CRESCENDO until such time as the
software is installed and functioning properly. CRESCENDO shall deliver to MRC
the sets of diskettes containing the MEDRite(R) software, together with one set
of documentation for each set of diskettes, within ten (10) days of the signing
of this contract. MRC shall have the right to make additional copies of the
documentation, at its own expense, as needed for use at its various
transcription stations.
MRC shall furnish appropriate IBM compatible PCs, at its
expense for installation of the software. CRESCENDO is not responsible for the
condition of the hardware, either during or after the installation of the
software. However, CRESCENDO acknowledges that it is familiar with the hardware
utilized by MRC and hereby warrants that the software is compatible
- -------------------------------------------------------------------------------
Page 3
<PAGE> 4
with MRC's hardware and will run on that hardware. MRC is responsible for
installing all the software on its hardware and making it operational.
5. TRAINING. CRESCENDO has trained MRC head office personnel
in the use and operation of the software. CRESCENDO shall also provide training
in the use and operation of any modifications, updates or extensions of the
software that may be developed from time to time. This training shall be
provided at no charge to head office personnel at CRESCENDO's facilities in
Laval, Quebec, and at CRESCENDO discretion.
6. WARRANTY OF TITLE; COPYRIGHT INFRINGEMENT. CRESCENDO
warrants that it has good title to the software and the right to license its use
to MRC.
MRC shall promptly notify CRESCENDO of any action or claim
alleging that the software or MRC's use of the software violates the trade
secret, trademark, copyright, patent or other proprietary rights of any other
party, and further agrees to cooperate with CRESCENDO in the investigation and
resolution of the action or claim.
If CRESCENDO is so notified of a claim involving title or use
of the software, CRESCENDO shall indemnify and hold MRC harmless against any and
all such claims and shall defend same at its expense and shall pay any costs and
damages awarded, provided that CRESCENDO shall have sole control of the defense
of any action and all negotiations for its settlement or compromise.
CRESCENDO shall not be required to indemnify MRC against
damages arising from MRC's independent modification or conversion of the
software or for any use of the software after the termination of this contract.
At any time during the course of the litigation arising out of
a claim of infringement of a trade secret, United States patent or copyright or
other proprietary right, or, if in CRESCENDO's opinion the software is likely to
become the subject of such a claim, CRESCENDO shall, at its option and expense,
either procure for MRC the right to continue using the software, replace or
modify the software so that it becomes noninfringing.
7. WARRANTY; FITNESS OF USE. In the event that a programming
error attributable to CRESCENDO is found to exist in the software, then
CRESCENDO shall provide the services necessary to remedy such programming error,
either by replacing the software or by taking other appropriate action.
CRESCENDO shall use due diligence to correct all faults rated priority one or
two, which are deemed to mean "determined to cause major inconvenience, system
crashes, unexpected or incorrect results". All replaced programs shall become
the property of CRESCENDO on an exchange basis. THIS WARRANTY WILL NOT APPLY IF
SUCH ERROR CORRECTION IS REQUIRED BECAUSE OF MISUSE OR ALTERATION OF PRODUCT BY
MRC OR CAUSES OTHER THAN ORDINARY USE. Repair services will be rendered during
normal business hours, CRESCENDO shall have full and free access to the computer
equipment, software and printouts at MRC's place of business when performing
such services.
- -------------------------------------------------------------------------------
Page 4
<PAGE> 5
The warranties set forth in this Contract are in addition to
and not in limitation of the service and training requirements set forth
elsewhere in this Contract.
It is agreed for purposes of compliance with this paragraph,
that CRESCENDO's documentation, and all modifications thereto, shall be utilized
by the parties as the standard for specifications for the system requirements
and functionality. The parties shall endeavour, if at all practicable, to use
the documentation references to determine fault origination as to intended
purposes versus perceived purpose.
8. LIMITATION ON DAMAGES. NEITHER CRESCENDO, NOR ANYONE ELSE
WHO HAS BEEN INVOLVED IN THE CREATION, PRODUCTION, OR DELIVERY OF THIS PRODUCT
SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, OR INCIDENTAL DAMAGES
(INCLUDING DAMAGES FOR LOSS OF BUSINESS INFORMATION PROFITS, BUSINESS
INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE) ARISING OUT OF THE USE
OR INABILITY TO USE SUCH PRODUCT.
