<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO
(State or Other jurisdiction of
incorporation or organization)
5122
(Primary Standard
Industrial Classification Code Number)
31-0958666
(I.R.S. Employer
Identification No.)
5555 GLENDON COURT
DUBLIN, OHIO 43016
(614) 717-5000
(Address, including ZIP code, and telephone number, including area code, of
Registrant's principal executive offices)
ROBERT D. WALTER
CHAIRMAN
CARDINAL HEALTH, INC.
5555 GLENDON COURT
DUBLIN, OHIO 43016
(614) 717-5000
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
WITH COPIES TO
JOHN M. GHERLEIN
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
(216) 621-0200
VICTOR J. PACI
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
(617) 951-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED
TITLE OF MAXIMUM PROPOSED
EACH CLASS OFFERING PRICE MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE PER SHARE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED OR WARRANT PRICE FEE
<S> <C> <C> <C> <C>
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Common Shares, without par
value........................... 704,416 Shares(1) $5.61(1) $3,954,803(1) $1,198.42
Warrants to purchase Common
Shares.......................... 14,806(2) $8.53 $126,334(2) $38.28
----------
Total............................. $1,236.70
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(1) Pursuant to Rule 457(f)(2) promulgated under the Securities Act of 1933, as
amended, and estimated solely for purposes of calculating the registration
fee, the proposed maximum aggregate offering price is $3,954,803, which
equals one-third of the aggregate par value or stated value of the shares of
Common Stock and Preferred Stock of MediQual Systems, Inc. ("MediQual") to
be cancelled in the merger (the "Merger") described in this Registration
Statement. The proposed maximum offering price per share is equal to the
proposed maximum aggregate offering price determined in the manner described
in the preceding sentence divided by the maximum number of Common Shares,
without par value, of the Registrant that could be issued in the Merger
based on the highest share exchange ratios (which exchange ratios may be
adjusted under certain circumstances) as provided in the Merger Agreement
described in this Registration Statement. The Amount to be Registered
includes Common Shares issuable on the exercise of the Warrants being
registered and Common Shares issuable to holders of options to purchase
MediQual Common Stock.
(2) Assumes that Warrants of the Registrant are issued in exchange for all
currently outstanding Warrants to purchase Common Stock of MediQual using
the highest exchange ratios (which ratios may be adjusted under certain
circumstances) as provided in the Merger Agreement. The proposed maximum
aggregate offering price consists of the aggregate exercise prices for the
Warrants using the exchange ratio described in the preceding sentence.
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of MediQual Systems, Inc. ("MediQual") to be held at the
principal executive offices of MediQual at 1900 West Park Drive, Westborough,
Massachusetts on August 18, 1997, at 10:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the execution by MediQual of an Amended and
Restated Agreement and Plan of Merger, dated as of July 7, 1997 (the "Merger
Agreement"), and the authorization of a merger pursuant to which a wholly owned
subsidiary of Cardinal Health, Inc. ("Cardinal") will be merged with and into
MediQual (the "Merger"). The terms of the Merger Agreement provide that holders
of MediQual Common Stock, Class A Preferred Stock, Class B Preferred Stock and
Class C Preferred Stock (in each case, as defined in the accompanying Proxy
Statement/Prospectus) will be entitled to receive a number of Cardinal common
shares, without par value ("Cardinal Common Shares"), as determined pursuant to
the share exchange formulas set forth in the Merger Agreement.
The Board of Directors of MediQual has carefully reviewed and considered
the terms and conditions of the proposed Merger and has determined that the
terms of the Merger Agreement and the Merger are in the best interests of
MediQual and its stockholders.
THE MEDIQUAL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND
ADOPTION OF THE EXECUTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
I urge you to carefully review and consider the accompanying Notice of
Special Meeting of Stockholders, Proxy Statement/Prospectus and Proxy, which
contain information about MediQual and Cardinal and describe the proposed Merger
and certain related matters. Please give this material your careful attention.
All stockholders are invited to attend the Special Meeting in person. The
affirmative vote of the holders of not less than a majority of the outstanding
shares of Class B Preferred Stock and Class C Preferred Stock of MediQual, each
voting as a separate class, as well as the affirmative vote of the holders of
Class B Preferred Stock, Class C Preferred Stock and MediQual Common Stock,
voting together as a single class (with each share of Class B Preferred Stock
and Class C Preferred Stock entitling the holder thereof to such number of votes
as shall equal the number of shares of MediQual Common Stock into which each
such share of Class B Preferred Stock and Class C Preferred Stock is convertible
on the record date for voting at the Special Meeting) will be necessary for
approval and adoption of the Merger Agreement and authorization of the Merger.
Whether or not you attend the Special Meeting, it is important that your shares
be represented and voted at the Special Meeting. Therefore, I urge you to
complete, sign, date, and promptly return the enclosed Proxy in the enclosed
postage-paid envelope. If you decide to attend the Special Meeting and vote in
person, you will, of course, have that opportunity.
Sincerely,
Eric A. Kriss
President and Chief Executive Officer
<PAGE> 3
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 18, 1997
TO THE STOCKHOLDERS OF MEDIQUAL SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of MediQual Systems, Inc. ("MediQual") will be held at 10:00 a.m.,
local time, on August 18, 1997, at MediQual's principal offices at 1900 West
Park Drive, Westborough, Massachusetts, to consider and vote upon the following
proposals:
1. To approve and adopt the execution of the Amended and Restated Agreement
and Plan of Merger, dated as of July 7, 1997 (the "Merger Agreement"), among
MediQual, Cardinal Health, Inc. ("Cardinal"), and Hub Merger Corp. ("Subcorp"),
a wholly owned subsidiary of Cardinal, and to authorize the merger (the
"Merger") of Subcorp with and into MediQual, pursuant to which, among other
things, (i) MediQual will become a wholly owned subsidiary of Cardinal, and (ii)
each outstanding share of MediQual Common Stock, Class A Preferred Stock, Class
B Preferred Stock and Class C Preferred Stock (in each case, as defined in the
accompanying Proxy Statement/Prospectus) will be converted into the right to
receive a number of Cardinal common shares, without par value ("Cardinal Common
Shares"), determined pursuant to the share exchange formulas set forth in the
Merger Agreement. A copy of the Merger Agreement is attached as Annex A to the
accompanying Proxy Statement/Prospectus.
2. To consider such other matters incidental to the Merger as may properly
come before the Special Meeting and any adjournments or postponements thereof.
Only stockholders of record at the close of business on July , 1997 are
entitled to notice of and only holders of record on August 8, 1997 are entitled
to vote at the Special Meeting and any adjournment or postponement thereof.
Holders of MediQual Common Stock, Class A Preferred Stock, Class B Preferred
Stock and Class C Preferred Stock will have the right to dissent from the Merger
and, subject to certain conditions, receive payment in cash for their shares.
These rights are described in greater detail in the accompanying Proxy
Statement/Prospectus under the caption "Rights of Dissenting Stockholders" and
are set forth in Section 262 of the Delaware General Corporation Law. A copy of
such provisions is attached as Annex B to the accompanying Proxy
Statement/Prospectus and incorporated therein by reference.
BY ORDER OF THE BOARD OF DIRECTORS
Eric A. Kriss
Secretary
Westborough, Massachusetts
, 1997
IMPORTANT
All stockholders are cordially invited to attend the Special Meeting in person.
However, to ensure your representation at the Special Meeting you are urged to
complete, sign, date and return the enclosed Proxy as promptly as possible in
the postage-paid envelope enclosed for that purpose. YOU MAY REVOKE YOUR PROXY
IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY
TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL MEETING. ANY STOCKHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY.
<PAGE> 4
MEDIQUAL SYSTEMS, INC.
PROXY STATEMENT
CARDINAL HEALTH, INC.
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders
(collectively, "MediQual Stockholders") of shares of Common Stock, $.001 par
value ("MediQual Common Stock"), Class A Preferred Shares ("Class A Preferred
Stock"), Class B Preferred Shares ("Class B Preferred Stock"), which includes
the Series 1986 Class B Preferred Shares ("1986 Class B Preferred Shares") and
the Series 1987 Class B Preferred Shares ("1987 Class B Preferred Shares"), and
the Class C Preferred Shares (the "Class C Preferred Stock") of MediQual
Systems, Inc., a Delaware corporation ("MediQual"), in connection with the
solicitation of proxies by the Board of Directors of MediQual for use at the
Special Meeting of MediQual Stockholders to be held on Monday, August 18, 1997,
at MediQual's principal offices at 1900 West Park Drive, Westborough,
Massachusetts, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof (the "Special Meeting").
At the Special Meeting, holders of MediQual Common Stock, Class B Preferred
Stock and Class C Preferred Stock as of the close of business on August 8, 1997
will be asked to consider and vote on a proposal (the "Merger Proposal") to
approve and adopt the execution of the Amended and Restated Agreement and Plan
of Merger, dated as of July 7, 1997 (the "Merger Agreement"), among Cardinal
Health, Inc. ("Cardinal"), Hub Merger Corp. ("Subcorp"), a wholly owned
subsidiary of Cardinal, and MediQual, and to authorize the merger (the "Merger")
of Subcorp with and into MediQual provided for in the Merger Agreement. The
Merger will be consummated on the terms and subject to the conditions set forth
in the Merger Agreement, as a result of which (i) MediQual will become a wholly
owned subsidiary of Cardinal and (ii) MediQual Stockholders will be entitled to
receive a number of Cardinal Common Shares, without par value ("Cardinal Common
Shares"), for each outstanding share of MediQual Common Stock, Class A Preferred
Stock, Class B Preferred Stock and Class C Preferred Stock (sometimes
collectively referred to herein as "MediQual Stock") held by them (with cash in
lieu of fractional shares) as determined pursuant to the share exchange formulas
(the "Exchange Ratios") set forth in the Merger Agreement. See "The Merger
Agreement -- Merger Consideration."
This Proxy Statement/Prospectus also constitutes the Prospectus of Cardinal
with respect to the Cardinal Common Shares to be issued by Cardinal in the
Merger described herein in exchange for the outstanding shares of MediQual
Common Stock, Class A Preferred Stock, Class B Preferred Stock and Class C
Preferred Stock and with respect to warrants to purchase Cardinal Common Shares
("Cardinal Warrants") that may be issued in exchange for outstanding warrants to
purchase MediQual Common Stock ("MediQual Warrants"). See "The Merger
Agreement -- MediQual Warrants." Cardinal Common Shares are quoted on the New
York Stock Exchange (the "NYSE") under the symbol "CAH." On July , 1997, the
last sale price of Cardinal Common Shares on the NYSE Composite Tape was
$ . . MediQual Stockholders should obtain current quotes for the
Cardinal Common Shares.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
All information contained or incorporated by reference in this Proxy
Statement/Prospectus with respect to Cardinal has been supplied by Cardinal. All
information contained in this Proxy Statement/Prospectus with respect to
MediQual has been supplied by MediQual.
This Proxy Statement/Prospectus, the Letter to MediQual Stockholders, the
Notice of the Special Meeting and the form of proxy for use at the Special
Meeting are first being mailed to MediQual Stockholders on or about July ,
1997.
The date of this Proxy Statement/Prospectus is July , 1997.
<PAGE> 5
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF CARDINAL COMMON SHARES OR CARDINAL WARRANTS MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF CARDINAL OR MEDIQUAL SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME AFTER THE DATE HEREOF.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes and incorporates by reference
forward-looking statements based on current plans and expectations of MediQual,
Cardinal and Subcorp, relating to, among other matters, analyses based upon
forecasts of future results, and estimates of amounts that are not yet
determinable. Such forward-looking statements are contained in the sections
entitled "Summary," "The Merger," "Certain Federal Income Tax Consequences,"
"The Companies" and other sections of this Proxy Statement/Prospectus. Such
statements involve risks and uncertainties which may cause actual future
activities and results of operations to be materially different from that
suggested in this Proxy Statement/Prospectus, including, among others,
fluctuations in MediQual's and Cardinal's quarterly operating results,
MediQual's and Cardinal's dependence on their current managements, potential
conflicts of interests of certain persons, competition in the clinical
information management systems industry, as well as other factors described
elsewhere in this Proxy Statement/Prospectus.
AVAILABLE INFORMATION
Cardinal is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by Cardinal with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at its principal office at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048, and Chicago Regional Office, Citicorp Center, 500 West Madison, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates, or, with respect to certain of such
material, through the Commission's World Wide Web site (http://www.sec.gov). The
Cardinal Common Shares are listed on the NYSE, and such reports, proxy
statements and other information concerning Cardinal should also be available
for inspection and copying at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Cardinal has filed with the Commission a Registration Statement on Form S-4
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Cardinal Common Shares to be issued in the Merger and the
Warrants to purchase Cardinal Common Shares ("Cardinal Warrants") that may be
issued in connection therewith (the "Registration Statement"). This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Reference is hereby made to the
Registration Statement and related exhibits for further information with respect
to Cardinal and the securities offered hereby. Statements contained herein
concerning the provisions of any document are necessarily summaries of such
documents and not complete and, in each instance, reference is made to the copy
of such document attached hereto or filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
2
<PAGE> 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Cardinal with the Commission pursuant to
the Exchange Act (Commission File No. 0-12591) are hereby incorporated by
reference in this Proxy Statement/Prospectus:
1. The description of Cardinal Common Shares contained in Cardinal's
Registration Statement on Form 8-A dated August 19, 1994, and any amendment
or report filed for the purpose of updating such description;
2. Cardinal's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (except for Items 7 and 8 which are incorporated herein by
reference in the June 1997 Cardinal Form 8-K as defined below), filed with
the Commission on August 26, 1996 (the "1996 Cardinal Form 10-K");
3. The information contained in Cardinal's Proxy Statement dated
September 27, 1996 for its Annual Meeting of Stockholders held on October
29, 1996 that has been incorporated by reference in the 1996 Cardinal Form
10-K and was filed with the Commission on Schedule 14A on October 5, 1996,
other than the information contained therein under the captions "Report of
the Committee on Executive Compensation" and "Performance Graphs;";
4. Cardinal's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1996, December 31, 1996 and March 31, 1997; and
5. Cardinal's Current Reports on Form 8-K dated October 11, 1996,
March 3, 1997, March 18, 1997, April 21, 1997 and June 10, 1997 (the "June
1997 Cardinal Form 8-K").
All reports and other documents filed with the Commission by Cardinal
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the Special Meeting shall
be deemed to be incorporated by reference herein and to be a part hereof from
the respective dates of filing of such reports and other documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained herein or in any other
subsequently filed document that is also incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WITH
RESPECT TO CARDINAL THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES
OF THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS OR HEREIN)
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO: CARDINAL
HEALTH, INC., 5555 GLENDON COURT, DUBLIN, OHIO 43016, ATTENTION: DAVID BEARMAN,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER.
In order to ensure timely delivery, any request for documents should be
made by July , 1997.
3
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS........................................................... 2
AVAILABLE INFORMATION................................................................ 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................... 3
SUMMARY.............................................................................. 6
The Companies........................................................................ 6
The Special Meeting................................................................ 6
The Merger......................................................................... 8
Certain Federal Income Tax Consequences............................................ 14
Availability of Dissenters' Rights................................................. 14
Comparison of Shareholder Rights................................................... 14
Summary Historical and Unaudited Pro Forma Financial Information................... 15
COMPARATIVE PER SHARE DATA........................................................... 19
MARKET PRICE AND DIVIDEND DATA....................................................... 21
THE SPECIAL MEETING.................................................................. 22
General............................................................................ 22
Matters to Be Considered at the Special Meeting.................................... 22
Record Date; Vote Required; Voting at the Meeting.................................. 22
Voting of Proxies.................................................................. 23
Solicitation of Proxies............................................................ 23
Recommendation of the MediQual Board of Directors.................................. 23
Dissenters' Rights................................................................. 23
THE MERGER........................................................................... 24
Background of the Merger........................................................... 24
Reasons for the Merger; Recommendations of the Boards of Directors................. 25
Interests of Certain Persons in the Merger......................................... 27
Accounting Treatment............................................................... 28
Certain Federal Income Tax Consequences............................................ 29
Regulatory Approvals............................................................... 29
Federal Securities Law Consequences................................................ 29
Support/Voting Agreements.......................................................... 30
THE MERGER AGREEMENT................................................................. 31
The Merger......................................................................... 31
Merger Consideration............................................................... 32
Exchange Procedures................................................................ 37
Representations, Warranties and Covenants.......................................... 37
No Negotiations or Solicitations................................................... 41
Conditions......................................................................... 41
MediQual Stock Options............................................................. 42
MediQual Warrants.................................................................. 43
Escrow Agreement; Indemnification.................................................. 43
Termination; Effect of Termination................................................. 45
Amendment and Waiver............................................................... 46
Expenses........................................................................... 46
RIGHTS OF DISSENTING STOCKHOLDERS.................................................... 46
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............................................. 48
</TABLE>
4
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THE COMPANIES........................................................................ 49
Business of Cardinal............................................................... 49
Subcorp............................................................................ 50
Business of MediQual............................................................... 51
SELECTED FINANCIAL DATA OF MEDIQUAL.................................................. 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF MEDIQUAL........................................................................ 56
PRINCIPAL STOCKHOLDERS OF MEDIQUAL................................................... 61
COMPARISON OF SHAREHOLDER RIGHTS..................................................... 63
Preferences........................................................................ 63
Amendment of Charter Documents..................................................... 63
Amendment and Repeal of By-laws and Regulations.................................... 63
Removal of Directors............................................................... 64
Vacancies on the Board............................................................. 64
Right to Call Special Meeting of Shareholders...................................... 64
Shareholder Action Without a Meeting............................................... 65
Class Voting....................................................................... 65
Cumulative Voting.................................................................. 65
Provisions Affecting Business Combinations and Control Share Acquisitions.......... 65
Mergers, Acquisitions and Certain Other Transactions............................... 66
Consideration of Constituencies.................................................... 66
Rights of Dissenting Shareholders.................................................. 66
Dividends.......................................................................... 67
Preemptive Rights of Shareholders.................................................. 67
Director Liability and Indemnification............................................. 67
DESCRIPTION OF CARDINAL CAPITAL STOCK................................................ 69
LEGAL MATTERS........................................................................ 70
EXPERTS.............................................................................. 70
OTHER MATTERS........................................................................ 70
FINANCIAL STATEMENTS OF MEDIQUAL SYSTEMS, INC........................................ F-1
ANNEXES:
A -- Amended and Restated Agreement and Plan of Merger, dated as of July 7, 1997,
among Cardinal Health, Inc., Hub Merger Corp. and MediQual Systems, Inc.