9. PROPRIETARY RIGHTS. MRC acknowledges and agrees that the
MEDRite(R) software and all updates, modifications and extensions of that
software, including those updates, modifications and extensions created jointly
with MRC's assistance, remain the property of CRESCENDO and may be copyrighted
by CRESCENDO. MRC further acknowledges and agrees that the MEDRite(R) software
and all updates, modifications and extensions of that software, including those
updates, modifications and extensions created jointly with MRC's assistance, are
trade secrets of CRESCENDO.
10. NON-DISCLOSURE. During the course of this contract and
business relationship, CRESCENDO will have access to and become familiar with
various trade secrets, including patient records, customer and supplier list and
compilations of information, records and specifications, that are owned by MRC
and that are vital importance to MRC's business. Crescendo shall not disclose
any of these trade secrets, directly or indirectly, or use them in any way,
either during the term of this Contract or at any later time, except as required
in the course of its dealings with MRC. All patient records, data bases, files,
records, documents, lists, and similar items relating to the business of MRC
whether prepared by CRESCENDO or otherwise coming into CRESCENDO's possession,
shall remain the exclusive property of MRC.
ARTICLE III
-----------
SUPPORT AGREEMENT
-----------------
1. SUPPORT AGREEMENT. CRESCENDO shall make its employees
available for telephone consultations with MRC head office personnel to answer
questions or resolve problems that may arise from the use of the software.
Furthermore, this unlimited support shall include remote diagnostics and
troubleshooting when required.
This support shall be provide Monday to Friday, from eight
(8:00) a.m. to six (6:00) p.m. Eastern Standard Time, excluding statutory
holidays. Response time shall be a
- -------------------------------------------------------------------------------
Page 5
<PAGE> 6
maximum of two hours after receipt of call, except for cases that are beyond
CRESCENDO's control (such as bad weather or "acts of God").
The support agreement also entities MRC to and covers the cost
all updates and extensions to the software, excluding shipping, duties and
taxes, and unique software development specifically requested by MRC.
2. COST. MRC shall pay CRESCENDO Ten Thousand Dollars US
($10,000.00US) per year for support of the software. This fee is due upon
execution of this Contract and on each subsequent anniversary date of the
Contract and upon receipt of invoice. MRC shall continue to pay the cost of this
Support Agreement as long as this contract is enforced, as provided for in
"Article V, Paragraph 2 - License Period".
3. EXCLUSIONS. This support agreement does not include
replacement of data lost due to failure of hardware or software; MRC is advised
to "back-up" all data on an alternative storage medium in order to avoid
possible loss of data. This support agreement shall not apply if such program
servicing is required because of misuse or alteration of the software by MRC or
causes other than ordinary use.
4. WARRANTIES AND DAMAGES. Any replacement software or
modifications produced under this support agreement are subject to the same
warranties, rights of recovery, non-disclosure provisions and limitations on
damages as the original software licensed hereunder.
5. SOFTWARE MODIFICATIONS. CRESCENDO shall provide the same
program support for any modifications, updates or extensions of the software
developed from time to time.
6. SOFTWARE UPDATES. Crescendo acknowledges that from time to
time it will need to enhance and update the software so that it meets the ever
evolving needs of the medical transcription industry. CRESCENDO, at its option
may choose to undertake to modify or develop the software so that it meets the
changing needs of the medical transcription industry. CRESCENDO shall not be
limited to any particular platform, source code or database system in developing
additional software.
ARTICLE IV
----------
SOFTWARE DEVELOPMENT
--------------------
1. INTENT. Although MEDRite(R) is a complete product that
addresses the current needs of medical transcription services, these needs are
ever evolving. Needs may be changed by the addition of new clients, new
requirements for interfacing with mainframe computers or other special
requirements in the manner in which work is prepared and subsequently
transmitted or communicated. It is therefore the intent of the parties to
participate, one with the other, in developing additional transcription software
and to modify existing software in order to better serve the needs of MRC in a
competitive marketplace.