B -- Section 262 of the Delaware General Corporation Law
</TABLE>
5
<PAGE> 9
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and the Annexes hereto (the "Proxy
Statement/Prospectus"). This summary is not intended to be complete and is
qualified in its entirety by the more detailed information and financial
statements appearing elsewhere or incorporated by reference in this Proxy
Statement/Prospectus. MediQual Stockholders and holders of MediQual Warrants are
urged to read and consider carefully all of the information contained or
incorporated by reference in this Proxy Statement/Prospectus, including the
Annexes.
THE COMPANIES
CARDINAL AND SUBCORP
Cardinal, a holding company operating through a number of separate
operating subsidiaries, is a leading health care service provider which offers
an array of value-added pharmaceutical distribution services and
pharmaceutical-related products and services to a broad base of customers. It is
one of the nation's largest wholesale distributors of pharmaceutical and related
health care products to independent and chain drug stores, hospitals, alternate
care centers and the pharmacy departments of supermarkets and mass merchandisers
located throughout the continental United States. Through its Pyxis Corporation
subsidiary ("Pyxis"), Cardinal develops, manufactures, leases, sells and
services unique point-of-use systems which automate the distribution, management
and control of medications and supplies in hospitals and alternate care
facilities. Cardinal is also the largest franchisor of independent retail
pharmacies in the United States through its Medicine Shoppe International, Inc.
subsidiary ("MSI"). In addition, through its Owen Healthcare, Inc. subsidiary
("Owen"), Cardinal provides pharmacy management and information services to
hospitals. PCI Services, Inc.("PCI"), another one of Cardinal's subsidiaries, is
also a leading international provider of integrated packaging services to
pharmaceutical manufacturers.
Subcorp is a newly formed, wholly owned subsidiary of Cardinal formed for
the purpose of effecting the Merger.
The principal executive offices of Cardinal and Subcorp are located at 5555
Glendon Court, Dublin, Ohio 43016, and their telephone number is (614) 717-5000.
See "The Companies--Business of Cardinal."
MEDIQUAL
MediQual Systems, Inc. is a leading supplier of clinical information
management ("CIM") systems and services to the health care industry. MediQual's
systems and services combine proprietary clinical knowledge with raw patient
encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care. MediQual's primary offering, the Atlas System, is a
modular CIM System intended to enhance health care value by providing a
comprehensive, cost-effective desktop solution to the problem of generating
sophisticated information from disparate raw data sources. The Atlas System,
which is comprised of three models, each designed to analyze different data, is
designed to systematically analyze effectiveness (whether a particular treatment
helped the patient); efficiency (whether the proper resources were used to
provide care); and appropriateness (whether the chosen treatment was the best
option) in a variety of applications. MediQual's hospital customers often use
the information provided by the Atlas System to determine the appropriate areas
for cost reduction which would not have an adverse effect on patient care. See
"The Companies--Business of MediQual."
THE SPECIAL MEETING
Date, Time and Place of the Special Meeting. The Special Meeting will be
held at the principal executive offices of MediQual at 1900 West Park Drive,
Westborough, Massachusetts, on August 18, 1997, at 10:00 a.m., local time, to
consider and vote upon (i) the Merger Proposal; and (ii) such other matters
incidental to the Merger as may properly come before the Special Meeting or any
adjournments or postponements thereof.
Record Date; Required Vote. Holders of record of MediQual Stock at the
close of business on July , 1997 are entitled to notice of the Special
Meeting. Only holders of MediQual Common Stock, Class B
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Preferred Stock and Class C Preferred Stock at the close of business on August
8, 1997 will be entitled to vote at the Special Meeting. On May 31, 1997, there
were outstanding (i) 3,915,411 shares of MediQual Common Stock, held by
approximately 175 holders of record, (ii) 6,316,726 shares of Class B Preferred
Stock, held by 130 holders of record, which were convertible into 1,584,970
shares of MediQual Common Stock, and (iii) 2,022 shares of Class C Preferred
Stock, held by three holders of record, which were convertible into 628,289
shares of MediQual Common Stock. See "The Special Meeting--Record Date; Vote
Required; Voting at the Meeting." Holders of Class A Preferred Stock and holders
of MediQual Warrants are not entitled to vote on the Merger Proposal.
The affirmative vote of the holders of not less than a majority of the
outstanding shares of Class B Preferred Stock and Class C Preferred Stock, each
voting as a separate class, as well as the affirmative vote of the holders of
Class B Preferred Stock, Class C Preferred Stock and MediQual Common Stock
voting together as a single class (with each share of Class B Preferred Stock
and Class C Preferred Stock entitling the holder thereof to such number of votes
as shall equal the number of shares of MediQual Common Stock into which each
such share of Class B Preferred Stock or Class C Preferred Stock is convertible
on August 8, 1997) is required to approve the Merger Proposal. As of May 31,
1997, the directors and executive officers of MediQual and certain of their
affiliates may be deemed to be beneficial owners of MediQual Stock representing
approximately 65% of the Class B Preferred Stock, 100% of the Class C Preferred
Stock and approximately 61% of the voting power of the MediQual Common Stock
(which includes the votes of holders of Class B Preferred Stock and Class C
Preferred Stock as described above). Certain MediQual Stockholders, including
certain directors of MediQual and certain of their affiliates, who as of May 31,
1997, beneficially owned in the aggregate approximately 65% of the Class B
Preferred Stock, 100% of the Class C Preferred Stock and approximately 61% of
the voting power of the MediQual Common Stock (which includes the votes of
holders of Class B Preferred Stock and Class C Preferred Stock as described
above), have agreed to vote or direct the vote of all MediQual Stock over which
they and, in the case of the holders of MediQual Common Stock or Class B
Preferred Stock, their affiliates have voting power or control in favor of the
Merger Proposal. Accordingly, if each person who has agreed to vote for the
Merger Proposal actually does so, approval of the Merger Proposal is assured.
See "The Special Meeting--Record Date; Vote Required; Voting at the Meeting."
Proxies. All shares of MediQual capital stock that are entitled to vote
and are represented at the Special Meeting by properly executed proxies received
prior to the vote at the Special Meeting, and not duly and timely revoked, will
be voted at the Special Meeting in accordance with the instructions indicated
thereon. If no instructions are indicated, such proxies will be voted FOR the
Merger Proposal.
If any other matters incidental to the Merger are properly presented for
consideration at the Special Meeting (or any adjournments or postponements
thereof), including, among others, consideration of a motion to adjourn or
postpone the Special Meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the enclosed form of Proxy and voting thereunder will have discretion to vote
on such matters in accordance with their best judgment.
Revocability of Proxies. Any proxy given pursuant to this solicitation may
be revoked by (i) filing with the Secretary of MediQual, before the taking of
the vote at the Special Meeting, a written notice of revocation bearing a later
date than the date of the proxy, (ii) duly executing a later-dated proxy
relating to the same shares and delivering it to MediQual's Secretary before the
vote at the Special Meeting, or (iii) attending the Special Meeting and voting
in person (although attendance at the Special Meeting will not in and of itself
constitute a proxy revocation). Any written notice of revocation or subsequent
proxy should be sent so as to be delivered to MediQual Systems, Inc., 1900 West
Park Drive, Westborough, Massachusetts 01581, Attention: Secretary, or
hand-delivered to the Secretary of MediQual at or before the vote at the Special
Meeting.
Recommendation of the Board of Directors. The Board of Directors of
MediQual has determined that the terms of the Merger Agreement and the
transactions contemplated thereby are in the best interests of MediQual and the
MediQual Stockholders. Accordingly, the MediQual Board of Directors has
unanimously approved the Merger Proposal and recommends that MediQual
Stockholders entitled to vote at the Special Meeting vote FOR approval of the
Merger Proposal.
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Appraisal Rights. MediQual Stockholders will be entitled to appraisal or
dissenters' rights in connection with the Merger. See "Rights of Dissenting
Stockholders."
THE MERGER
GENERAL; EXCHANGE RATIOS
Pursuant to the Merger Agreement, each share of MediQual Stock issued and
outstanding immediately prior to the Effective Time, other than shares held in
the treasury of MediQual, if any, which will be cancelled, and other than shares
as to which the holder thereof has properly exercised appraisal rights as
described in "The Special Meeting--Appraisal Rights", will be converted into and
represent that number of Cardinal Common Shares equal to (a) with respect to
MediQual Common Stock, the Common Equivalent Exchange Ratio (as defined below),
(b) with respect to Class A Preferred Stock, the Class A Exchange Ratio (as
defined below), and (c) with respect to MediQual Class B Preferred Stock and
MediQual Class C Preferred Stock, the product of the Common Equivalent Exchange
Ratio multiplied by the maximum number of shares of MediQual Common Stock into
which such share of Class B Preferred Stock or Class C Preferred Stock is
convertible at the Effective Time. See "The Merger Agreement -- Merger
Consideration."
EFFECTIVE TIME OF THE MERGER; CLOSING DATE
The Merger will become effective (the "Effective Time") when a certificate
of merger is filed with the Delaware Secretary of State or at such later time as
is specified in the certificate of merger. This filing will be made on a date
(the "Closing Date") specified by Cardinal and MediQual, which date will be as
soon as practicable, but in any event within ten business days, following the
date upon which all conditions set forth in the Merger Agreement have been
satisfied or waived, as the case may be, or such other time as Cardinal and
MediQual may mutually agree. It is currently contemplated that the Closing Date
will occur on the date of the Special Meeting, subject to satisfaction or waiver
of each of the conditions to consummation of the Merger. See "The Merger
Agreement -- Conditions."
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to, among other things, (i) approval
by MediQual Stockholders of the Merger Proposal; (ii) no temporary restraining
order, preliminary or permanent injunction or other order or decree which
prevents the consummation of the Merger having been issued and remaining in
effect, and no statute, rule or regulation having been enacted by any
governmental authority which prevents the consummation of the Merger; (iii) the
Commission having declared the Registration Statement effective, and at the
Effective Time, no stop order or similar restraining order having been
threatened by the Commission or entered by the Commission or any state
securities administrator prohibiting the Merger; and (iv) no action having been
instituted by any governmental authority which seeks to prevent consummation of
the Merger or seeking material damages in connection with the transactions
contemplated by the Merger Agreement which, in each case, continues to be
outstanding. In addition, consummation of the Merger by Cardinal and Subcorp, on
the one hand, and MediQual, on the other hand, is conditioned upon the
representations and warranties of the other parties being true and correct in
all material respects on and as of the Closing Date (except for those made as of
a specified time), and performance in all material respects of each obligation
and agreement and compliance in all material respects with each covenant to be
performed and complied with by the other parties thereto. See "The Merger
Agreement -- Conditions."
In addition, consummation of the Merger is subject to (i) receipt by
Cardinal of letters at the Effective Time in form and substance satisfactory to
Cardinal from Deloitte & Touche LLP and Arthur Andersen LLP stating that the
Merger will qualify as a pooling-of-interests for accounting and financial
reporting purposes; (ii) receipt by MediQual of all material third party
consents required because of the Merger Agreement and the Merger; (iii) MediQual
having not received notice from more than 5%, on a fully diluted common stock
basis, of MediQual Stockholders seeking to exercise appraisal rights under
Section 262 of the DGCL; (iv) the book value of MediQual, as reflected in its
then most recent financial statements, exceeding an amount specified in the
Merger Agreement; (v) 95% of the outstanding MediQual Warrants having been
exercised or having been surrendered in exchange for Cardinal Warrants without
any such warrant holder having refused to
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exercise or exchange such warrant; and (vi) the ongoing relationship and
economic terms of an agreement between MediQual and a third party shall have
been ratified by the third party on terms and conditions reasonably satisfactory
to Cardinal. See "The Merger Agreement -- Conditions."
ESCROW AGREEMENT; INDEMNIFICATION
Pursuant to an escrow arrangement (the "Escrow Agreement") to be entered
into on the Closing Date among Cardinal, MediQual, Eric Kriss, as a
representative of the MediQual Stockholders (the "MediQual Stockholders
Representative"), and Bank One Trust Company, NA (the "Escrow Agent"), a number
of Cardinal Common Shares (the "Retained Shares") equal to 6.5% of the aggregate
number of Cardinal Common Shares that would otherwise be issuable to MediQual
Stockholders on the Closing Date if Cardinal Common Shares were not to be issued
into escrow pursuant to the Merger Agreement will be deposited in escrow with
the Escrow Agent (the "Escrow Fund"). The escrow created by the Escrow Agreement
is for the purpose of providing for the payment of the indemnification
obligations of the MediQual Stockholders pursuant to the Merger Agreement and
for the payment of the expenses of the MediQual Stockholders Representative. A
number of the Retained Shares equal to 6% of the aggregate number of Cardinal
Common Shares that would otherwise be issuable to MediQual Stockholders on the
Closing Date if Cardinal Common Shares were not to be issued into escrow will be
available to reimburse Cardinal for any damages asserted against, resulting to,
imposed upon, or incurred or suffered by Cardinal, directly or indirectly, as a
result of or arising from any inaccuracy in or breach or nonfulfillment of any
of the representations and warranties made by MediQual in the Merger Agreement
or any other documents executed or delivered in connection with the Merger
Agreement (collectively, "Indemnifiable Claims"). The remainder of the Retained
Shares, and any other Retained Shares available after the Release Date (as
defined below), will be available to reimburse the MediQual Stockholders
Representative for its expenses. The Escrow Agreement provides that the Retained
Shares are to be released from escrow to the MediQual Stockholders on a
proportionate basis (based on the respective numbers of Cardinal Common Shares
into which their MediQual Stock will be convertible at the Effective Time of the
Merger) upon the earlier of (i) the date on which Cardinal's audited financial
statements for the first fiscal year ending after the Effective Time are issued
and (ii) the first anniversary of the Effective Time of the Merger (such earlier
date being hereafter referred to as the "Release Date"). However, if Cardinal or
the MediQual Stockholders Representative makes any claims against the Retained
Shares prior to the Release Date, a number of Retained Shares sufficient to
satisfy the claims will remain in escrow until the resolution of such claim
pursuant to the procedures provided in the Escrow Agreement and the Merger
Agreement. The indemnification obligations of the MediQual Stockholders to
Cardinal are subject to certain limitations. See "The Merger -- Escrow
Agreement; Indemnification."
NO SOLICITATION
Pursuant to the Merger Agreement, MediQual has agreed not to, and to cause
its affiliates and representatives not to, solicit proposals from or provide
information to or engage in discussions with third parties with respect to
specified business combinations or similar transactions. See "The Merger
Agreement -- No Negotiations or Solicitations."
TERMINATION OF THE MERGER AGREEMENT
Under specified circumstances, the Merger Agreement may be terminated prior
to the Effective Time, before or after approval of the Merger Agreement by the
MediQual Stockholders. See "The Merger Agreement -- Termination; Effect of
Termination."
TERMINATION FEES
If the Merger Agreement is terminated and it is judicially determined that
termination was caused by an intentional breach of the Merger Agreement, then in
addition to other remedies at law or equity for breach of the Merger Agreement,
the breaching party is required to indemnify and hold harmless the other parties
thereto for the reasonable costs, fees and expenses of their counsel and
accountants, as well as fees and expenses incident to the negotiation,
preparation and execution of the Merger Agreement and related documentation and
is required to pay to the terminating party or parties a termination fee equal
to $1,250,000,
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which payments will constitute the terminating party's sole and exclusive remedy
with respect to such breach. See "The Merger Agreement -- Termination; Effect of
Termination."
MEDIQUAL STOCK OPTIONS
Prior to the Effective Time, Cardinal and MediQual are required to take all
such actions as may be necessary to cause each unexpired and unexercised option
under stock option plans of MediQual in effect on the date of the Merger
Agreement which has been granted by MediQual to current or former directors,
officers or key employees of MediQual (or others) (each, a "MediQual Option") to
be automatically converted at the Effective Time into an option (a "Cardinal
Exchange Option") to purchase that number of Cardinal Common Shares equal to the
number of shares of MediQual Common Stock issuable immediately prior to the
Effective Time upon exercise of the MediQual Option (without regard to actual
restrictions on exercisability) multiplied by the Common Equivalent Exchange
Ratio, with an exercise price per share equal to the exercise price per share
which existed under the corresponding MediQual Option divided by the Common
Equivalent Exchange Ratio, and with other terms and conditions that are the same
as the terms and conditions of such MediQual Option immediately before the
Effective Time; provided that with respect to any MediQual Option that is an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the foregoing conversion will be
carried out in a manner satisfying the requirements of Section 424(a) of the
Code. As of May 31, 1997, 336,152 shares of MediQual Common Stock were issuable
upon the exercise of outstanding MediQual Options, which options, assuming a
Common Equivalent Exchange Ratio of 0.0845 (assuming an Average Share Price
equal to the closing price on the NYSE Composite Tape of Cardinal Common Shares
on May 24, 1997 of $55.00), will be converted into and become 28,405 Cardinal
Exchange Options at the Effective Time. See "The Merger -- Merger
Consideration." The weighted average exercise price per share of all MediQual
Options outstanding as of May 31, 1997 was $1.34 per share. Following the Merger
and assuming a Common Equivalent Exchange Ratio of 0.0845, the average exercise
price per share of Cardinal Exchange Options will be approximately $15.86 per
share. Each of the executive officers and directors of MediQual currently holds
MediQual Options which will become Cardinal Exchange Options. Pursuant to the
terms of the stock option plans under which the MediQual Options were issued,
the unvested portion of certain of such MediQual Options will vest upon
consummation of the Merger. See "The Merger -- Interests of Certain Persons in
the Merger."
MEDIQUAL WARRANTS
Prior to the Effective Time, MediQual is required to use all reasonable
efforts to cause to be exercised, immediately prior to the Closing and to
satisfy in full all of MediQual's obligations under, all warrants to purchase
MediQual Common Stock which may then remain issued and outstanding. As described
more fully under "The Merger Agreement -- Escrow Agreement; Indemnification,"
6.5% of the aggregate number of Cardinal Common Shares which would otherwise be
issuable to holders of MediQual Stock (including MediQual Stock issuable upon
exercise of MediQual Warrants) on the Closing Date will be deposited in an
Escrow Fund.
In addition, it is a condition to Cardinal's obligation to consummate the
Merger and the transactions contemplated by the Merger Agreement that warrants
to purchase at least 95% of the MediQual Common Stock which is issuable upon the
exercise of all MediQual Warrants outstanding on the date of the Merger
Agreement shall have been (A) exercised effective as of or prior to the
Effective Time or (B) duly surrendered in exchange for Cardinal Warrants (in
form and substance reasonably satisfactory to Cardinal with an exercise price
equal to the quotient obtained by dividing the current exercise price of $.80 by
the Common Equivalent Exchange Ratio) to purchase a number of Cardinal Common
Shares equal to the product of (x) the number of shares of MediQual Common Stock
issuable upon the exercise of the MediQual Warrants being surrendered and (y)
the Common Equivalent Exchange Ratio; provided however, that this condition will
not have been satisfied if any holder of MediQual Warrants who does not exercise
or surrender MediQual Warrants pursuant to clause (A) or (B) above has advised
MediQual, in writing or otherwise, that such holder will not surrender or
exercise all of such holder's MediQual Warrants. The form of the Cardinal
Warrant which is being sent to holders of MediQual Warrants and which is filed
as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part provides that Cardinal Warrants
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may not be exercised after the Effective Time except pursuant to an effective
registration statement under the Securities Act or upon receipt by Cardinal of
an opinion of counsel satisfactory to Cardinal that the issuance of Cardinal
Common Shares upon exercise of the warrants is not in violation of the
registration requirements of the Securities Act or any applicable state
securities law. Cardinal is under no obligation to file, and does not intend to
file, a registration statement covering the issuance of Cardinal Common Shares
upon the exercise of Cardinal Warrants. Accordingly, the Cardinal Warrants will
only be exercisable following the Effective Time if the holder delivers to
Cardinal a legal opinion reasonably satisfactory to Cardinal to the effect that
the issuance of Cardinal Common Shares upon such exercise will be exempt from
the registration requirements of the Securities Act. See "The Merger -- Federal
Securities Law Consequences."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for accounting
and financial reporting purposes. Consummation of the Merger is conditioned on,
among other matters, Cardinal's receipt of letters, at the Effective Time in
form and substance reasonably satisfactory to Cardinal, from Deloitte & Touche
LLP and Arthur Andersen LLP stating that the Merger will qualify as a
pooling-of-interests for accounting and financial reporting purposes. See "The
Merger -- Accounting Treatment."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
MediQual.
In reaching its conclusion to approve the Merger Agreement, the Board of
Directors of MediQual (the "MediQual Board") consulted with the management of
MediQual, as well as its financial and legal advisors, and considered the
following factors which, among others, it believed to be significant in making
such a decision:
(i) The MediQual Board considered the effect on the MediQual Stockholders
of MediQual continuing as an independent entity compared to the effect of a
combination with Cardinal. The MediQual Board determined that an integration of
MediQual with Cardinal, given Cardinal's greater marketing, sales and financial
resources, may provide a better opportunity for the long-term success of
MediQual's product offerings and thereby maximize the value of the MediQual
Stock for the MediQual Stockholders.
(ii) The MediQual Board considered the determination it had made that,
although MediQual had demonstrated the ability to operate profitably and
generate sufficient cash flow to service its short-term obligations, MediQual
would be unable to expand its business significantly without the receipt of
substantial additional capital. As an additional factor, the MediQual Board
considered the inability of MediQual to consummate a proposed initial public
offering in its 1996 fiscal year and the opportunities to access Cardinal's
greater financial resources offered by the Merger.
(iii) The MediQual Board considered the financial performance and
condition, businesses and prospects of MediQual and Cardinal including, but not
limited to, information with respect to the historical stock prices of Cardinal
and the respective operating performances of MediQual and Cardinal.
(iv) The MediQual Board considered the terms of the Merger Agreement,
including the form and amount of the consideration to be received by the
MediQual Stockholders, the terms and structure of the Merger, and the size and
nature of the Escrow Fund. The MediQual Board deemed it significant that the
Merger would provide the stockholders of MediQual with Cardinal Common Shares,
for which there is an active and liquid trading market, in exchange for their
MediQual Stock, for which there is no established trading market or other means
to readily achieve liquidity.
(v) The MediQual Board considered the results of the process undertaken on
behalf of MediQual by Smith Barney Inc. ("Smith Barney"), MediQual's financial
advisor, to solicit third party indications of interest in an acquisition of
MediQual, and the ensuing negotiations with the two parties which had made
serious offers. Taking into account the views of management and Smith Barney,
the MediQual Board determined that the offer made by Cardinal was the superior
offer and offered the MediQual Stockholders more liquidity and a greater
possible return on their investments.
(vi) The MediQual Board considered that MediQual is subject, under the
terms of its Amended and Restated Certificate of Incorporation (the "MediQual
Certificate"), to the receipt of a request or requests to
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redeem all of the outstanding shares of its Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock along with accrued dividends on such
stock at a time when MediQual may not have the financial resources to fund such
a redemption.
(vii) The MediQual Board considered the fact that the Merger is expected to
be a tax-free transaction to the MediQual Stockholders and that it is expected
to qualify as a pooling-of-interests transaction for accounting and financial
reporting purposes.
(viii) The Merger affords the MediQual Stockholders the opportunity to
reduce the exposure inherent in MediQual's reliance on a few products and
services in a relatively discrete market, and the difficulties that MediQual
faces in competing against larger companies with more diversified product lines
and greater financial resources.
The foregoing discussion of certain information and factors deemed material
by the MediQual Board in considering the Merger Agreement and the Merger is not
intended to be exhaustive but is believed to include all material factors
considered by the MediQual Board. In view of the wide variety of information and
factors considered, the MediQual Board did not find it practical to, and did
not, assign any relative or specific weights to the foregoing factors, and
individual directors may have deemed different factors more significant than
others.
Cardinal.
In the course of reaching its decision to approve the Merger Agreement and
the transactions contemplated thereby, the Board of Directors of Cardinal (the
"Cardinal Board") consulted with Cardinal's management and considered a number
of factors, including among others (i) MediQual's leadership role in the
development of a clinical information management software product and the
extensive clinical information database accumulated by MediQual to date; (ii)
the transaction's impact on Cardinal's continued development as a value-added
provider of logistical, information, packaging, marketing and other health care
services that distinguish Cardinal from its distribution competitors; (iii) the
combination of Cardinal's sales and marketing presence in the health care
services industry with MediQual's sophisticated Atlas group of products and
technical expertise, allowing the combined company to develop new products and
relationships with hospitals, pharmaceutical manufacturers and other trading
partners; (iv) the high quality of MediQual's management team and the technical
capabilities and expertise of MediQual in the areas of clinical software
development and statistical analysis of health care data; (v) the financial
return anticipated by Cardinal management after the Merger due to several
factors, including the higher return on committed capital and return on sales in
the health care information business relative to Cardinal; (vi) the ability to
achieve the benefits of scale and efficiencies with respect to investments in
new technology, systems and services; and (vii) MediQual's clinical information
database regarding product efficiency and treatment cost, which complement
Cardinal's existing sources of data and provide the platform for creation of
potential new information businesses.
The Cardinal Board also considered the fact that it is a condition to the
consummation of the Merger that the Merger be treated as a pooling-of-interests
for financial reporting and accounting purposes, which would add no goodwill
relating to this transaction to Cardinal's balance sheet.
The foregoing discussion of the factors considered by the Cardinal Board is
not intended to be exhaustive. In view of the wide variety of factors considered
in connection with its evaluation of the Merger, the Cardinal Board did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. See
"The Merger -- Reasons for the Merger; Recommendations of the Boards of
Directors."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MediQual Board with respect to the
Merger Proposal, MediQual Stockholders should be aware that certain officers and
directors of MediQual (or their affiliates) have interests in the Merger that
are different from and in addition to the interests of MediQual Stockholders
generally. These interests include, but are not limited to, the fact that (i)
each of the executive officers and directors of MediQual currently holds
MediQual Options, which will be converted into Cardinal Exchange
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Options in the Merger based on the Common Equivalent Exchange Ratio which
applies to the MediQual Common Stock and that the vesting of certain of these
MediQual Options will be accelerated in accordance with the provisions of the
option plan established in 1987; (ii) MediQual and Cardinal have agreed to enter
into employment agreements with the following officers of MediQual at the
Effective Time: Eric Kriss, Chief Executive Officer and a director, William
Price, Vice President and Chief Financial Officer, Robert Reeder, Vice
President, Technical Operations, James Corum, Vice President, Technical
Development, Laura Berberian, Vice President, Content Development, Anita Whelan,
Vice President, Client Services, Diane Throop, Vice President, Clinical
Information Management, and Elizabeth Endyke, Vice President, Marketing; (iii)
at the Closing the following transactions with Eric A. Kriss, Chief Executive
Officer of MediQual, will be consummated in accordance with pre-existing
agreements: (x) MediQual will pay to Mr. Kriss the principal and interest owing
under the Promissory Note from MediQual to Mr. Kriss dated January 2, 1996 in
the original principal amount of $75,000, (y) MediQual will forgive the
repayment of the principal and any unpaid interest owing to it under the
Promissory Note dated March 29, 1993 from Mr. Kriss in the original principal
amount of $201,523 and (z) MediQual will pay to Mr. Kriss $200,000 in full
satisfaction of its obligations under a Letter Agreement dated January 20, 1996
between MediQual and Mr. Kriss; (iv) certain other officers of MediQual may
enter into employment agreements with MediQual and Cardinal in contemplation of
the Merger; and (v) Cardinal has agreed, from and after the Effective Time, to
cause MediQual, as the surviving corporation in the Merger, to indemnify and
hold harmless present and former officers and directors of MediQual in respect
of acts or omissions occurring prior to the Effective Time to the extent
provided under the MediQual Certificate and the By-Laws of MediQual (the
"MediQual By-laws") in effect on the date of the Merger Agreement, and has
agreed to use its reasonable efforts, subject to certain limitations, to
maintain policies of directors' and officers' liability insurance on behalf of
such officers and directors for one year following the Effective Time. The
MediQual Board was aware of these interests and took these interests into
account in approving the Merger Agreement and the transactions contemplated
thereby. See "The Merger -- Interests of Certain Persons in the Merger" and "The
Merger -- Support/Voting Agreements."
SUPPORT/VOTING AGREEMENTS
In connection with the execution of the Merger Agreement, certain MediQual
Stockholders, including certain directors of MediQual and certain of their
affiliates, (each a "Supporting Stockholder" and, together, the "Supporting
Stockholders"), who as of May 31, 1997, beneficially owned 100% of the Class A
Preferred Stock, approximately 65% of the Class B Preferred Stock, 100% of the
Class C Preferred Stock and approximately 61% of the voting power of the
MediQual Common Stock (which includes the vote of holders of Class B Preferred
Stock and Class C Preferred Stock as described under "The Special Meeting --
Record Date; Required Vote; Voting at the Meeting") executed separate
Support/Voting Agreements with Cardinal pursuant to which each Supporting
Stockholder agreed, among other things, to vote or direct the vote of all shares
of MediQual Stock beneficially owned by the Supporting Stockholder or its
affiliates, or over which the Supporting Stockholder or any of its affiliates
has voting power or control, directly or indirectly, to approve the Merger
Proposal. Each Supporting Stockholder also thereby agreed, among other things,
not to and not to permit any company, trust or other entity controlled by the
Supporting Stockholder or any of its affiliates to, (i) contract to sell, sell
or otherwise transfer or dispose of any shares of MediQual Stock, other than
pursuant to the Merger, without Cardinal's prior written consent; (ii) solicit,
initiate, encourage or facilitate, or furnish or disclose nonpublic information
in furtherance of, any inquiries or the making of any proposal with respect to
any recapitalization, merger, consolidation or other business combination
involving MediQual, or acquisition of any capital stock or any material portion
of the assets (except for acquisitions of assets in the ordinary course of
business consistent with past practice) of MediQual, or any combination of the
foregoing (a "Competing Transaction"), or negotiate, explore or otherwise engage
in discussions with any person (other than Cardinal, Subcorp or their respective
directors, officers, employees, agents and representatives) with respect to any
Competing Transaction or enter into any agreement, arrangement, or understanding
with respect to any Competing Transaction or agree to or otherwise assist in the
effectuation of any Competing Transaction; or (iii) if the shares held by the
Supporting Stockholder include Class A Preferred Stock, Class B Preferred Stock
or Class C Preferred Stock, provide, participate in the giving of, or consent to
or acquiesce in the giving of a written request with respect to the redemption
of any shares of capital stock of
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MediQual pursuant to the MediQual Certificate. In addition, if the shares held
by the Supporting Stockholder include Class B Preferred Stock or Class C
Preferred Stock, the Supporting Stockholder also represented and warranted that
it had delivered to MediQual its written consent pursuant to the MediQual
Certificate to the authorization of the Merger by the MediQual Board of
Directors. Each Support/Voting Agreement may be terminated at the option of any
party thereto at any time upon the earlier of (i) the termination of the Merger
Agreement and (ii) the Effective Time. See "The Merger -- Support/Voting
Agreements."
EXCHANGE PROCEDURES
If the Merger Proposal is approved and the Merger is consummated, as soon
as practicable after the Effective Time, a letter of transmittal will be mailed
or delivered to each MediQual Stockholder to be used in forwarding certificates
evidencing such holder's shares of MediQual Stock for surrender and exchange for
certificates evidencing Cardinal Common Shares to which such holder has become
entitled and, if applicable, cash in lieu of fractional Cardinal Common Shares.
After receipt of such letter of transmittal, each holder of certificates
formerly representing shares of MediQual Stock should surrender such
certificates to ChaseMellon Shareholder Services, LLC, the exchange agent for
the Merger (the "Exchange Agent"), pursuant to and in accordance with the
instructions accompanying such letter of transmittal, and each holder will
receive in exchange therefor certificates evidencing the whole number of
Cardinal Common Shares to which he is entitled and any cash which may be payable
in lieu of fractional Cardinal Common Shares. See "The Merger Agreement --
Merger Consideration." Such letter of transmittal will be accompanied by
instructions specifying other details of the exchange. MEDIQUAL STOCKHOLDERS
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that no gain or loss for federal income tax purposes will be
recognized by MediQual or the MediQual Stockholders as a result of the Merger
(except to the extent such holders receive cash in lieu of fractional Cardinal
Common Shares). However, it is not a condition to the consummation of the Merger
that counsel for any party issue an opinion to the foregoing effect. See
"Certain Federal Income Tax Consequences."
AVAILABILITY OF DISSENTERS' RIGHTS
Pursuant to Section 262 of the DGCL, MediQual Stockholders who object to
the Merger and do not vote in favor of the Merger have certain rights to dissent
and demand to be paid the "fair value" of their MediQual Stock. See "Rights of
Dissenting Stockholders." Section 262 of the DGCL is set forth as Annex B to
this Proxy Statement/Prospectus.
COMPARISON OF SHAREHOLDER RIGHTS
As a result of the Merger, shares of MediQual Stock, the rights of which
are governed by Delaware law and the MediQual Certificate and the MediQual
By-laws, will be converted into the right to receive Cardinal Common Shares, the
rights of which are governed by Ohio law and Cardinal's Articles of
Incorporation and Code of Regulations. There are differences between the rights
of MediQual Stockholders and the rights of holders of Cardinal Common Shares.
These differences result from differences between Ohio and Delaware law and
differences between the governing instruments of MediQual and Cardinal. For a
discussion of the various differences between the rights of MediQual
Stockholders and Cardinal Shareholders, see "Comparison of Shareholder Rights."
14
<PAGE> 18
SUMMARY HISTORICAL AND UNAUDITED PRO
FORMA FINANCIAL INFORMATION
CARDINAL SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary historical financial information of Cardinal set forth below
has been derived from and should be read in conjunction with the audited
financial statements and other financial information of Cardinal incorporated by
reference in this Proxy Statement/Prospectus. See "Incorporation of Certain
Documents by Reference."
CARDINAL HEALTH, INC.
SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) NINE MONTHS
-------------------------------------------------------------- ENDED MARCH 31, (1)
MARCH 31, MARCH 31, JUNE 30, JUNE 30, JUNE 30, -----------------------
1992 1993(2) 1994(2) 1995 1996(2) 1996(3) 1997(3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net revenues............. $3,959,402 $4,991,241 $6,253,557 $8,342,517 $9,246,420 $6,824,765 $8,117,382
Earnings available for
Common Shares before
cumulative effect of
change in accounting
principle.............. 41,873 67,669 84,628 142,515 117,634 106,620 119,229
Earnings per Common Share
before cumulative
effect of change in
accounting principle
(4):
Primary.............. 0.57 0.79 0.88 1.42 1.14 1.05 1.10
Fully diluted........ 0.57 0.76 0.88 1.40 1.14 1.04 1.10
Cash dividends declared
per Common Share
(4):................... 0.04 0.05 0.07 0.08 0.08 0.06 0.07
BALANCE SHEET DATA:
Total assets............. 1,080,651 1,333,601 1,710,949 2,264,726 2,825,175 2,651,903 3,051,666
Long-term obligations,
less current portion... 314,816 293,760 232,955 240,469 265,146 267,016 279,539
Redeemable preferred
stock.................. 19,560 20,400 -- -- -- -- --
Shareholders' equity..... 287,478 397,437 572,720 817,038 1,035,838 1,013,363 1,258,788
</TABLE>
- ---------------
(1) Amounts reflect business combinations in fiscal 1992, 1994, 1995, 1996 and
1997. The most significant of these business combinations have been
accounted for as pooling-of-interests transactions and, accordingly, prior
period amounts have been restated to retroactively reflect all such material
combinations. For those business combinations which were accounted for as
purchase transactions, the pro forma effect as if these transactions had
occurred at the beginning of the respective periods would not have been
significantly different.