- -------------------------------------------------------------------------------
Page 6
<PAGE> 7
CRESCENDO shall from time to time, develop products that
address different requirements in the medical records field. These products
which do not directly influence the transcribing or communication of reports are
NOT covered by this agreement. These additional products, not covered herein
include, digital voice recording or automated chart tracking and coding.
CRESCENDO may offer these products to MRC under a separate agreement and MRC may
choose to procure or license these products and services at some future time.
It is not the intent of the parties to this Contract to
cooperate in technology fields outside of medicine. Nothing herein is intended
to restrict CRESCENDO from independently pursuing development of software or
hardware technology in those fields.
2. UNIQUE DEVELOPMENT. From time to time, MRC will advise
CRESCENDO of the need for unique development in order to advance the software to
better meet the needs of it's clients. CRESCENDO, at its option may choose to
undertake to modify or develop the software so that it meets the changing needs
of MRC. CRESCENDO covenants that it will respond to MRC in a prompt and
forthright manner to each of its request for unique development. CRESCENDO also
covenants that when it agrees to a modification or development of additional
unique software specifically for MRC, it will employ its best efforts in a
diligent manner to provide MRC with the results. CRESCENDO covenants that it
will employ its best faith effort in a diligent manner to modify the software in
accordance with MRC's directives.
CRESCENDO shall not be limited to any particular platform,
source code or database system in developing additional software.
3: COST. The cost of developing and implementing unique
software developments, specifically requested and appropriately approved by MRC,
as referred to in "Article IV, Paragraph 2", will be borne solely by MRC. The
cost shall be Thirty-Five Dollars US ($35.00US) per hour of development.
4. PROPRIETARY RIGHTS. All software developed under this
agreement in cooperation with MRC shall be and remain the property of CRESCENDO
subject to MRC's right of use.
5. LICENSE. MRC shall be entitled to a license to use any
modifications, updates or extensions of the MEDRite(R) software under the same
terms and conditions as the original license.
6. NON-DISCLOSURE. Any updated or modified software produced
under this agreement is subject to the same warranties, rights of recovery,
nondisclosure provisions and limitations on damages as the original software
licensed hereunder.
7. INDEPENDENT CONTRACTOR. The parties agree that CRESCENDO
shall perform its duties under this agreement as an independent contractor, not
as an employee of MRC. CRESCENDO shall not have or claim any right arising from
employee status.
- -------------------------------------------------------------------------------
Page 7
<PAGE> 8
ARTICLE V
---------
COMPENSATION AND LICENSE PERIOD
-------------------------------
1. COMPENSATION. As compensation for the use of the MEDRite(R)
software, with the inclusion of Electronic Signature module and the two MRC
Payroll and Billing reports, MRC shall pay CRESCENDO a total fee of Two Hundred
and Fifty Thousand Dollars US ($250,000.00US).
MRC shall pay Fifty Thousand Dollars US ($50,000.00US) as an
initial payment upon execution of this Contract. An additional seventeen (17)
monthly payments of Eleven Thousand Seven Hundred and Sixty Four Dollars and
Seventy Cents US ($11,764.70US), starting with the first day of the second month
to cover the balance of the Two Hundred Thousand Dollars US ($200,000.00US).
MRC shall pay an additional Eight Thousand Dollars US
($8,000.00US) for future offices opened or acquired that are in addition to the
forty-one (41) offices included in Attachment "A" of this Contract. For any
additional offices opened or acquired between February 1, 1994 and July 31,
1995, amounts owned will only become due on August 1, 1995 at a rate of Eight
Thousand Dollars US ($8,000.00US) per month starting on the first day of the
nineteen month. For offices opened or acquired after July 31, 1995 that are in
addition to the forty-one (41) offices included in Attachment "A" of this
Contract, payment shall be upon receipt of invoice, though MRC shall be granted
terms so that a maximum of Eight Thousand Dollars US ($8,000.00US) per month is
paid. These payments shall continue until such time as all monies owned to
Crescendo have been paid.
2. LICENSE PERIOD; TERMINATION. This contract shall remain in
effect for a period of three (3) years after the effective date, subject to the
terms of this agreement, and shall automatically renew for successive one (1)
year periods unless terminated as provided herein by either party with ninety
(90) days advance written notice.
CRESCENDO may not terminate this agreement license except in
the case of nonpayment by MRC or violation of copyright by MRC.
Following termination of the Contract and payment to CRESCENDO
of all sums then due, the rights and duties of each party shall terminate,
except for those duties with respect to non-disclosure and trade secrets.
Termination of the license agreement also terminates the parties
responsibilities under the support and software development portions of this
Contract.
ARTICLE VI
----------
ESCROW PROVISIONS
-----------------
1. ESCROW. Crescendo hereby agrees to negotiate an ESCROW
agreement with MRC, that will allow for MRC to acquire the MEDRite source code,
all associated software, development tools, development environment and all
associated documentation (herein after referred to as "Source Code Materials")
should Crescendo be adjudicated bankrupt and cease to operate, or should
Crescendo or it's successors cease to support the MEDRite software as
- -------------------------------------------------------------------------------
Page 8
<PAGE> 9
provided for in "Article II, Paragraph 7", "Article III, Paragraph 1" and
"Article IV, Paragraph 5". The parties shall use a mutually agreeable and
reputable ESCROW lawyer to conclude this provision. Crescendo shall update the
"Source Code Materials" at least once each calendar year. Should this ESCROW
agreement be executed MRC agrees that the acquired "Source Code Materials" may
only be used for the purposes of supporting it's business of providing
transcription services for it's clients.
2. TRAINING. Crescendo hereby agrees that under the terms of
the ESCROW provision that it will provide training to two (2) qualified MRC
employees in regards to the development methodology and development environments
used by Crescendo's development staff, in regards to the MEDRite software. This
training will be held at Crescendo's corporate offices and will be conducted by
key development personnel. A review of the "Source Code Materials" held in
ESCROW will be held at the same time. These training sessions are to be provided
at least once each calendar year and shall continue as long as this contract is
enforced, as provided for in "Article V, Paragraph 2 - License Period".
3. COST. The cost of the ESCROW agreement, the annual
maintenance cost of the ESCROW agreement and the cost of the ESCROW training
sessions shall be borne solely by MRC.
ARTICLE VII
-----------
GENERAL PROVISIONS
------------------
1. Any controversy or claim arising out of or relating to this
Contract shall be settled by arbitration conducted in accordance with the then
current Rules of the American Arbitration Association (the "Association"),
strictly in accordance with the terms of this Contract, and the substantive law
of the State of Ohio. The arbitration shall be held in Cleveland, Ohio and shall
be conducted by three (3) arbitrators. Each party shall select one (1)
arbitrator and the two (2) nominees shall select the third arbitrator. At least
one of the arbitrators shall be chosen from a panel of persons knowledgeable in
data processing and business information systems, and at least one (1) of the
arbitrators shall be an attorney. Judgment on an award rendered by the
arbitrators may be entered and enforced in any court of competent jurisdiction.
Neither party shall institute an arbitration proceeding until that party has
furnished to the other party, by certified mail, at least ten (10) days prior
to, written notice of its intent to do so.
Notwithstanding the foregoing provision, either party may
apply directly to a Court of competent jurisdiction, without proceeding through
arbitration, for an injunction, provided that the party must certify, under
oath, that the other party's breach is such that an immediate injunction is
required to preserve the status quo. Upon issuance of an injunction the Court
may then refer the matter to arbitration under this provision.
2. The prevailing party shall be entitled to a reasonable
attorney's fee together with the costs of any action brought in law or at equity
to enforce the provisions of the License Agreement.
- -------------------------------------------------------------------------------
Page 9
<PAGE> 10
3. Any notices required or permitted under this contract shall
be made in writing to the party at the address shown at the beginning of this
Contract or at any subsequent address that may be designated in writing from
time to time by that party.
4. This Contract is governed by the laws of the State of Ohio.
Venue shall be in the Cuyahoga County, Ohio.