(2) In fiscal 1996, Cardinal recorded charges of approximately $67.3 million
($47.8 million, net of tax) primarily in connection with the business
combinations of Cardinal with MSI in November 1995 (the "MSI Merger") and
Pyxis in May 1996 (the "Pyxis Merger"). In fiscal 1994, Cardinal recorded a
charge to reflect estimated merger costs of approximately $35.9 million
($28.2 million, net of tax) in connection with the business combination of
Cardinal with Whitmire Distribution Corporation ("Whitmire") in February
1994 (the "Whitmire Merger"). During fiscal 1993, Cardinal received a
termination fee of approximately $13.5 million, resulting from the
termination by Durr-Fillauer Medical, Inc. of its agreement to merge with
Cardinal. During fiscal 1993, Cardinal also recorded charges totaling
approximately $13.7 million, primarily related to the closing of certain
non-core operations and the restructuring of certain distribution
operations. In addition, the modification of the terms of certain Whitmire
stock options in fiscal 1993 resulted in a one-time stock option
compensation charge of approximately
15
<PAGE> 19
$5.2 million. Collectively, these items are referred to as "unusual items."
See Note 2 of "Notes to Consolidated Financial Statements" in the June 1997
Cardinal Form 8-K, which is incorporated by reference in this Proxy
Statement/Prospectus.
(3) During the nine months ended March 31, 1996 and 1997, Cardinal recorded a
charge of approximately $17.6 million ($12.5 million, net of tax) in
connection with the MSI Merger and $57 million ($40.2 million, net of tax)
in connection with the business combinations of Cardinal with PCI in October
1996 (the "PCI Merger") and Cardinal with Owen in March 1997 (the "Owen
Merger"), respectively.
The following supplemental information, presented for purposes of
facilitating meaningful comparisons to ongoing operations and to other
companies, summarizes the results of operations of Cardinal, adjusted to
reflect the elimination of the effect of the unusual items discussed above
and the redemption of Whitmire's preferred stock pursuant to the terms of
the Whitmire Merger. Solely for purposes of the summary presented below,
such redemption is assumed to have been funded from the liquidation of
investments in tax-exempt marketable securities.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
----------------------------------- MARCH 31,
MARCH 31, JUNE 30, JUNE 30, ---------------------
1993 1994 1996 1996 1997
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Earnings available for Common
Shares before cumulative effect
of change in accounting
principle, excluding unusual
items.......................... $72,863 $113,741 $165,467 $119,115 $159,406
Earnings per Common Share before
cumulative effect of change in
accounting principle, excluding
unusual items:
Primary..................... .85 1.19 1.61 1.17 1.47
Fully diluted............... .82 1.18 1.60 1.16 1.47
</TABLE>
Earnings as presented above are reconciled to the amounts in the preceding
table as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
----------------------------------- MARCH 31,
MARCH 31, JUNE 30, JUNE 30, ---------------------
1993 1994 1996 1996 1997
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Earnings available for Common
Shares as reported, before
cumulative effect of change in
accounting principle........... $67,669 $ 84,628 $117,634 $106,620 $119,229
Supplemental adjustments:
Unusual items, primarily merger
costs....................... 28,180 47,833 12,495 40,177
Preferred stock redemptions.... 2,876 1,205
Interest adjustment on
preferred stock............. (575) (272)
Termination fee................ (7,163)
Restructuring charge........... 7,265
Stock option charge............ 2,791
------- -------- -------- -------- --------
Earnings as supplementally
adjusted....................... $72,863 $113,741 $165,467 $119,115 $159,406
======= ======== ======== ======== ========
</TABLE>
(4) Earnings and cash dividends per share have been adjusted to give retroactive
effect for stock splits, including the three-for-two split paid on December
16, 1996.
16
<PAGE> 20
MEDIQUAL SUMMARY HISTORICAL FINANCIAL INFORMATION
MEDIQUAL SYSTEMS, INC.
SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Revenues....................... $14,700 $13,097 $12,084 $10,974 $11,002 $ 2,739 $ 3,098
Net income (loss) to common
stockholders................. (346) (391) (109) (1,757) 1,838 472 954
Pro forma earnings (loss)
per share(1):
Primary...................... (0.08) (0.08) (0.02) (0.31) 0.31 0.08 0.16
Fully diluted................ (0.08) (0.08) (0.02) (0.31) 0.29 0.08 0.15
BALANCE SHEET DATA:
Total assets................... 4,760 6,483 4,865 3,231 4,696 3,878 5,017
Long-term debt, less current
portion...................... 256 331 267 605 75 141 --
Redeemable preferred stock..... 8,389 10,594 10,986 11,281 11,741 11,395 11,861
Stockholders' deficit.......... (10,184) (10,441) (10,485) (12,227) (9,696) (11,453) (8,741)
</TABLE>
- ---------------
(1) See Note 2 of MediQual's Notes to Financial Statements for an explanation of
the basis used to calculate pro forma earnings (loss) per share. See
"Financial Statements of MediQual Systems, Inc."
UNAUDITED PRO FORMA COMBINED SUMMARY FINANCIAL INFORMATION
The unaudited pro forma combined summary financial information of Cardinal
and MediQual set forth below gives effect to the Merger under the
pooling-of-interests accounting method, and assumes that the Merger had occurred
at the beginning of the earliest periods presented. The pro forma data presents
the consolidated statements of earnings for Cardinal for the fiscal years ended
June 30, 1994, June 30, 1995 and June 30, 1996, and the nine months ended March
31, 1996 and March 31, 1997, combined with the statements of earnings of
MediQual for the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, and the nine months ended September 30, 1996 and the nine
months ended March 30, 1997. The impact of including the financial results of
MediQual for the six months ended December 31, 1996 in the pro forma data for
the fiscal year ended June 30, 1996 and the nine months ended March 31, 1997 is
not material for either period. The unaudited pro forma balance sheet
information presents the balance sheets of Cardinal at June 30, 1996 and March
31, 1997, combined with MediQual's balance sheets as of December 31, 1996 and
March 31, 1997, respectively. MediQual's fiscal year ends on December 31. For
purposes of combining MediQual's historical financial information with
Cardinal's historical financial information, the financial information of
MediQual has been accumulated for the periods as indicated above. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the Merger had been consummated at such time, nor is it necessarily
indicative of future operating results or financial position.
17
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) NINE MONTHS ENDED
---------------------------------------- MARCH 31,(1)
JUNE 30, JUNE 30, JUNE 30, -------------------------
1994(2) 1995 1996(2)(4) 1996(2) 1997(2)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net revenues................................ $6,265,641 $8,353,491 $9,257,422 $6,833,120 $8,185,775
Earnings available for Common Shares,
excluding estimated MediQual merger
expenses.................................. 84,519 140,758 119,472 108,103 120,894
Earnings per Common Share, excluding
MediQual merger expenses (3)(4):
Primary................................. 0.88 1.39 1.15 1.06 1.11
Fully diluted........................... 0.87 1.38 1.15 1.05 1.10
Cash dividends declared per Common Share
(5)....................................... 0.07 0.08 0.08 0.06 0.07
BALANCE SHEET DATA:
Total assets................................ $2,829,871 $3,056,683
Long-term obligations, less current
portion................................... 265,221 279,539
Shareholders' equity (6).................... 1,037,883 1,261,908
</TABLE>
- ---------------
(1) Amounts reflect business combinations in fiscal 1994, 1995, 1996 and 1997.
(2) Amounts reflect the effect of unusual items recorded by Cardinal in the
fiscal years ended June 30, 1994 and June 30, 1996 and the nine months ended
March 31, 1996 and March 31, 1997. The following pro forma supplemental
information summarizes the pro forma results of Cardinal and MediQual,
adjusted to reflect the elimination of the effect of unusual items discussed
in Notes 2 and 3 of "Summary -- Summary Historical and Unaudited Pro Forma
Financial Information -- Cardinal Summary Historical Financial Information."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------- MARCH 31,
JUNE 30, JUNE 30, JUNE 30, ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Pro forma earnings available for Common Shares,
excluding MediQual merger expenses and unusual
items.......................................... $113,632 $140,758 $167,305 $120,598 $161,071
Pro forma earnings per Common Share, excluding
MediQual merger expenses and unusual items:
Primary...................................... 1.18 1.39 1.62 1.18 1.47
Fully diluted................................ 1.17 1.38 1.60 1.17 1.47
</TABLE>
(3) Earnings per Common Share have been adjusted to give retroactive effect to
all stock splits (a five-for-four stock split paid by Cardinal in June 1994
and a three-for-two stock split paid by Cardinal in December 1996).
(4) Earnings per Common Share amounts assume the conversion of each share of
MediQual Common Stock, Class B Preferred Stock and Class C Preferred Stock
into Cardinal Common Shares, assuming a Common Equivalent Exchange Ratio of
0.0845 and the conversion of each share of Class A Preferred Stock into
300.5223 Cardinal Common Shares (in each case assuming an average Share
Price equal to $55 and 6.6 million fully diluted shares of MediQual Common
Stock). See "The Merger Agreement--Merger Consideration."
(5) Cash dividends declared per Common Share represent the historical dividends
of Cardinal for all periods presented and exclude all dividends paid by
entities with which Cardinal has merged. MediQual paid no dividends on
Common Shares during these periods. Cash dividends declared per Common Share
have been adjusted to give retroactive effect to a five-for-four stock split
paid by Cardinal in June 1994 and a three-for-two stock split paid by
Cardinal in December 1996.
(6) Amount does not reflect the pro forma effect of expenses related to the
Merger. Upon consummation of the Merger, the combined company will record a
one-time charge to reflect transaction and other costs incurred as a result
of the Merger. While an estimate of such costs is not currently available,
Cardinal and MediQual do not anticipate that these costs will have a
significant effect on the combined company's financial condition.
18
<PAGE> 22
COMPARATIVE PER SHARE DATA
Set forth below are earnings, cash dividends declared and book value per
share data for Cardinal and MediQual on both historical and pro forma combined
bases and on a per share equivalent pro forma basis for MediQual. Pro forma
combined earnings per share are derived from the "Unaudited Pro Forma Combined
Summary Financial Information" presented elsewhere in this Proxy
Statement/Prospectus, which gives effect to the Merger under the
pooling-of-interests accounting method. Pro forma combined cash dividends
declared per share reflect Cardinal cash dividends per share declared in the
periods indicated and exclude all dividends paid by all entities with which
Cardinal has merged. Book value per share for the pro forma combined
presentation is based upon outstanding Cardinal Common Shares, adjusted to
include estimated Cardinal Common Shares to be issued in the Merger for
outstanding shares of MediQual Stock at the Effective Time. The per share
equivalent pro forma combined data for shares of MediQual Common Stock is based
on the assumed conversion of each share of MediQual Common Stock, Class B
Preferred Stock and Class C Preferred Stock into Cardinal Common Shares based on
a Common Equivalent Exchange Ratio of 0.0845 and the conversion of each share of
Class A Preferred Stock into 300.5223 Cardinal Common Shares (based on an
assumed Average Share Price of $55 and 6.6 million fully diluted shares of
MediQual Common Stock). See "The Merger Agreement--Merger Consideration." The
information set forth below should be read in conjunction with the respective
audited and unaudited financial statements of Cardinal and MediQual incorporated
by reference or contained in this Proxy Statement/Prospectus and the "Unaudited
Pro Forma Combined Summary Financial Information" and the notes thereto
presented in the "Summary" hereto. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------- ---------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
MEDIQUAL -- PRO FORMA(1)
Earnings (loss) per share:
Primary................................................. $(0.02) $(0.31) $ 0.31 $0.08 $0.16
Fully diluted........................................... (0.02) (0.31) 0.29 0.08 0.15
Book value per share...................................... 0.34 0.51
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
----------------------------- -------------------
1994(2) 1995 1996(2) 1996(2) 1997(2)
------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CARDINAL -- HISTORICAL(2)
Earnings per Common Share:
Primary................................................. $0.88 $1.42 $ 1.14 $1.05 $ 1.10
Fully diluted........................................... 0.88 1.40 1.14 1.04 1.10
Cash dividends declared per Common Share.................. 0.07 0.08 0.08 0.06 0.07
Book value per share...................................... 10.00 11.61
CARDINAL AND MEDIQUAL -- PRO FORMA COMBINED(2)(3):
Earnings per Common Share, excluding MediQual merger
expenses(4):
Primary............................................... $0.88 $1.39 $ 1.15 $1.06 $ 1.11
Fully diluted......................................... 0.87 1.38 1.15 1.05 1.10
Cash dividends declared per Common Share.................. 0.07 0.08 0.08 0.06 0.07
Book value per share, excluding the MediQual merger
expenses(4)............................................. 9.96 11.57
EQUIVALENT PRO FORMA COMBINED PER MEDIQUAL SHARE (2)(3):
Earnings per Common Share, excluding MediQual merger
expenses(4):
Primary............................................... $0.08 $0.13 $ 0.11 $0.10 $ 0.11
Fully diluted......................................... 0.08 0.13 0.11 0.10 0.10
Cash dividends declared per Common Share.................. 0.01 0.01 0.01 0.01 0.01
Book value per share, excluding the MediQual merger
expenses(4)............................................. 0.95 1.10
</TABLE>
- ---------------
(1) See Note 2 of MediQual's Notes to Financial Statements for an explanation of
the basis used to calculate pro forma earnings (loss) per share. Book value
per share was computed on the same basis. See "Financial Statements of
MediQual Systems, Inc."
(2) Cardinal's historical earnings per Common Share, the pro forma combined
earnings per Common Share, and the equivalent pro forma combined earnings
per Common Share reflect the effect of unusual items
19
<PAGE> 23
recorded by Cardinal in the fiscal years ended June 30, 1994 and June 30,
1996 and the nine months ended March 31, 1997 and 1996. See a discussion of
these items in Note 2 of "Summary--Summary Historical and Unaudited Pro
Forma Financial Information--Cardinal Summary Historical Financial
Information." Excluding the impact of the unusual items, the amounts would
be as follows:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cardinal -- Historical earnings per Common Share,
excluding unusual items:
Primary............................................ $1.19 $1.42 $1.61 $1.17 $1.47
Fully diluted...................................... 1.18 1.40 1.60 1.16 1.47
Pro forma combined earnings per Common Share, excluding
unusual items and MediQual merger expenses(3):
Primary............................................ $1.18 $1.39 $1.62 $1.18 $1.47
Fully diluted...................................... 1.17 1.38 1.60 1.17 1.47
Equivalent Pro Forma combined earnings per Common
Share, excluding unusual items and MediQual merger
expenses(3):
Primary............................................ $0.11 $0.13 $0.15 $0.11 $0.14
Fully diluted...................................... 0.11 0.13 0.15 0.11 0.14
</TABLE>
(3) The pro forma combined and the equivalent pro forma combined information
(excluding the book value per share information) presents the combination of
Cardinal for the fiscal years ended June 30, 1994, June 30, 1995 and June
30, 1996 and the nine months ended March 31, 1996 and March 31, 1997,
combined with MediQual for the fiscal years ending December 31, 1994,
December 31, 1995 and December 31, 1996 and the nine months ended September
30, 1996 and March 31, 1997, respectively.
The book value per share information as of June 30, 1996 is calculated based
on Cardinal's balance sheet as of June 30, 1996 combined with MediQual's
balance sheet as of December 31, 1996. The book value per share information
as of March 31, 1997 is calculated based on Cardinal and MediQual balance
sheets as of March 31, 1997.
(4) Amount does not reflect the pro forma effect of MediQual merger expenses.
Upon consummation of the Merger, the combined company will record a one-time
charge to reflect transaction and other costs incurred as a result of the
Merger. While an estimate of such costs is not currently available, Cardinal
and MediQual do not anticipate that these costs will have a significant
effect on the combined company's financial condition.
20
<PAGE> 24
MARKET PRICE AND DIVIDEND DATA
The following table reflects the range of the reported high and low closing
prices of Cardinal Common Shares on the NYSE Composite Tape and the per share
dividends paid thereon, during the periods indicated. No class of MediQual Stock
is publicly traded and no comparative market price data is available. MediQual
has not paid any dividends on the MediQual Common Stock or any class of
Preferred Stock in the past three years, although dividends have accrued (but
not been paid) on Class A Preferred Stock and Class C Preferred Stock. The
information in the table has been adjusted to reflect retroactively all
applicable stock splits.
<TABLE>
<CAPTION>
CARDINAL
COMMON SHARES
-------------------------------
CALENDAR YEAR HIGH LOW DIVIDENDS
- ------------------------------ ------ ------ ---------
<S> <C> <C> <C>
1994:
First quarter............... $27.06 $22.20 $ 0.016
Second quarter.............. 27.20 22.94 0.016
Third quarter............... 28.09 24.42 0.02
Fourth quarter.............. 32.17 27.42 0.02
1995:
First quarter............... $33.92 $29.50 $ 0.02
Second quarter.............. 31.67 28.17 0.02
Third quarter............... 37.67 29.17 0.02
Fourth quarter.............. 38.59 34.09 0.02
1996:
First quarter............... $42.83 $35.00 $ 0.02
Second quarter.............. 50.17 40.17 0.02
Third quarter............... 55.08 44.67 0.02
Fourth quarter.............. 58.38 51.92 0.02
1997:
First quarter............... $64.13 $54.38 $ 0.025
Second quarter.............. $62.00 $51.63 $ 0.025
</TABLE>
On May 23, 1997, the last full trading day prior to the public announcement
of the Merger Agreement, the last sale price of Cardinal Common Shares was
$58.00 per share, as reported on the NYSE Composite Tape. On July , 1997, the
most recent practicable date prior to the printing of this Proxy
Statement/Prospectus, the last sale price of Cardinal Common Shares was
$ per share. MediQual Stockholders are encouraged to obtain current
market quotations for Cardinal Common Shares.
Cardinal has applied for the listing on the NYSE of the Cardinal Common
Shares to be issued in the Merger.
Cardinal anticipates that it will continue to pay quarterly cash dividends.
However, the timing and amount of any future dividends remain within the
discretion of the Cardinal Board and will depend on Cardinal's future earnings,
financial condition, capital requirements and other factors.