5. This Contract shall be effective on February 1, 1994,
provided that both parties have executed this agreement in writing.
6. This Contract constitutes the entire agreement of the
parties and supersedes all prior arrangements and representations of the parties
relating to the subject matter of this Contract.
EXECUTED by MRC this 7th day of February, 1994.
MEDICAL RECORDS CORPORATION
By: /s/ Herbert L. Marcus
---------------------------------------
its, Vice President
EXECUTED by CRESCENDO this ____ day of February, 1994
CRESCENDO SYSTEMS CORPORATION
By:_______________________________________
its, President
- -------------------------------------------------------------------------------
Page 10
<PAGE> 11
ADDENDUM TO CONTRACT FOR LICENSE
--------------------------------
OF MEDRITE SOFTWARE AND SUPPORT ARRANGEMENTS
--------------------------------------------
THIS ADDENDUM IS BEING MADE TO THE EXISTING AGREEMENT, by and between
MEDICAL RECORDS CORP, (hereinafter referred to as "MRC") and CRESCENDO SYSTEMS
CORPORATION, (hereinafter referred to as "CRESCENDO") shall be effective on the
1st day of September, 1996.
WITNESSETH:
WHEREAS, MRC has effectively merged it's business with
Medifax/Secrephone and become The MRC Group
WHEREAS, MRC desires new functionality be added to the MedRite software
so that it meets certain needs as expressed by the Medifax/Secrephone for
existing installations
WHEREAS, CRESCENDO has developed additional MedRite modules and
enhancements not covered under the initial agreement
WHEREAS, MRC wishes to license the new additions to the MedRite(R)
software from CRESCENDO under the terms of this Addendum and CRESCENDO is
willing to grant a license on such terms; and
WHEREAS, CRESCENDO is willing to continue to provide support services
necessary to modify and update the MedRite(R) software to maximize its
effectiveness for MRC's business; and
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises
contained in the original Contract and this addendum, the parties hereto agree
and contract as follows:
ARTICLE I
---------
DEFINITIONS
-----------
1. DEFINITIONS. The following new definitions now apply to this
Contract:
A. "Existing office" refers to any of the MRC transcriptionist offices
covered under the initial contract
B. "New office" refers to any office that exceeds the initial contracted
forty offices or any office that operated under the Medifax/Secrephone banner
C. "Relocation of office" means any MRC office that performed
transcription and was subsequently relocated to within a 250 mile radius and
continues to transcribe at least seventy percent of the clients from the
original office
D. "Closure of office" means any MRC office that performed transcription
and was subsequently closed and/or relocated outside of a 250 mile radius.
<PAGE> 12
ARTICLE II
----------
LICENSE AGREEMENT
-----------------
1. LICENSE FOR USE. UNCHANGED.
2. USE AT TRANSCRIPTION STATIONS. UNCHANGED.
3. COPIES OF SOFTWARE; RESTRICTION ON USE. Unauthorized copying of
the software, including forms of the software that may have been modified,
merged or included with other software, is expressly forbidden. MRC may not
modify the software in any way without the expressed written permission of
CRESCENDO. MRC may not allow any other person or entity to copy the MedRite(R)
software or accompanying documentation. MRC may not give, sell or otherwise
distribute the MedRite(R) software or accompanying documentation to any other
person or entity.
CRESCENDO shall supply MRC with diskettes at its own cost, excluding
shipping, duties and taxes. MRC shall be responsible for reproducing and
distributing the original diskettes to their offices. Each set of diskettes
shall include the MedRite(R) program, including the FAX interface and electronic
authentication, in an "Unlimited Network User Version", "Remote User Version"
and "Standalone Version", in addition to the "Medical Word List Version 3.0",
the "Crescendo Database Editor", "ASCII Main Frame Download Program", "HL7
Mainframe Download Program" and "Generic Real-time\Batch Mainframe Interface
(see attachment A)" (available by December 31, 1996). Each package shall contain
nine (9) diskettes, serialized to reflect MRC as the client. MRC shall also be
permitted to copy or download the software for use by authorized offices, remote
users and clients. MRC's clients may only use the MedRite software to process
reports (excluding electronic authentication) that were originally created by
MRC employees. MRC must notify Crescendo within thirty days of each new
transcription office installation.
4. INSTALLATION. UNCHANGED.
5. TRAINING. UNCHANGED.
6. WARRANTY OF TITLE; COPYRIGHT INFRINGEMENT. UNCHANGED.
7. WARRANTY; FITNESS OF USE. UNCHANGED.
8. LIMITATION ON DAMAGES. UNCHANGED.
9. PROPRIETARY RIGHTS. UNCHANGED.
10. NON-DISCLOSURE. UNCHANGED.
ARTICLE III
-----------
SUPPORT AGREEMENT
-----------------
1. SUPPORT AGREEMENT. UNCHANGED
2. COST. MRC shall pay CRESCENDO Sixteen Thousand Dollars US
($16,000.00US) per year for support of the software. On each subsequent
anniversary date of the Contract and upon receipt of invoice. A prorated fee of
Three Thousand Dollars US ($3,000.00) for the remainder of this contract term is
due upon execution of this Addendum. MRC shall continue to pay the cost of this
Support Agreement as long as this contract is enforced, as provided for in
"Article V, Paragraph 2 - License Period".
3. EXCLUSIONS. Unchanged.
4. WARRANTIES AND DAMAGES. Unchanged.
5. SOFTWARE MODIFICATIONS. Unchanged.
6. SOFTWARE UPDATES. Unchanged.
<PAGE> 13
ARTICLE IV
----------
SOFTWARE DEVELOPMENT
--------------------
1. INTENT. UNCHANGED
2. UNIQUE DEVELOPMENT. UNCHANGED
3. COST. UNCHANGED
4. PROPRIETARY RIGHTS. UNCHANGED
5. LICENSE. UNCHANGED
6. NON-DISCLOSURE. UNCHANGED
7. INDEPENDENT CONTRACTOR. UNCHANGED
8. SPECIAL DEVELOPMENT. As part of the revised agreement Crescendo will
modify the MedRite software to include the following enhancements: the
ability for at home transcriptionist to call an office and quickly extract
all the related data for a specific client and then import the data into
their own environment; the ability to bill by the minute of dictation;
quickly access the on-line archived medical reports; produce numbered audit
trails and batch summaries; extend the ASCII import facility to include
carbon copy and fax parameters; and improve the highlighting of a carbon copy
recipient's name.
ARTICLE V
---------
COMPENSATION AND LICENSE PERIOD
-------------------------------
1. COMPENSATION. As compensation for the use of the new MedRite(R) version a
fee of One Hundred and Forty Thousand Dollars US ($140,000.00US), for the
original forty (40) offices, will be charged. Furthermore, MRC shall pay
Crescendo a fee of One Hundred and Twenty Thousand Dollars ($120,000.00) for
the first ten office new offices operated by MRC. MRC shall also pay an
additional Ten Thousand Four Hundred Dollars US ($10,400.00US) for future
offices opened or acquired that are in addition to the fifty-offices (50)
offices described above.
Additionally. MRC shall pay Crescendo a fee of
$3,500.00 when a transcription office that is using MedRite and the license
has been fully paid is closed and MRC wish to install that same software into
another office. However, should the office simply be relocated as defined in
this addendum, then no additional payments are required.
2. LICENSE PERIOD; TERMINATION. UNCHANGED
----------------------------
ARTICLE VI
----------
ESCROW PROVISIONS
-----------------
1. ESCROW. UNCHANGED
2. TRAINING. UNCHANGED
3. COST. UNCHANGED
3
<PAGE> 14
ARTICLE VII
-----------
GENERAL PROVISIONS
------------------
UNCHANGED
EXECUTED by MRC this 24th day of September, 1996.
MEDICAL RECORDS CORPORATION
BY: /s/ Herbert Marcus
----------------------------------
its,
---------------------------------
EXECUTED by CRESCENDO this 30th day of September, 1996.