Pursuant to the Merger Agreement, MediQual has agreed that, during the
period from the date of the Merger Agreement to the Effective Time, MediQual
will not make, declare or pay any dividend or distribution on any class of
MediQual capital stock.
21
<PAGE> 25
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to MediQual Stockholders
in connection with the solicitation of proxies by the Board of Directors of
MediQual for use at the Special Meeting to be held on August 18, 1997, at the
principal executive offices of MediQual at 1900 West Park Drive, Westborough,
Massachusetts, commencing at 10:00 a.m., local time, and at any adjournment or
postponement thereof.
This Proxy Statement/Prospectus, the Letter to MediQual Stockholders, the
Notice of the Special Meeting and the form of proxy for use at the Special
Meeting are first being mailed to MediQual Stockholders on or about
, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, MediQual Stockholders will consider and vote on:
1. The Merger Proposal to approve and adopt the Merger Agreement (a
copy of which is included as Annex A to this Proxy
Statement/Prospectus and incorporated by reference herein) and to
authorize the Merger.
2. Such other business incidental to the Merger as may properly come
before the Special Meeting.
RECORD DATE; VOTE REQUIRED; VOTING AT THE MEETING
The Board of Directors of MediQual has fixed July , 1997, as the record
date for determination of MediQual Stockholders entitled to notice of and August
8, 1997 as the record date for the determination of MediQual Stockholders
entitled to vote at the Special Meeting. Accordingly, only holders of MediQual
Stock of record at the close of business on July , 1997, will be entitled to
notice of the Special Meeting. Only holders of record on August 8, 1997 of
MediQual Common Stock, Class B Preferred Stock and Class C Preferred Stock are
entitled to vote at the Special Meeting. Such votes are exercisable in person or
by a properly executed proxy at the Special Meeting. Holders of Class A
Preferred Stock and holders of MediQual Warrants are not entitled to vote on the
Merger Proposal.
The presence, in person or by properly executed proxy, of holders of a
majority of the outstanding shares of each class of MediQual capital stock
entitled to vote at the Special Meeting is necessary to constitute a quorum for
the transaction of business at such meeting. The Special Meeting may be
adjourned for the purpose of obtaining additional proxies or votes or for any
other purpose, and, at any subsequent reconvening of the Special Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the Special Meeting (except for any proxies that
have theretofore properly been revoked or withdrawn), notwithstanding that they
may have been properly voted on the same or any other matter at a previous
meeting.
The affirmative vote of the holders of not less than a majority of the
outstanding shares of Class B Preferred Stock and Class C Preferred Stock, each
voting as a separate class, as well as the affirmative vote of the holders of
not less than a majority of Class B Preferred Stock, Class C Preferred Stock and
MediQual Common Stock voting together as a single class (with each share of
Class B Preferred Stock and Class C Preferred Stock entitling the holder thereof
to such number of votes as shall equal the number of shares of MediQual Common
Stock into which each such share of Class B Preferred Stock or Class C Preferred
Stock is convertible on August 8, 1997) is required to approve the Merger
Proposal. As of May 31, 1997, the directors and executive officers of MediQual
and certain of their affiliates may be deemed to be beneficial owners of
MediQual Stock representing approximately 65% of the Class B Preferred Stock,
100% of the Class C Preferred Stock and approximately 60% of the voting power of
the MediQual Common Stock (which includes the votes of holders of Class B
Preferred Stock and Class C Preferred Stock as described above). Certain
MediQual Stockholders, including certain directors of MediQual and certain of
their affiliates, who as of May 31, 1997, beneficially owned in the aggregate
approximately 65% of the Class B Preferred Stock, 100% of the Class C Preferred
stock and approximately 61% of the voting power of the MediQual Common Stock
(which includes the votes of holders of Class B Preferred Stock and Class C
Preferred Stock as described above), have agreed to vote or direct the vote of
all MediQual Stock over which they or their affiliates have
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voting power or control in favor of the Merger Proposal. Accordingly, if each
person who has agreed to vote for the Merger Proposal actually does so, approval
of the Merger Proposal is assured.
VOTING OF PROXIES
All properly executed proxies received prior to or at the Special Meeting
and not revoked will be voted at such meeting in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR the Merger Proposal.
If any other matters incidental to the Merger are properly presented at the
Special Meeting for consideration, including, among other things, consideration
of a motion to adjourn such meeting to another time or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the enclosed form of proxy, and acting thereunder, will have discretion to
vote on such matters in accordance with their best judgment (unless
authorization to use such discretion is withheld). MediQual is not aware of any
matters expected to be presented at the meeting other than the Merger Proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of MediQual, before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the date of
the proxy, (ii) duly executing a later dated proxy relating to the same shares
and delivering it to the Secretary of MediQual before the taking of the vote at
the Special Meeting, or (iii) attending the Special Meeting and voting in
person. In order to vote in person at the Special Meeting, MediQual Stockholders
must attend the meeting and cast their votes in accordance with the voting
procedures established for the meeting. Attendance at the meeting will not in
and of itself constitute a revocation of a proxy. Any written notice of
revocation or subsequent proxy must be sent so as to be delivered at or before
the taking of the vote at the meeting to MediQual Systems, Inc., 1900 West Park
Drive, Westborough, Massachusetts 01581, Attention: Secretary, or hand-delivered
to the secretary of MediQual at or before the vote at the Special Meeting.
SOLICITATION OF PROXIES
The expenses of the solicitation of proxies for the Special Meeting will be
borne by MediQual, except that expenses incurred in connection with filing,
printing and mailing the Registration Statement and this Proxy
Statement/Prospectus will be shared equally by Cardinal and MediQual, subject to
each party's obligation to reimburse the other for its expenses under certain
circumstances. See "The Merger Agreement -- Termination; Effect of Termination."
In addition to solicitation by mail, proxies may be solicited by directors,
officers and key employees of MediQual in person or by telephone, telegram or
other means of communication. These persons will receive no additional
compensation for solicitation of proxies, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made by MediQual with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and MediQual will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
RECOMMENDATION OF THE MEDIQUAL BOARD OF DIRECTORS
The Board of Directors of MediQual has unanimously determined that the
terms of the Merger Agreement and the transactions contemplated thereby are in
the best interests of MediQual and the MediQual Stockholders. Accordingly, the
MediQual Board of Directors recommends that MediQual Stockholders vote FOR the
Merger Proposal.
DISSENTERS' RIGHTS
MediQual Stockholders will be entitled to appraisal rights under Delaware
law. See "Rights of Dissenting Stockholders."
HOLDERS OF MEDIQUAL CAPITAL STOCK SHOULD NOT SEND ANY STOCK CERTIFICATES WITH
THEIR PROXIES. IF THE MERGER PROPOSAL IS APPROVED AND THE MERGER IS CONSUMMATED,
HOLDERS OF MEDIQUAL CAPITAL STOCK WILL BE SENT A LETTER OF TRANSMITTAL WITH
INSTRUCTIONS FOR SURRENDERING THEIR CERTIFICATES REPRESENTING SHARES OF MEDIQUAL
STOCK.
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THE MERGER
BACKGROUND OF THE MERGER
The health care industry is undergoing a period of rapid consolidation, and
MediQual believes that its smaller size, relative to many of its competitors,
and its limited capital resources are serious impediments to continuing and
accelerating its growth in revenues and profitability. Accordingly, for a period
of time the MediQual Board considered various alternative means of increasing
its capital resources, including through a possible initial public offering of
its common stock, acquisitions of other companies, or a possible combination
(whether through a sale, merger or joint venture) with a strong health care
oriented partner which could provide MediQual with additional capital resources
as well as a competitive advantage when competing for business from large
hospitals and integrated health networks.
At a meeting of the MediQual Board on January 24, 1997, the MediQual Board
authorized the engagement of Smith Barney as MediQual's financial advisor in
connection with the pursuit of a sale or merger of the company. Between February
1997 and May 1997, MediQual engaged in preliminary discussions with several
third parties regarding a potential business combination with MediQual.
As part of its growth strategy, Cardinal continuously evaluates and
maintains a variety of contacts with potential candidates for business
combinations. In February 1997, Smith Barney contacted a representative of
Cardinal to inquire as to whether Cardinal had any interest in exploring a
business combination with MediQual. Later that month in San Diego, California, a
representative of Cardinal began exploratory discussions with MediQual's Chief
Executive Officer regarding MediQual's interest in finding a strategic partner.
On March 18, 1997, representatives of Smith Barney and MediQual, including
MediQual's Chief Executive Officer and Chief Financial Officer, met with
Cardinal executives in Dublin, Ohio, to continue exploratory discussions of a
possible business combination of Cardinal and MediQual. On April 2, 1997, the
parties entered into a confidentiality agreement, and MediQual sent confidential
financial information to Cardinal. On April 7, 1997, representatives of Cardinal
visited the executive offices of MediQual in Westborough, Massachusetts, and met
with MediQual's Chief Executive Officer and Chief Financial Officer and
representatives of Smith Barney to commence a due diligence review of MediQual,
which included a discussion of a potential strategic combination of the
companies and a demonstration of MediQual's software products.
On April 23, 1997, MediQual's Chief Executive Officer and Chief Financial
Officer met with senior management of Cardinal, including Cardinal's Chairman
and Chief Executive Officer, to discuss MediQual's business and the strategic
merits of a combination of Cardinal and MediQual. On May 1, 1997,
representatives of Cardinal met with MediQual's senior management in
Westborough, Massachusetts and continued its due diligence review of MediQual's
business and operations. On May 2, 1997, MediQual's Chief Executive Officer and
two other senior managers met with representatives of Cardinal, including its
Chairman and Chief Executive Officer, in Houston, Texas, to continue discussions
about the strategic aspects of a combination of the companies.
As a result of these meetings and discussions, on May 8, 1997, Cardinal
senior management delivered to MediQual's Chief Executive Officer a written
proposal indicating that Cardinal would be willing to consider a business
combination with MediQual in which all common stock equivalents on a fully
diluted basis of MediQual would be exchanged for Cardinal Common Shares.
On May 8, 1997, the MediQual Board met to discuss the acquisition proposal
of a third party and the proposal of Cardinal set forth in the letter of May 8.
Representatives of Smith Barney participated in the meeting by telephone, and
described the process that had resulted in the proposal from Cardinal. At the
meeting, copies of the two merger proposals were distributed and discussed, and
consideration was given to the operating and financial history of the two
potential acquirers and possible synergies with MediQual. A determination was
made that the Cardinal proposal was likely to provide superior value to the
shareholders of MediQual than the offer made by the other party. Nevertheless,
the MediQual Board requested that Smith Barney attempt to secure a higher offer
from Cardinal (which Cardinal subsequently declined to do). Finally, the
MediQual Board authorized the MediQual Chief Executive Officer and Chief
Financial Officer to proceed
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with Cardinal toward the negotiation of a definitive merger agreement,
consistent with the terms and conditions described in Cardinal's proposal.
At its regular quarterly meeting, on May 14, 1997, the Cardinal Board of
Directors considered the proposed transaction with MediQual, approved the terms
of the proposed transaction, and authorized Cardinal management to continue due
diligence and to negotiate definitive documentation.
From May 19 to May 24, senior members of MediQual management, together with
MediQual's representatives, conferred with representatives of Cardinal and
Cardinal senior management and negotiated the detailed terms, provisions and
conditions of the Merger Agreement, the Support/Voting Agreements, the Escrow
Agreement and the form of Employment Agreement for the officers of MediQual. At
the same time, Cardinal representatives conducted substantial additional due
diligence of MediQual's business and operations. In the course of these
discussions, the terms of the Common Equivalent Exchange Ratio, the Class A
Preferred Exchange Ratio and the other material terms of the transaction were
finalized.
On May 21, 1997, the MediQual Board met via telephonic conference call to
consider the terms of the Merger Agreement, the Voting/Support Agreements, and
the Escrow Agreement. At this meeting, MediQual's Chief Executive Officer
presented the directors with a general outline of the terms of the proposed
Merger Agreement, and then led the directors through a section by section review
of the specific terms of the Merger Agreement. The Chief Executive Officer also
presented an outline of the remaining open terms of the Agreement and the
proposals on such issues MediQual had received from Cardinal, which presentation
was followed by a general discussion. Finally, the Chief Executive Officer was
authorized to proceed to negotiate final resolution on all open issues with
Cardinal. By Unanimous Written Consent in Lieu of a Special Meeting, dated as of
May 23, 1997, the MediQual Board made a determination that the terms of the
Merger Agreement and the transactions contemplated therein were in the best
interests of MediQual and its shareholders, and accordingly, the MediQual Board
unanimously approved the Merger Agreement and the Escrow Agreement and resolved
to recommend that the MediQual Stockholders vote for the approval and adoption
of the Merger Proposal at a special meeting of MediQual Shareholders to be held
for that purpose. See "--Reasons for the Merger; Recommendations of the Boards
of Directors -- MediQual."
On May 27, 1997, the Merger Agreement and the Support/Voting Agreements
were executed, and the parties issued a joint press release announcing the
Merger.
In late June, MediQual proposed to Cardinal certain changes to the escrow
arrangements that would provide for the payment of the expenses of the MediQual
Stockholders Representative incurred in his capacity as such under the Escrow
Agreement. On July 7, 1997, the parties executed an Amended and Restated Merger
Agreement reflecting such changes.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
MediQual. In reaching its conclusion to approve the Merger Agreement, the
MediQual Board consulted with the management of MediQual, as well as its
financial and legal advisors, and considered the following factors which, among
others, it believed to be significant to making such a decision:
(i) The MediQual Board considered the effect on the MediQual Stockholders
of MediQual continuing as an independent entity compared to the effect of a
combination with Cardinal. The MediQual Board determined that an integration of
MediQual with Cardinal, given Cardinal's greater marketing, sales and financial
resources, may provide a better opportunity for the long-term success of
MediQual's product offerings and thereby maximize the value of the MediQual
Stock for the MediQual Stockholders.
(ii) The MediQual Board considered the determination it had made that,
although MediQual had demonstrated the ability to operate profitably and
generate sufficient cash flow to service its short-term obligations, MediQual
would be unable to expand its business significantly without the receipt of
substantial additional capital. As an additional factor, the MediQual Board
considered the inability of MediQual to consummate a proposed initial public
offering in its 1996 fiscal year and the opportunities to access Cardinal's
greater financial resources offered by the Merger.
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(iii) The MediQual Board considered the financial performance and
condition, businesses and prospects of MediQual and Cardinal, including, but not
limited to, information with respect to the historical stock prices of Cardinal
and the respective operating performances of MediQual and Cardinal.
(iv) The MediQual Board considered the terms of the Merger Agreement,
including the form and amount of the consideration to be received by the
MediQual Stockholders, the terms and structure of the Merger, and the size and
nature of the Escrow Fund. The MediQual Board deemed it significant that the
Merger would provide the stockholders of MediQual with Cardinal Common Shares
for which there is an active and liquid trading market, in exchange for their
MediQual Stock, for which there is no established trading market or other means
to readily achieve liquidity.
(v) The MediQual Board considered the results of the process undertaken
on behalf of MediQual by Smith Barney to solicit third party indications of
interest in an acquisition of MediQual, and the ensuing negotiations with the
two parties which had made serious offers. Taking into account the views of
management and Smith Barney, the Board determined that the offer made by
Cardinal was the superior offer and offered the MediQual Stockholders more
liquidity and a greater possible return on their investments.
(vi) The MediQual Board considered that in the absence of a combination
with Cardinal, MediQual is subject, under the terms of the MediQual Certificate,
to the receipt of a request or requests to redeem all of the outstanding shares
of its Class A Preferred Stock, Class B Preferred Stock and Class C Preferred
Stock along with accrued dividends on such stock at a time when MediQual may not
have the financial resources to fund such a redemption.
(vii) The MediQual Board considered the fact that the Merger is expected
to be a tax-free transaction to the MediQual Stockholders and that it is
expected to qualify as a pooling-of-interests transaction for accounting and
financial reporting purposes.
(viii) The Merger affords the MediQual Stockholders the opportunity to
reduce the exposure inherent in MediQual's reliance on a few products and
services in a relatively discrete market, and the difficulties that MediQual
faces in competing against larger companies with more diversified product lines
and greater financial resources.
The foregoing discussion of certain information and factors deemed material
by the MediQual Board in considering the Merger Agreement and the Merger is not
intended to be exhaustive but is believed to include all material factors
considered by the MediQual Board. In view of the wide variety of information and
factors considered, the MediQual Board did not find it practical to, and did
not, assign any relative or specific weights to the foregoing factors, and
individual directors may have deemed different factors more significant than
others.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF MEDIQUAL HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTERESTS OF, MEDIQUAL AND ITS
STOCKHOLDERS. ACCORDINGLY, THE MEDIQUAL BOARD RECOMMENDS THAT MEDIQUAL
STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL.
Cardinal. In the course of reaching its decision to approve the Merger
Agreement and the transactions contemplated thereby, the Board of Directors of
Cardinal consulted with Cardinal's management and considered a number of
factors, including among others (i) MediQual's leadership role in the
development of a clinical information management software product and the
extensive clinical information database accumulated by MediQual to date; (ii)
the transaction's impact on Cardinal's continued development as a value-added
provider of logistical, information, packaging, marketing and other health care
services that distinguish Cardinal from its distribution competitors; (iii) the
combination of Cardinal's sales and marketing presence in the health care
services industry with MediQual's sophisticated Atlas group of products and
technical expertise, allowing the combined company to develop new products and
relationships with hospitals, pharmaceutical manufacturers and other trading
partners; (iv) the high quality of MediQual's management team and the technical
capabilities and expertise of MediQual in the areas of clinical software
development and statistical analysis of health care data; (v) the financial
return anticipated by Cardinal management after the Merger due to several
factors, including the higher return on committed capital and return on sales in
the
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health care information business relative to Cardinal; (vi) the ability to
achieve the benefits of scale and efficiencies with respect to investments in
new technology, systems and services; and (vii) MediQual's clinical information
database regarding product efficacy and treatment cost, which complement
Cardinal's existing sources of data and provide the platform for creation of
potential new information businesses.
The Cardinal Board also considered the fact that it is a condition to the
consummation of the Merger that the Merger be treated as a pooling-of-interests
for financial reporting and accounting purposes, therefore, adding no goodwill
relating to this transaction to Cardinal's balance sheet.
The foregoing discussion of the factors considered by the Cardinal Board is
not intended to be exhaustive. In view of the wide variety of factors considered
in connection with its evaluation of the Merger, the Cardinal Board did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MediQual Board with respect to the
Merger Agreement, MediQual Stockholders should be aware that certain officers
and directors of MediQual (or their affiliates) have interests in the Merger
that are different from and in addition to the interests of MediQual
Stockholders generally. The Board of Directors of MediQual was aware of these
interests and took these interests into account in approving the Merger
Agreement and the transactions contemplated thereby.
MediQual Options. Prior to the Effective Time, Cardinal and MediQual will
take all such actions as may be necessary to cause each unexpired and
unexercised MediQual Option under stock option plans of MediQual in effect on
the date of the Merger Agreement which has been granted by MediQual to current
or former directors, officers, key employees of MediQual (or others) to be
automatically converted at the Effective Time into a Cardinal Exchange Option to
purchase that number of Cardinal Common Shares equal to the number of shares of
MediQual Common Stock issuable immediately prior to the Effective Time upon
exercise of the MediQual Option (without regard to actual restrictions on
exercisability) multiplied by the Common Equivalent Exchange Ratio, with an
exercise price per share equal to the exercise price per share which existed
under the corresponding MediQual Option divided by the Common Equivalent
Exchange Ratio, and with other terms and conditions that are the same as the
terms and conditions of such MediQual Option immediately before the Effective
Time; provided that with respect to any MediQual Option that is an "incentive
stock option" within the meaning of Section 422 of the Code, the foregoing
conversion will be carried out in a manner satisfying the requirements of
Section 424(a) of the Code. As of May 31, 1997, 336,152 shares of MediQual
Common Stock were issuable upon the exercise of outstanding MediQual Options,
which options, assuming a Common Equivalent Exchange Ratio of 0.0845 (assuming
an Average Share Price equal to the last sale price of Cardinal Common Shares on
May 24, 1997 of $55.00), will be converted to become 28,405 Cardinal Exchange
Options at the Effective Time. The weighted average exercise price per share of
all MediQual Options outstanding as of the Record Date is $1.34 per share.
Following the Merger and assuming a Common Equivalent Exchange Ratio of 0.0845,
the average exercise price per share of Cardinal Exchange Options will be
approximately $15.86 per share. Each of the officers of MediQual currently holds
MediQual Options which will become Cardinal Exchange Options. Pursuant to the
terms of the stock option plans under which the MediQual Options were issued,
the unvested portion of certain of the MediQual Options held by officers and
directors of MediQual will automatically vest upon consummation of the Merger.
Cardinal has agreed under the Merger Agreement to file with the Commission,
within 45 business days after the Closing Date, a registration statement on Form
S-8 or other appropriate form under the Securities Act to register the Cardinal
Common Shares issuable upon exercise of the Cardinal Exchange Options and to use
reasonable efforts to cause such registration statement to remain effective
until the exercise or expiration of such options.
Employment Agreements. It is a condition to Cardinal's obligation to
consummate the Merger that Eric Kriss, Chief Executive Officer and a director,
William Price, Vice President and Chief Financial Officer, Robert Reeder, Vice
President, Technical Operations, James Corum, Vice President, Technical
Development, Laura Berberian, Vice President, Content Development, Anita Whelan,
Vice President, Client Services,
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Diane Throop, Vice President, Clinical Information Management, and Elizabeth
Endyke, Vice President, Marketing, of MediQual enter into employment agreements
with MediQual and Cardinal at the Effective Time. Such agreements (the
"Employment Agreements") will provide for base salary, incentive compensation,
and other benefits.
The Employment Agreements will be for a term ending on December 31, 1998.
Under each of the Employment Agreements, if the employee's employment is
terminated by MediQual without "cause" (as defined in the Employment Agreement)
or by the executive for "good reason" (as defined in the Employment Agreement),
MediQual will be obligated to continue to pay the employee's base salary for the
remaining term of the Employment Agreement, but any earnings the employee
obtains from other employment will reduce MediQual's obligations to provide the
employee with continued base salary.
Under each of the Employment Agreements, the employee will be subject to a
confidentiality covenant, a covenant not to solicit employees of MediQual,
Cardinal and their affiliates, and a covenant not to compete with MediQual,
Cardinal and their affiliates. The noncompetition covenant will remain in effect
until one year after the end of the employment period.
Arrangements with Mr. Kriss. At the Closing, the following transactions
with Eric Kriss, Chief Executive Officer of MediQual, will be consummated in
accordance with preexisting agreements with Mr. Kriss: MediQual will pay to Mr.
Kriss the principal and interest owing under the Promissory Note from MediQual
to Mr. Kriss dated January 2, 1996 in the original principal amount of $75,000,
MediQual will forgive the repayment of the principal and any unpaid interest
owing to it under the Promissory Note dated March 29, 1993 from Mr. Kriss in the
original principal amount of $201,523, and MediQual will pay to Mr. Kriss
$200,000 in full satisfaction of its obligations under a Letter Agreement dated
January 20, 1996 between MediQual and Mr. Kriss.
Indemnification; Insurance. In the Merger Agreement, Cardinal has agreed
that, from and after the Effective Time, it will cause MediQual as the
corporation surviving the Merger to indemnify and hold harmless the present and
former officers and directors of MediQual in respect of acts or omissions
occurring prior to the Effective Time to the extent provided under the MediQual
Certificate and the MediQual By-laws in effect on the date of the Merger
Agreement. Cardinal has also agreed to use its reasonable efforts to cause
MediQual to maintain in effect for not less than one year after the Effective
Time MediQual's current policy of directors' and officers' insurance with
respect to matters occurring prior to the Effective Time. However, MediQual may
substitute therefor policies containing terms and conditions which are no less
advantageous to covered officers and directors and MediQual is not required to
pay a premium for such insurance in excess of $18,000, but in such case is
required to purchase as much insurance as possible for such $18,000.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for accounting
and financial reporting purposes. Consummation of the Merger is conditioned on
Cardinal's receipt of a letter at the Effective Time, in form and substance
reasonably satisfactory to Cardinal, from Deloitte & Touche LLP, independent
auditors of Cardinal, and Arthur Andersen LLP, independent auditors of MediQual,
stating that the Merger will qualify as a pooling-of-interests for accounting
and financial reporting purposes.
Under the pooling-of-interests method of accounting, the recorded assets
and liabilities of Cardinal and MediQual will be carried forward to the combined
company at their historical recorded amounts, income of the combined company
will include income of MediQual and Cardinal for the entire fiscal year in which
the combination occurs, and the reported income of the separate companies for
previous periods will be combined and restated as income of the combined
company. See "The Merger Agreement -- Conditions" and "Summary -- Summary
Historical and Unaudited Pro Forma Combined Financial Information."
MediQual has agreed in the Merger Agreement to obtain written undertakings
("Affiliate Letters") at least 45 days prior to the Special Meeting from each
person who may be at the Effective Time or was on the date of the Merger
Agreement an "affiliate" of MediQual for purposes of Rule 145 under the
Securities Act to the effect that, among other things, such person will not
sell, transfer or otherwise dispose of, or direct or cause the sale, transfer or
other disposition of, any shares of MediQual capital stock or Cardinal Common
Shares or MediQual Options beneficially owned thereby during the 30 days prior
to the Effective Time and will not sell,
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transfer or otherwise dispose of, or direct or cause the sale, transfer or other
disposition of, any Cardinal Common Shares or Cardinal Options (or Cardinal
Common Shares issuable upon exercise thereof) beneficially owned thereby as a
result of the Merger or otherwise until after such time as Cardinal shall have
publicly released a report in the form of a quarterly earnings report,
registration statement filed with the Commission, report filed with the
Commission or any other public filing, statement or announcement which includes
the combined financial results of Cardinal and MediQual for a period of at least
30 days of combined operations of Cardinal and MediQual following the Effective
Time. See "The Merger Agreement -- Representations, Warranties and Covenants."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that no gain or loss for federal income tax purposes will be
recognized by MediQual or the MediQual Stockholders as a result of the Merger
(except to the extent such holders receive cash in lieu of fractional Cardinal
Common Shares). However, it is not a condition to the consummation of the Merger
that counsel for any party issue an opinion to the foregoing effect. See
"Certain Federal Income Tax Consequences."
REGULATORY APPROVALS
Other than as described in this Proxy Statement/Prospectus, consummation of
the Merger does not require the approval of any federal or state agency.
FEDERAL SECURITIES LAW CONSEQUENCES
All Cardinal Common Shares issued in connection with the Merger will be
freely transferable, except that any Cardinal Common Shares received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Cardinal or MediQual prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act with respect to affiliates of Cardinal or MediQual, or Rule 144 under the
Securities Act with respect to persons who are or become affiliates of Cardinal,
or as otherwise permitted under the Securities Act. Persons who may be deemed to
be affiliates of Cardinal or MediQual generally include individuals or entities
that control, are controlled by or are under common control with, such person
and generally include the executive officers and directors of such person as
well as principal shareholders of such person.
Affiliates may not sell their Cardinal Common Shares acquired in connection
with the Merger, except pursuant to an effective registration under the
Securities Act covering such shares or in compliance with Rule 145 under the
Securities Act (or Rule 144 under the Securities Act in the case of persons who
become affiliates of Cardinal) or another applicable exemption from the
registration requirements of the Securities Act. In general, Rule 145 under the
Securities Act provides that for one year following the Effective Time an
affiliate (together with certain related persons) would be entitled to sell
Cardinal Common Shares acquired in connection with the Merger only through
unsolicited "broker transactions" or in transactions directly with a "market
maker," as such terms are defined in Rule 144. Additionally, the number of
Cardinal Common Shares to be sold by an affiliate (together with certain related
persons and certain persons acting in concert) within any three-month period for
purposes of Rule 145 under the Securities Act may not exceed the greater of 1%
of the outstanding Cardinal Common Shares or the average weekly trading volume
of such shares during the four calendar weeks preceding such sale. No affiliate
of MediQual is expected to receive Cardinal Common Shares in connection with the
Merger which exceed 1% of the outstanding Cardinal Common Shares. Rule 145 under
the Securities Act will remain available to MediQual affiliates if Cardinal
remains current with its informational filings with the Commission under the
Exchange Act. One year after the Effective Time, an affiliate will be able to
sell such Cardinal Common Shares without being subject to such manner of sale or
volume limitations provided that Cardinal is current with its Exchange Act
informational filings and such affiliate is not then an affiliate of Cardinal.
Two years after the Effective Time, an affiliate will be able to sell such
Cardinal Common Shares without any restrictions so long as such affiliate had
not been an affiliate of Cardinal for at least three months prior to the date of
such sale. See "-- Accounting Treatment."
Cardinal Warrants issued in exchange for MediQual Warrants will also be
freely transferable, except that any Cardinal Warrants received by affiliates of
Cardinal or MediQual prior to the Merger may only be sold in transactions
permitted under the resale provisions of Rule 145 described above. However,
because there is no
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public trading market for the Cardinal Warrants (and no such market is expected
to develop), the exemption provided by Rule 145 will not be available for the
resale of Cardinal Warrants by such persons for the first year following the
Effective Time. Beginning one year after the Effective Time, such persons will
be able to sell their Cardinal Warrants without being subject to the Rule 145
manner of sale or volume limitations, so long as Cardinal is current with its
Exchange Act informational requirements and such persons are not affiliates of
Cardinal. Two years after the Effective Time, such persons will be able to sell
such Cardinal Warrants without any restrictions so long as such persons had not
been affiliates of Cardinal for at least three months prior to the date of such
sale.
Pursuant to the form of Cardinal Warrants, Cardinal Common Shares are not
required to be issued upon exercise of the Cardinal Warrant except (i) pursuant
to an effective registration statement under the Securities Act or (ii) upon the
holder first furnishing to Cardinal an opinion of counsel satisfactory to
Cardinal that such issuance is not in violation of the registration requirements
of the Securities Act or any applicable state securities law. Since Cardinal is
not under any obligation to file, and does not intend to file, a registration
statement under the Securities Act covering the issuance of any Cardinal Common
Shares upon exercise of Cardinal Warrants, the Cardinal Warrants will be
exercisable only pursuant to an exemption from the registration requirements of
the Securities Act, and then only upon the holder of the Cardinal Warrant
furnishing to Cardinal an opinion of counsel satisfactory to Cardinal that an
exemption from registration is available. Cardinal may waive the requirement for
an opinion of counsel at the time of exercise if the availability of an
exemption from registration is readily apparent. Generally, Cardinal Common
Shares acquired upon the exercise of a Cardinal Warrant by the surrender of
Cardinal Common Shares having a fair market value equal to the applicable
exercise price of the Cardinal Warrant, or by a so-called cashless or net
exercise, which is permitted in the form of Cardinal Warrant, may be an exempt
security within the meaning of Section 3(a)(9) of the Securities Act and
therefore exempt from the registration requirements of the Securities Act. By
virtue of the initial registration of the issuance of the Cardinal Warrants
under the Securities Act, Cardinal believes that Cardinal Common Shares issued
upon the exercise of a Cardinal Warrant pursuant to Section 3(a)(9) of the
Securities Act will be freely tradeable, except that Cardinal Common Shares
received by affiliates of Cardinal or MediQual prior to the Merger may be sold
by them only in transactions permitted by the resale provisions of Rule 145
under the Securities Act described above. The exercise of a Cardinal Warrant by
the payment of the cash exercise price will generally be exempt from the
registration requirements of the Securities Act only if it meets the
requirements for the exemption provided in Section 4(2) of the Securities Act
which involves the issuance of Cardinal Common Shares in a transaction not
involving a public offering. The availability of this or any other exemption
will be dependent on the facts and circumstances existing at the time of the
proposed exercise and there can be no assurance that this exemption will be
available at the time a holder of Cardinal Warrant wishes to exercise, or at
all. Any Cardinal Common Shares issued upon the exercise of Cardinal Warrants
pursuant to Section 4(2) of the Securities Act will be "restricted securities"
within the meaning of Rule 144 under the Act and may not be publicly resold by
the holder for a period of one year following the time of exercise of the
Cardinal Warrant. Beginning one year after the time of exercise of the Cardinal
Warrant, the Cardinal Common Shares acquired upon the exercise of the warrant
pursuant to such exemption may be sold subject to the manner of sale and volume
limitations of Rule 144 which are similar to the Rule 145 limitations described
above.
Holders of MediQual Warrants who exercise all of their MediQual Warrants
prior to the Effective Time, and therefore receive Cardinal Common Shares in the
Merger, will not be subject to the foregoing limitations on the exercise of
Cardinal Warrants, although 6.5% of these shares will be deposited into escrow
at the Effective Time to be held as Retained Shares pursuant to the terms of the
Escrow Agreement.
SUPPORT/VOTING AGREEMENTS
Concurrently with the execution of the Merger Agreement, Cardinal and
certain MediQual Stockholders, including certain directors of MediQual and
certain of their affiliates, who as of May 31, 1997, beneficially owned in the
aggregate 100% of the Class A Preferred Stock, approximately 65% of the Class B
Preferred Stock, 100% of the Class C Preferred Stock and approximately 61% of
the voting power of the MediQual Common Stock (which includes the votes of
holders of Class B Preferred Stock and Class C Preferred Stock as described
under "The Special Meeting--Record Date; Vote Required; Voting at the Meeting")
executed
30
<PAGE> 34
separate Support/Voting Agreements pursuant to which each Supporting Stockholder
agreed that, among other things, such Supporting Stockholder (i) will not, will
not permit any company, trust or other entity controlled by such Supporting
Stockholder to, and will not permit any of its affiliates to, contract to sell,
sell or otherwise transfer or dispose of any of the shares of the capital stock
of MediQual of which such Supporting Stockholder or its affiliates is the record
or beneficial owner ("Supporting Stockholder Shares") or any interest therein or
securities convertible thereunto or any voting rights with respect thereto,
other than (x) pursuant to the Merger or (y) with Cardinal's prior written
consent; (ii) will not, will not permit any such company, trust or other entity
to, and will not permit any of its affiliates to, directly or indirectly
(including through its officers, directors, employees, or other
representatives), solicit, initiate, encourage or facilitate, or furnish or
disclose non-public information in furtherance of, any inquiries or the making
of any proposal with respect to any Competing Transaction, or negotiate, explore
or otherwise engage in discussions with any person (other than Cardinal, Subcorp
or their respective directors, officers, employees, agents and representatives)
with respect to any Competing Transaction or enter into any agreement,
arrangement, or understanding with respect to any Competing Transaction or agree
to or otherwise assist in the effectuation of any Competing Transaction; (iii)
if the shares held by the MediQual Stockholder include Class A Preferred Stock,
Class B Preferred Stock or Class C Preferred Stock, provide, participate in the
giving of, or consent to or acquiesce in the giving of a written request with
respect to the redemption of any shares of capital stock of MediQual pursuant to
the MediQual Certificate; and (iv) will vote all of such Supporting Stockholder
Shares beneficially owned by such Supporting Stockholder or its affiliates, or
over which such Supporting Stockholder and, in the case of the holders of Class
A Preferred Stock or Class B Preferred Stock, any of its affiliates has voting
power or control, directly or indirectly (including any MediQual Common Stock
acquired after the date of the Support/Voting Agreement), at the record date for
any meeting of shareholders of MediQual called to consider and vote to approve
the Merger and the Merger Agreement and/or the transactions contemplated thereby
in favor thereof and neither Supporting Stockholder nor any of its affiliates
will vote such Supporting Stockholder Shares in favor of any Competing
Transaction. Each Support/Voting Agreement may be terminated at the option of
any party thereto at any time after the earlier of (i) termination of the Merger
Agreement and (ii) the Effective Time.
Each Supporting Stockholder and the number of shares of MediQual Common
Stock beneficially owned by it or over which it had voting control as of May 31,
1997 are as follows: Eric Kriss (551,903.75 shares of MediQual Common Stock);
William D. Ryan (855,833.25 shares of MediQual Common Stock and 229 shares of
Class A Preferred Stock); Charles M. Jacobs (341,250 shares of MediQual Common
Stock); Peter Nessen (options to purchase 12,000 shares of MediQual Common
Stock); Robert J. Daly and certain entities affiliated with TA Associates, Inc.