CRESCENDO SYSTEMS CORPORATION
BY: /s/ Costa Mandilaris
----------------------------------
its, President
---------------------------------
4
<PAGE> 15
ATTACHMENT A
OVERVIEW AND OBJECTIVES
The MedRite(R) Mainframe Interface Program described in this document intends to
supersede all existing interface programs (MDSINTER.EXE, HL7INTER.EXE and
MTECHINT.EXE). The new interface program will also include certain enhancements
in the areas of supported IS vendors and modes of operation.
The MedRite(R) Mainframe Interface Program will be implemented so that it can
operate in one or several modes. It is intended that it should be possible for
data to be obtained in an on-line real time or batch fashion in one location and
have MedRite(R) located in the same or another location. It will also be
possible to handle sessions to multiple clients in the same program. Although
the program offers a flexible approach there will probably be modes that are
mutually exclusive.
The following is a list of the main features.
* OS platform will be Windows 95/NT.
* HL7 versions 2.1 and 2.2 will be supported in real time and
batch.
* Future versions of HL7 will be supported.
* Existing basic ASCII interface will be supported in real time
and batch.
* A fixed record size, field configurable and user defined ASCII
interface will be supported in real time and batch.
* Mainframe to/from MedRite(R) or file batches will be supported
interactively on TCP/IP via socket connections.
* Batch processing of files between mainframe and MedRite(R).
* Multi-client configuration support.
For a schematic describing the program's architecture see appendix A.
PROTOCOLS
TCP/IP
THE TCP/IP socket implementation will be based on WINSOCK. The MedRite(R)
Mainframe Interface Program will be able to act both as a server or a client
(dial up and being dialed into). IP addresses will be established automatically.
<PAGE> 1
Exhibit 11.1
SUPPLEMENTAL DISCLOSURE OF EPS CALCULATION
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1995
<S> <C> <S>
BASIC
Numerator Net loss (126,191)
Denominator Wt. avg common shares outstanding 1,272,048
EPS (0.10)
DILUTED
Numerator Not shown due to net loss as impact is antidilutive
Denominator Not shown due to net loss as impact is antidilutive
TWELVE MONTHS ENDED DECEMBER 31, 1996
BASIC
Numerator Net loss (1,316,445)
Denominator Wt. avg common shares outstanding 2,578,421
EPS (0.51)
DILUTED
Numerator Not shown due to net loss as impact is antidilutive
Denominator Not shown due to net loss as impact is antidilutive
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997
<S> <C> <C>
BASIC
Numerator Net loss (1,013,137)
Denominator Wt. avg common shares outstanding 4,106,364
EPS (0.25)
PRO FORMA BASIC
Numerator Net loss (actual) (1,013,137)
Add: Interest expense on debt to be repaid,
net of tax 356,610
-------------
Adjusted net loss (656,527)
Denominator Basic wt. avg common shares outstanding 4,106,364
Assumed conversion of preferred shares 7,262,094
Approximate issuance of Offering shares
for debt repayments
-------------
Adjusted wt. avg common shares outstanding
EPS
DILUTED
Numerator Net loss (actual) (1,013,137)
Denominator Basic wt. avg common shares outstanding 4,106,364
Add: Assumed conversion of preferred shares 7,262,094
Add: Potential dilutive securities 2,189,702
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 20,194,102
Divided by estimated FMV of shares 13.50
--------------
Anticipated shares repurchased (1,495,860)
-------------
Adjusted wt. avg common shares outstanding 12,062,300
EPS (0.08) N/A as
antidilutive
due to loss
PRO FORMA DILUTED
Numerator Adjusted pro forma net loss per above (656,527)
Denominator Adjusted pro forma wt. avg common shares outstanding
per above
Add: Potential dilutive securities 2,189,702
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 20,194,102
Divided by estimated FMV of shares
--------------
Anticipated shares repurchased
-------------
Adjusted wt. avg common shares outstanding
EPS N/A as
antidilutive
due to loss
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
<S> <C> <C>
BASIC
Numerator Net income 382,580
Denominator Wt. avg common shares outstanding 4,106,364
EPS 0.09
PRO FORMA BASIC
Numerator Net income (actual) 382,580
Add: Interest expense on debt to be repaid,
net of tax 175,224
-------------
Adjusted net income 557,804
Denominator Basic wt. avg common shares outstanding 4,106,364
Assumed conversion of preferred shares 7,262,094
Approximate issuance of Offering shares
for debt repayment
-------------
Adjusted wt. avg common shares outstanding
EPS
DILUTED
Numerator Net income (actual) 382,580
Denominator Basic wt. avg common shares outstanding 4,106,364
Add: Assumed conversion of preferred shares 7,262,094
Add: Potential dilutive securities 2,189,702
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 20,194,102
Divided by estimated FMV of shares 13.50
--------------
Anticipated shares repurchased (1,495,860)
-------------
Adjusted wt. avg common shares outstanding 12,062,300
EPS 0.03
PRO FORMA DILUTED
Numerator Adjusted pro forma net income per above 557,804
Denominator Adjusted pro forma wt. avg common shares outstanding
per above
Add: Potential dilutive securities 2,189,702
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 20,194,102
Divided by estimated FMV of shares
--------------
Anticipated shares repurchased
-------------
Adjusted wt. avg common shares outstanding
EPS
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
<S> <C> <C>
BASIC
Numerator Net income 1,516,921
Denominator Wt. avg common shares outstanding 4,111,588
EPS 0.37
PRO FORMA BASIC
Numerator Net income (actual) 1,516,921
Add: Interest expense on debt to be repaid,
net of tax 155,310
-------------
Adjusted net income 1,672,231
Denominator Basic wt. avg common shares outstanding 4,111,588
Assumed conversion of preferred shares 7,262,094
Approximate issuance of Offering shares
for debt repayment
-------------
Adjusted wt. avg common shares outstanding
EPS
DILUTED
Numerator Net income (actual) 1,516,921
Denominator Basic wt. avg common shares outstanding 4,111,588
Add: Assumed conversion of preferred shares 7,262,094
Add: Potential dilutive securities 2,433,292
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 21,933,510
Divided by estimated FMV of shares 13.50
--------------
Anticipated shares repurchased (1,624,704)
-------------
Adjusted wt. avg common shares outstanding 12,182,270
EPS 0.12
PRO FORMA DILUTED
Numerator Adjusted pro forma net income per above 1,672,231
Denominator Adjusted pro forma wt. avg common shares outstanding
per above
Add: Potential dilutive securities 2,433,292
Less: Approx. proceeds and tax benefit from
potentially dilutive securities 21,933,510
Divided by estimated FMV of shares
--------------
Anticipated shares repurchased
-------------
Adjusted wt. avg common shares outstanding
EPS
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated March 3, 1998 and May 1, 1998 (and to all references to our Firm) included
in or made a part of this S-1 Registration Statement.
Cleveland, Ohio,
July 30, 1998. /s/ Arthur Andersen LLP
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 16, 1996 (and to all references to our Firm) included in or made
a part of this S-1 Registration Statement.
Mayfield Village, Ohio, /s/ Skoda, Minotti, Reeves & Co.
July 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MRC
GROUP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,007,740
<SECURITIES> 1,990,944
<RECEIVABLES> 19,489,925
<ALLOWANCES> 981,581
<INVENTORY> 0
<CURRENT-ASSETS> 28,819,997
<PP&E> 27,572,276
<DEPRECIATION> 14,621,286
<TOTAL-ASSETS> 79,029,517
<CURRENT-LIABILITIES> 16,500,575
<BONDS> 7,270,177
47,493,252
104
<COMMON> 42,955
<OTHER-SE> 6,066,390
<TOTAL-LIABILITY-AND-EQUITY> 79,029,517
<SALES> 60,172,857
<TOTAL-REVENUES> 60,172,857
<CGS> 47,869,544
<TOTAL-COSTS> 47,869,544
<OTHER-EXPENSES> 9,561,615
<LOSS-PROVISION> 150,000
<INTEREST-EXPENSE> 97,777
<INCOME-PRETAX> 2,643,921
<INCOME-TAX> 1,127,000
<INCOME-CONTINUING> 1,516,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,516,921
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.12
</TABLE>