(4,134,980 shares of Class B Preferred Stock, convertible into 1,036,580 shares
of MediQual Common Stock); and David Dominik and certain entities affiliated
with Bain Capital, Inc. (733,179 shares of MediQual Common Stock and 2,022
shares of Class C Preferred Stock, convertible into 629,088 shares of MediQual
Common Stock). If each person who has agreed to vote for the Merger Proposal
actually does so, approval of the Merger Proposal is assured. See "The Special
Meeting -- Record Date; Vote Required; Voting at the Meeting."
The foregoing is a summary of the material provisions of the Support/Voting
Agreements, a form of which is filed as an exhibit to the Registration
Statement. See "Available Information." This summary is qualified in its
entirety by reference to the form of Support/Voting Agreement which is
incorporated herein by reference.
THE MERGER AGREEMENT
The following is a summary of material provisions of the Merger Agreement,
a copy of which is included as Annex A to this Proxy Statement/Prospectus. This
summary is qualified in its entirety by reference to the Merger Agreement which
is incorporated herein by this reference.
THE MERGER
The Merger Agreement provides that Subcorp will be merged with and into
MediQual with the result that MediQual as the Surviving Corporation becomes a
wholly owned subsidiary of Cardinal, subject to the requisite approval of
MediQual Stockholders and the satisfaction or waiver of the other conditions to
the
31
<PAGE> 35
Merger. The Merger will become effective at the Effective Time upon the filing
of a duly executed certificate of merger with the Delaware Secretary of State or
at such later time as shall be agreed upon by Cardinal and MediQual and
specified in the certificate of merger. This filing is to be made on the Closing
Date specified by Cardinal and MediQual, which date will be as soon as possible,
but in any event within ten business days following the date upon which all
conditions set forth in the Merger Agreement have been satisfied or waived, as
the case may be, or such other time as the parties may mutually agree. It is
currently anticipated that the Effective Time will occur on the date of the
Special Meeting, assuming the Merger Agreement and the Merger are approved at
such meeting and all other conditions to the Merger have been satisfied or
waived.
MERGER CONSIDERATION
General; Exchange Ratios; Adjustment Election. Pursuant to the Merger
Agreement, each share of MediQual Stock issued and outstanding immediately prior
to the Effective Time, other than shares held in the treasury of MediQual, if
any, which will be cancelled and, other than shares as to which the holder
thereof has properly exercised appraisal rights as described in "Rights of
Dissenting Stockholders," will be converted into and represent that number of
Cardinal Common Shares equal to (i) with respect to MediQual Common Stock, the
Common Equivalent Exchange Ratio, (ii) with respect to Class A Preferred Stock,
the Class A Exchange Ratio, and (iii) with respect to Class B Preferred Stock
and Class C Preferred Stock, the product of the Common Equivalent Exchange Ratio
and the maximum number of shares of MediQual Common Stock into which such share
of Class B Preferred Stock or Class C Preferred Stock is convertible at the
Effective Time.
The Common Equivalent Exchange Ratio (rounded to the nearest ten-thousandth
of a share) is equal to the quotient obtained by dividing (A) the quotient
obtained by dividing (I) $30.8 million by (II) the Average Share Price (as
defined below) (except that, for purposes of this Clause II only, if the Average
Share Price is less than $52.25, then the Average Share Price will be deemed to
be equal to $52.25, and that, for purposes of this Clause II only, if the
Average Share Price is greater than $57.75, then the Average Share Price will be
deemed to be equal to $57.75) by (B) the number of Fully Diluted MediQual Shares
(as defined below) issued and outstanding immediately prior to the Effective
Time; provided, however, that if Cardinal has given written notice to MediQual
in the manner provided for in Section 7.1 of the Merger Agreement and as
described under the caption "The Merger Agreement -- Termination; Effect of
Termination") (an "Adjustment Election"), then the Common Equivalent Exchange
Ratio will equal the quotient obtained by dividing (A) the quotient obtained by
dividing (I) $27,557,895 by (II) the Average Share Price by (B) the number of
Fully Diluted MediQual Shares issued and outstanding immediately prior to the
Effective Time.
The Class A Preferred Exchange Ratio (rounded to the nearest ten-thousandth
of a share) is equal to the quotient obtained by dividing (A) the quotient
obtained by dividing (I) the stated value of $2,290,000 for all outstanding
shares of MediQual Class A Preferred Stock plus all accrued but unpaid dividends
thereon (which amount was $1,420,777 at March 31, 1997) as of the Effective Time
(collectively, the "Class A Exchange Amount") by (II) the Average Share Price
(except that, for purposes of this Clause II only, if the Average Share Price is
less than $52.25, then the Average Share Price will be deemed to be equal to
$52.25, and that, for purposes of this Clause II only, if the Average Share
Price is greater than $57.75, then the Average Share Price will be deemed to be
equal to $57.75) by (B) 229; provided, however, if Cardinal has made an
Adjustment Election, then the Class A Preferred Exchange Ratio will equal the
quotient obtained by dividing (A) the quotient obtained by dividing (I) the
product of the Class A Exchange Amount and .8947 by (II) the Average Share Price
by (B) 229.
"Average Share Price" means the average of the closing prices of Cardinal
Common Shares as reported on the New York Stock Exchange ("NYSE") Composite Tape
("NYSE Composite Tape") on each of the last twenty trading days ending on the
sixth trading day prior to the Special Meeting. "Fully Diluted MediQual Shares"
means the sum obtained by adding (r) the number of shares of MediQual Common
Stock (including fractions thereof) actually issued and outstanding, (s) the
maximum number of shares of MediQual Common Stock (including fractions thereof)
issuable upon the exercise of all outstanding warrants to purchase shares of
MediQual Common Stock, (t) the maximum number of shares of MediQual Common Stock
(including fractions thereof) issuable upon the exercise of all outstanding
options to purchase shares of MediQual Common Stock (including both vested and
unvested options), and (u) the maximum number of
32
<PAGE> 36
shares of MediQual Common Stock (including fractions thereof) issuable upon the
conversion of all issued and outstanding shares of Class B Preferred Stock and
Class C Preferred Stock. The number of Fully Diluted MediQual Shares outstanding
as of any particular date will depend, among other factors, on the amount of
accrued and unpaid dividends on the MediQual Class A Preferred Stock and the
MediQual Class C Preferred Stock as of such date. See "-- MediQual Common Stock,
MediQual Class B Preferred Stock and MediQual Class C Preferred Stock" and
"-- MediQual Class A Preferred Stock." As of May 31, 1997, there were 6,622,789
Fully Diluted MediQual Shares outstanding. The final number of "Fully Diluted
MediQual Shares," as well as the underlying calculations for such number, will
be stipulated to Cardinal in writing by MediQual's chief financial officer not
later than the end of business on the fifth trading day prior to the Special
Meeting.
As described more fully under "The Merger Agreement -- Termination; Effect
of Termination," MediQual has the right to terminate the Merger Agreement if the
Average Share Price is less than $46.75 unless, if the Average Share Price is
not less than $44.00, Cardinal has made an Adjustment Election. Therefore, if
the Average Share Price is less than $46.75 and not less than $44.00, then,
prior to MediQual exercising its right to terminate the Merger Agreement,
Cardinal would have the right (but not the obligation) to make an Adjustment
Election, which, if made, would cause the Common Equivalent Exchange Ratio and
the Class A Preferred Exchange Ratio to be calculated as specified above and
would mean that MediQual could not terminate the Merger Agreement because the
Average Share Price is less than $46.75. If, however, the Average Share Price is
less than $46.75 and not less than $44.00 and Cardinal opts not to make an
Adjustment Election, then MediQual would have the right to terminate the Merger
Agreement. The Boards of Directors of Cardinal and MediQual, respectively, have
not determined what actions they would take or what factors they would consider
if circumstances changed such that the Average Share Price was less than $46.75.
The consummation of the Merger and the conversion of MediQual Stock into
Cardinal Common Shares as described above are subject to the satisfaction or
waiver of certain conditions (see "The Merger Agreement -- Conditions") and the
right of one or both of MediQual and Cardinal to terminate the Merger Agreement
under certain circumstances as described under the caption "The Merger
Agreement -- Termination; Effect of Termination." The definitive Common
Equivalent Exchange Ratio and Class A Preferred Exchange Ratio will be
determinable after the close of trading on the fifth trading day prior to the
Special Meeting, at which time MediQual Stockholders may call William C. Price,
Vice President and Chief Financial Officer of MediQual, at (508) 366-6365, to
obtain the definitive Common Equivalent Exchange Ratio and Class A Preferred
Exchange Ratio.
MediQual Common Stock, MediQual Class B Preferred Stock and MediQual Class
C Preferred Stock. The following tables set forth (i) the Common Equivalent
Exchange Ratio and (ii) with respect to the Series 1986 Class B Preferred
Shares, the Series 1987 Class B Preferred Shares and the Class C Preferred
Stock, the number of shares of MediQual Common Stock into which one share of
such stock is convertible (the "MediQual Common Stock Equivalents") and the
number of Cardinal Common Shares to be received by holders of MediQual Common
Stock, 1986 Class B Preferred Shares, 1987 Class B Preferred Shares and Class C
Preferred Stock for one share of such stock, in each case assuming various
Average Share Prices between $52.25 and $57.75 and making the other assumptions
described below:
MediQual Common Stock:
<TABLE>
<CAPTION>
COMMON EQUIVALENT NUMBER OF CARDINAL
AVERAGE SHARE PRICE(a) EXCHANGE RATIO(b) COMMON SHARES
- ---------------------- ----------------- ------------------
<S> <C> <C>
$52.2500 0.0889 0.0889
53.0000 0.0877 0.0877
54.0000 0.0861 0.0861
55.0000 0.0845 0.0845
56.0000 0.0830 0.0830
57.0000 0.0815 0.0815
57.7500 0.0805 0.0805
</TABLE>
- ---------------
(a) The Average Share Price is defined in the Merger Agreement as the average of
the closing prices per share of the Cardinal Common Shares as reported on
the NYSE Composite Tape on each of the last twenty trading days ending on
the sixth trading day prior to the Special Meeting.
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<PAGE> 37
(b) Assumes that the number of Fully Diluted MediQual Shares is equal to
6,627,227 (which is the estimated number of Fully Diluted MediQual Shares as
of an estimated Closing Date of August 18, 1997, assuming (i) no payment of
accrued dividends on the Class A Preferred Stock and the Class C Preferred
Stock, (ii) no change in the current 1986 Class B Conversion Ratio (as
defined below) or 1987 Class B Conversion Ratio (as defined below), and
(iii) no change in the current Class C Conversion Ratio, other than as a
result of the accrual of dividends). The actual number of Fully Diluted
MediQual Shares will depend, among other factors, on the number of shares of
MediQual Common Stock into which the 1986 Class B Preferred Shares, the 1987
Class B Preferred Shares and the Class C Preferred Stock are convertible as
of the Effective Time. See the tables below.
1986 Class B Preferred Shares:
<TABLE>
<CAPTION>
1986 CLASS B NUMBER OF
AVERAGE CONVERSION COMMON EQUIVALENT CARDINAL
SHARE PRICE(a) RATIO(b) EXCHANGE RATIO(c) COMMON SHARES(d)
- -------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
$52.2500 0.2507 0.0889 0.0223
53.0000 0.2507 0.0877 0.0220
54.0000 0.2507 0.0861 0.0216
55.0000 0.2507 0.0845 0.0212
56.0000 0.2507 0.0830 0.0208
57.0000 0.2507 0.0815 0.0204
57.7500 0.2507 0.0805 0.0202
</TABLE>
- ---------------
(a) The Average Share Price is defined as the average of the closing prices per
share of the Cardinal Common Shares as reported on the NYSE Composite Tape
on each of the last twenty trading days ending on the sixth trading day
prior to the Special Meeting.
(b) The MediQual Certificate provides that each 1986 Class B Preferred Share is
convertible into a number of shares of MediQual Common Stock equal to the
quotient determined by dividing (i) $.70 by (ii) $2.80 (subject to
adjustment for certain anti-dilution events described in the MediQual
Certificate) (the "1986 Class B Conversion Ratio"). As of the date hereof,
each 1986 Class B Preferred Share is convertible into 0.2507 shares of
MediQual Common Stock. While it is not anticipated that the 1986 Class B
Conversion Ratio will change prior to the Effective Time, there can be no
assurance in this regard.
(c) Assumes that the number of Fully Diluted MediQual Shares is equal to
6,627,227 (which is the estimated number of Fully Diluted MediQual Shares as
of an estimated Closing Date of August 18, 1997, assuming (i) no payment of
accrued dividends on the Class A Preferred Stock and the Class C Preferred
Stock, (ii) no change in the current 1986 Class B Conversion Ratio (as
defined below) or the 1987 Class B Conversion Ratio (as defined below), and
(iii) no change in the current Class C Conversion Ratio (as defined below),
other than as a result of the accrual of dividends). The actual number of
Fully Diluted MediQual Shares will depend, among other factors, on the
actual number of shares of MediQual Common Stock into which the 1986 Class B
Preferred Shares, the 1987 Class B Preferred Shares and the Class C
Preferred Stock are convertible as of the Effective Time. See the tables
below.
(d) Equal to the product of (i) the 1986 Class B Conversion Ratio and (ii) the
Common Equivalent Exchange Ratio.
34
<PAGE> 38
1987 Class B Preferred Shares:
<TABLE>
<CAPTION>
NUMBER OF
AVERAGE 1987 CLASS B COMMON EQUIVALENT CARDINAL
SHARE PRICE(a) CONVERSION RATIO(b) EXCHANGE RATIO(c) COMMON SHARES(d)
- -------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
$52.2500 0.2534 0.0889 0.0225
53.0000 0.2534 0.0877 0.0222
54.0000 0.2534 0.0861 0.0218
55.0000 0.2534 0.0845 0.0214
56.0000 0.2534 0.0830 0.0210
57.0000 0.2534 0.0815 0.0207
57.7500 0.2534 0.0805 0.0204
</TABLE>
- ---------------
(a) The Average Share Price is defined as the average of the closing prices per
share of the Cardinal Common Shares as reported on the NYSE Composite Tape
on each of the last twenty trading days ending on the sixth trading day
prior to the Special Meeting.
(b) The MediQual Certificate provides that each 1987 Class B Preferred Share is
convertible into a number of shares of MediQual Common Stock equal to the
quotient determined by dividing (i) $2.00 by (ii) $7.92 (subject to
adjustment for certain anti-dilution events described in the MediQual
Certificate) (the "1987 Class B Conversion Ratio"). As of the date hereof,
each 1987 Class B Preferred Share is convertible into 0.2534 shares of
MediQual Common Stock. While it is not anticipated that the 1987 Class B
Conversion Ratio will change prior to the Effective Time, there can be no
assurance in this regard.
(c) Assumes that the number of Fully Diluted MediQual Shares is equal to
6,627,227 (which is the estimated number of Fully Diluted MediQual Shares as
of an estimated Closing Date of August 18, 1997, assuming (i) no payment of
accrued dividends on the Class A Preferred Stock and the Class C Preferred
Stock, (ii) no change in the current 1986 Class B Conversion Ratio or 1987
Class B Conversion Ratio, and (iii) no change in the current Class C
Conversion Ratio, other than as a result of the accrual of dividends). The
actual number of Fully Diluted MediQual Shares will depend, among other
factors, on the actual number of shares of MediQual Common Stock into which
the 1986 Class B Preferred Shares, the 1987 Class B Preferred Shares and the
Class C Preferred Stock are convertible as of the Effective Time. See the
tables above and below.
(d) Equal to the product of (i) the 1987 Class B Conversion Ratio and (ii) the
Common Equivalent Exchange Ratio.
Class C Preferred Stock:
<TABLE>
<CAPTION>
NUMBER OF
AVERAGE CLASS C COMMON EQUIVALENT CARDINAL
SHARE PRICE(a) CONVERSION RATIO(b) EXCHANGE RATIO(c) COMMON SHARES(d)
- -------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
$52.2500 315.0915 0.0889 28.0116
53.0000 315.0915 0.0877 27.6335
54.0000 315.0915 0.0861 27.1293
55.0000 315.0915 0.0845 26.6252
56.0000 315.0915 0.0830 26.1525
57.0000 315.0915 0.0815 25.6799
57.7500 315.0915 0.0805 25.3648
</TABLE>
- ---------------
(a) The Average Share Price is defined as the average of the closing prices per
share of the Cardinal Common Shares as reported on the NYSE Composite Tape
on each of the last twenty trading days ending on the sixth trading day
prior to the Special Meeting.
(b) The MediQual Certificate provides that each share of Class C Preferred Stock
is convertible into a number of shares of MediQual Common Stock equal to the
quotient determined by dividing (i) (A) the sum of $1,000 plus (B) 50% of
the accrued and unpaid dividends on a share of Class C Preferred Stock by
(ii) $4.00 (subject to adjustment for certain anti-dilution events described
in the MediQual
35
<PAGE> 39
Certificate) (the "Class C Conversion Ratio"). Dividends on each share of
Class C Preferred Stock accrue at a rate of 10% per annum. On August 18,
1997, each share of Class C Preferred Stock is expected to have accrued and
unpaid dividends of $523.43 and each share of Class C Preferred Stock will
be convertible into 315.0915 shares of MediQual Common Stock. While it is
not anticipated that the Class C Conversion Ratio will change prior to the
Effective Time, other than as a result of the accrual of dividends, there
can be no assurance in this regard.
(c) Assumes that the number of Fully Diluted MediQual Shares is equal to
6,627,227 (which is the estimated number of Fully Diluted MediQual Shares as
of an estimated Closing Date of August 18, 1997, assuming (i) no payment of
accrued dividends on the Class A Preferred Stock and the Class C Preferred
Stock, (ii) no change in the current 1986 Class B Conversion Ratio or 1987
Class B Conversion Ratio, and (iii) no change in the current Class C
Conversion Ratio, other than as a result of the accrual of dividends). The
actual number of Fully Diluted MediQual Shares will depend, among other
factors, on the actual number of shares of MediQual Common Stock into which
the 1986 Class B Preferred Shares, the 1987 Class B Preferred Shares and the
Class C Preferred Stock are convertible as of the Effective Time. See the
tables above and below.
(d) Equal to the product of (i) the Class C Conversion Ratio and (ii) the Common
Equivalent Exchange Ratio.
For example, if the Average Share Price of the Cardinal Common Shares is
$55.00 (the last sale price of Cardinal Common Shares on May 24, 1997), the
Common Equivalent Exchange Ratio will be 0.0845 (assuming a number of Fully
Diluted MediQual Shares equal to 6,627,227). If the Average Share Price is
greater than $57.75, the Common Equivalent Exchange Ratio would remain at
0.0805, which effectively would increase the "value" of the consideration to be
received by holders of MediQual Common Stock, 1986 Class B Preferred Shares,
1987 Class B Preferred Shares and Class C Preferred Stock as the Average Share
Price increases. If the Average Share Price is less than $52.25, the Common
Equivalent Exchange Ratio would remain at 0.0889, which effectively would
decrease the "value" of the consideration to be received by holders of MediQual
Common Stock, 1986 Class B Preferred Shares, 1987 Class B Preferred Shares and
Class C Preferred Stock as the Average Share Price decreases. The actual value
of the Cardinal Common Shares at the Effective Time may be higher or lower than
the Average Share Price, which is based on the average market value of the
Cardinal Common Shares over a defined period prior to the Special Meeting.
MediQual Stockholders should obtain current quotes for the Cardinal Common
Shares.
Class A Preferred Stock. The following table sets forth the Class A
Preferred Exchange Ratio and the number of Cardinal Common Shares to be received
by holders of Class A Preferred Stock for each share of such stock, assuming
various Average Share Prices between $52.25 and $57.75 and making the other
assumptions described below:
<TABLE>
<CAPTION>
CLASS A PREFERRED NUMBER OF CARDINAL
AVERAGE SHARE PRICE(a) EXCHANGE RATIO(b) COMMON SHARES
- ---------------------- ----------------- ------------------
<S> <C> <C>
$52.2500 316.3392 316.3392
53.0000 311.8627 311.8627
54.0000 306.0875 306.0875
55.0000 300.5223 300.5223
56.0000 295.1558 295.1558
57.0000 289.9776 289.9776
57.7500 286.2117 286.2117
</TABLE>
- ---------------
(a) The Average Share Price is defined as the average of the closing prices per
share of the Cardinal Common Shares as reported on the NYSE Composite Tape
on each of the last twenty trading days ending on the sixth trading day
prior to the Special Meeting.
(b) Assumes aggregate accrued and unpaid dividends on Class A Preferred Stock
equal to $1,495,078 at the Effective Time. Dividends on each share of Class
A Preferred Stock accrue at a rate equal to the rate announced from time to
time by Marine Midland Bank as its prime rate. Such prime rate is currently
8.50% per annum.
36
<PAGE> 40
For example, if the Average Share Price of the Cardinal Common Shares is
$55.00(the last sale price of Cardinal Common Shares on May 24, 1997), the Class
A Preferred Exchange Ratio will be 300.5223 (assuming aggregate accrued and
unpaid dividends on Class A Preferred Stock on the Closing Date equal to
$1,495,078). If the Average Share Price is greater than $57.75, the Class A
Preferred Exchange Ratio would remain at 286.2117, which effectively would
increase the "value" of the consideration to be received by holders of MediQual
Class A Preferred Stock as the Average Share Price increases. If the Average
Share Price is less than $52.25, the Class A Preferred Exchange Ratio would
remain at 316.3392, which effectively would decrease the "value" of the
consideration to be received by holders of Class A Preferred Stock per share of
such stock as the Average Share Price decreases. The actual value of the
Cardinal Common Shares at the Effective Time may be higher or lower than the
Average Share Price, which is based on the average market value of the Cardinal
Common Shares over a defined period prior to the Special Meeting. MediQual
Stockholders should obtain current quotes for the Cardinal Common Shares.
EXCHANGE PROCEDURES
HOLDERS OF SHARES OF MEDIQUAL STOCK SHOULD NOT SEND IN THEIR MEDIQUAL STOCK
CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, a letter of transmittal
will be mailed to each holder of record of a certificate or certificates (the
"Certificates") which immediately prior to the Effective Time represented
outstanding shares of MediQual Stock whose shares were converted into the right
to receive Cardinal Common Shares. The letter of transmittal will specify that
delivery shall be effected, and risk of loss and title to the Certificate shall
pass, only upon delivery of the Certificate to the Exchange Agent and will be in
such form and contain such provisions, including waivers and releases of
liability, as Cardinal may reasonably specify. This letter of transmittal must
be used in forwarding Certificates for surrender in exchange for certificates
evidencing Cardinal Common Shares to which a holder of shares of MediQual Stock
prior to the Effective Time has become entitled and, if applicable, cash in lieu
of any fractional Cardinal Common Share. Such letter of transmittal will be
accompanied by instructions specifying other details of the exchange. After
receipt of such letter of transmittal, each holder of Certificates should
surrender such Certificates to the Exchange Agent for the Merger, pursuant to
and in accordance with the instructions accompanying such letter of transmittal,
and each such holder will receive in exchange therefor a certificate evidencing
the whole number of Cardinal Common Shares to which he is entitled (but
excluding, for each MediQual Stockholder, such Stockholder's proportionate share
of the Retained Shares held in escrow, see "The Merger Agreement -- Escrow
Agreement; Indemnification"), and a check representing the amount of cash
payable in lieu of any fractional Cardinal Common Share, if any, and unpaid
dividends and distributions, if any, which such holder has the right to receive
pursuant to the Merger Agreement, after giving effect to any required
withholding tax. No interest will be paid or accrued on the cash in lieu of
fractional shares, if any, and unpaid dividends and distributions, if any,
payable to holders of Certificates. Certificates surrendered for exchange by any
person constituting an "affiliate" of MediQual for purposes of Rule 145(c) under
the Securities Act shall not be exchanged until Cardinal has received an
executed Affiliate Letter from such person as prescribed under the Merger
Agreement.
After the Effective Time, each Certificate, until so surrendered and
exchanged, will be deemed, for all purposes, to represent only the right to
receive upon surrender a certificate representing Cardinal Common Shares and
cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, as provided above. The holder of such unexchanged
Certificates will not be entitled to receive any dividends or other
distributions declared or made by Cardinal having a record date on or after the
Effective Time until the Certificate is surrendered. Subject to applicable laws,
upon surrender of such unexchanged Certificates, such dividends and
distributions, if any, will be paid without interest and less the amount of any
withholding taxes which may be required thereon.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Merger Agreement contains various representations, warranties and
covenants of Cardinal, Subcorp and MediQual. The representations and warranties
made by the parties in the Merger Agreement will survive the Effective Time and
will terminate on the earlier of (i) the date on which Cardinal's audited
financial
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statements for the first fiscal year ending after the Effective Time are issued
and (ii) the one-year anniversary of the Effective Time. Six and one half
percent of the Cardinal Common Shares otherwise issuable to the MediQual
Stockholders in the Merger will be deposited into escrow to provide for the
payment of the indemnification obligations of the MediQual Stockholders arising
from any inaccuracy in or breach of the representations and warranties made by
MediQual in the Merger Agreement and to provide for the payment of the expenses
of the MediQual Stockholders Representative under the Escrow Agreement. See "The
Merger Agreement -- Escrow Agreement; Indemnification."
Pursuant to the Merger Agreement, each of Cardinal and MediQual has agreed
that it will (i) use its reasonable efforts to take all action and to do all
things necessary, proper or advisable to consummate the Merger and the
transactions contemplated by the Merger Agreement (including, without
limitation, satisfying their respective conditions precedent to the Merger and
preparing, executing and delivering such further instruments and taking or
causing to be taken such other and further action as either party shall
reasonably request); (ii) file any Notification and Report Forms and related
materials required to be filed with the FTC and the Antitrust Division under the
HSR Act with respect to the Merger, although the parties have concluded that no
such filings are required; (iii) use its reasonable efforts to take any
additional action that may be necessary, proper or advisable in connection with
any other notices to, filings with, and authorizations, consents and approvals
of any governmental authority that it may be required to give, make or obtain;
(iv) use its best efforts to cause the Merger to qualify for
pooling-of-interests accounting treatment for financial reporting purposes,
including, without limitation, appropriate representation letters to Cardinal's
accountants; (v) use all reasonable efforts to cause the Merger to constitute a
tax-free "reorganization" under Section 368(a) of the Code; and (vi) unless
otherwise required by applicable laws or requirements of the NYSE (and in that
event only if time does not permit), at all times prior to the earlier of the
Effective Time or termination of the Merger Agreement pursuant to the terms of
the Agreement, consult with the other before issuing any press release with
respect to the Merger and not issue any such press release prior to such
consultation.
Cardinal has agreed in the Merger Agreement (i) to prepare and file with
the Commission the Registration Statement of which this Proxy
Statement/Prospectus is a part (the "Registration Statement") as soon as is
reasonably practicable and use all reasonable efforts to have the Registration
Statement declared effective by the Commission, to advise MediQual in writing
if, at any time prior to the Effective Time, Cardinal shall have obtained
knowledge of any information pertaining to Cardinal contained in or omitted from
the Registration Statement that would require an amendment or supplement to the
Registration Statement or this Proxy Statement/Prospectus and to promptly take
such action as shall be required to amend or supplement the Registration
Statement and to maintain the effectiveness of the Registration Statement
through the Effective Time, to take such other reasonable actions (other than
qualifying to do business in any jurisdiction in which it is not so qualified)
required to be taken under any applicable state securities laws in connection
with the issuance of Cardinal Common Shares in the Merger; (ii) to give prompt
notice to MediQual of (x) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would cause any Cardinal or Subcorp
representation or warranty contained in the Merger Agreement to be untrue or
inaccurate at or prior to the Effective Time and (y) any material failure of
Cardinal to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under the Merger Agreement; (iii) to use its
reasonable efforts to cause the Cardinal Common Shares issuable pursuant to the
Merger to be approved for listing on the NYSE, subject to official notice of
issuance prior to the Effective Time; and (iv) from and after the Effective
Time, to cause MediQual as the corporation surviving the Merger to indemnify and
hold harmless the present and former officers and directors of MediQual in
respect of acts or omissions occurring prior to the Effective Time to the extent
provided under the MediQual Certificate and MediQual By-laws in effect on the
date of the Merger Agreement and use its reasonable efforts to cause MediQual to
maintain in effect for not less than one year after the Effective Time, the
policies of directors' and officers' liability insurance of MediQual in effect
on the date of the Merger Agreement with respect to matters occurring prior to
the Effective Time. However, MediQual may substitute therefor policies
containing terms and conditions which are no less advantageous to covered
officers and directors and MediQual shall not be required to pay a premium for
such insurance in excess of $18,000, but in such case shall purchase as much
insurance as possible for such $18,000.
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MediQual covenants in the Merger Agreement (i) to take all action in
accordance with state and federal securities laws, the Delaware General
Corporation Law ("DGCL") and the MediQual Certificate and MediQual By-laws
reasonably necessary to obtain the consent and approval of MediQual Stockholders
with respect to the Merger, the Merger Agreement and the transactions
contemplated thereby on the earliest practicable date; (ii) (A) to promptly
furnish Cardinal with all information concerning MediQual as may be required for
inclusion in the Registration Statement, (B) to cooperate with Cardinal in the
preparation of the Registration Statement in a timely fashion and use all
reasonable efforts to assist Cardinal in having the Registration Statement
declared effective by the Commission as promptly as practicable, (C) if at any
time prior to the Effective Time, any information pertaining to MediQual
contained in or omitted from the Registration Statement makes such statements
contained in the Registration Statement false or misleading, to promptly so
inform Cardinal and provide Cardinal with the information necessary to make
statements contained therein not materially false and misleading, (D) to use all
reasonable efforts to cooperate with Cardinal in the preparation and filing of
the Registration Statement and this Proxy Statement/Prospectus with the
Commission, and (E) to use all reasonable efforts to mail at the earliest
practicable date to MediQual Stockholders this Proxy Statement/Prospectus, which
shall include all information required under applicable law to be furnished to
MediQual Stockholders in connection with the Merger and the transactions
contemplated thereby and shall include the recommendation of the MediQual Board
in favor of the Merger; (iii) during the period from the date of the Merger
Agreement to the Effective Time, to conduct its operations in the ordinary
course except as expressly contemplated by the Merger Agreement and the
transactions contemplated thereby and use its reasonable efforts to maintain and
preserve its business organization and its material rights and franchises and to
retain the services of its officers and key employees and maintain relationships
with customers, suppliers, lessees, licensees and other third parties, and to
maintain all of its operating assets in their current condition (normal wear and
tear excepted), to the end that their goodwill and ongoing business shall not be
impaired in any material respect; (iv) to use all reasonable efforts to preserve
its ownership rights to its intellectual property free and clear of any liens,
claims or encumbrances (other than those that exist on the date of the Merger
Agreement as referenced in MediQual's disclosure schedule to the Merger
Agreement) and to use all reasonable efforts to assert, contest and prosecute
any infringement of any issued foreign or domestic patent, trademark, service
mark, or copyright owned by MediQual or any misappropriation or disclosure of
any material trade secret, confidential information or know-how that forms a
part of its intellectual property; (v) to use all reasonable efforts to cause
each such person who may be at the Effective Time or was on the date of the
Merger Agreement an "affiliate" of MediQual for purposes of Rule 145 under the
Securities Act, to execute and deliver to Cardinal no less than 45 days prior to
the date of the Special Meeting, the written undertakings set forth in an
exhibit to the Merger Agreement, and on or prior to such date, with the advice
of its outside counsel, to provide Cardinal with a letter specifying all of the
persons or entities who may be deemed to be "affiliates" of MediQual as provided
above; (vi) to permit representatives of Cardinal to have appropriate access at
all reasonable times to MediQual's premises, properties, books, records,
contracts, tax records, documents, customers and suppliers; (vii) to give prompt
notice to Cardinal of (x) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would cause any MediQual representation or
warranty contained in the Merger Agreement to be materially untrue or inaccurate
at or prior to the Effective Time and (y) any material failure of MediQual to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it thereunder; (viii) to use all reasonable efforts to cause
certain employees of MediQual to enter into employment agreements with MediQual
substantially in the form attached as an exhibit to the MediQual disclosure
schedule; (ix) to use all reasonable efforts to cause as of or prior to Closing
the termination of, and the waiver or satisfaction of all remaining obligations
or liabilities, contingent or otherwise, of MediQual under, certain agreements
listed on the MediQual disclosure schedule; (x) use all reasonable efforts to
cause to be exercised, immediately prior to the Closing, and to satisfy in full
all of MediQual's obligations under, all warrants to purchase MediQual Common
Stock which may then remain issued and outstanding; (xi) to cause the committee
which is currently administering MediQual's 1996 Stock Incentive Plan (A) not to
cause the voluntary Acceleration (as defined in such Plan) of any MediQual
Option which is outstanding immediately prior to the Closing and (B) to make the
determination pursuant to the Plan that the Cardinal Exchange Options into which
such outstanding MediQual Options are converted at the Effective Time shall be
deemed to be "comparable options" for purposes of the Plan; (xii) that
Cardinal's and Subcorp's remedies at law for
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any violation or attempted violation of any of MediQual's obligations under that
portion of the Merger Agreement setting forth the covenants of the parties
thereto would be inadequate, and that in the event of any such violation or
attempted violation, Cardinal and Subcorp (or either of them) will be entitled
to a temporary restraining order, temporary and permanent injunctions, and other
equitable relief, without the necessity of posting any bond or proving any
actual damage, in addition to all other rights and remedies which may be
available to Cardinal and Subcorp from time to time.
MediQual also covenants in the Merger Agreement that, during the period
from the date of the Merger Agreement to the Effective Time, MediQual will not,
except as otherwise expressly contemplated by the Merger Agreement and the
transactions contemplated thereby (including the schedules thereto), without the
prior written consent of Cardinal: (i) do or effect any of the following actions
with respect to its securities: (A) adjust, split, combine or reclassify its
capital stock, (B) make, declare or pay any dividend or distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or exchangeable
for any shares of its capital stock, (C) grant any person any right or option to
acquire any shares of its capital stock, (D) issue, deliver or sell or agree to
issue, deliver or sell any additional shares of its capital stock or any
securities or obligations convertible into or exchangeable or exercisable for
any shares of its capital stock or such securities (except pursuant to the
exercise of outstanding options to purchase MediQual Common Stock), or (E) enter
into any agreement, understanding or arrangement with respect to the sale or
voting of its capital stock; (ii) directly or indirectly sell, transfer, lease,
pledge, mortgage, encumber or otherwise dispose of any of its material property
or assets other than licensing of its intellectual property made in the ordinary
course of business; (iii) make or propose any changes in the MediQual
Certificate or MediQual By-laws; (iv) merge or consolidate with any other person
or acquire a material amount of assets or capital stock of any other person or
enter into any confidentiality agreement with any person; (v) incur, create,
assume or otherwise become liable for any indebtedness for borrowed money or
assume, guarantee, endorse or otherwise as an accommodation become responsible
or liable for the obligations of any other individual, corporation or other
entity, other than in the ordinary course of business, consistent with past
practice not in excess of $100,000 in the aggregate; (vi) create any
subsidiaries; (vii) enter into or modify any employment, severance, termination
or similar agreements or arrangements with, or grant any bonuses, salary
increases, severance or termination pay to, any officer, director, consultant or
employee or otherwise increase the compensation or benefits provided to any
officer, director, consultant or employee other than salary increases granted in
the ordinary course of business consistent with past practice to employees who
are not officers or directors of MediQual, and except as may be required by
applicable law or a binding written contract in effect on the date of the Merger
Agreement; (viii) enter into, adopt or amend any employee benefit or similar
plan; (ix) change its method of doing business or change any method or principle
of accounting in a manner that is inconsistent with past practice; (x) settle
any suit, claim, action, proceeding or investigation, whether pending as of the
date of the Merger Agreement or thereafter made or brought involving an amount
in excess of $25,000; (xi) write up, write down or write off the book value of
any assets, individually or in the aggregate, in excess of $100,000 except for
depreciation and amortization in accordance with generally accepted accounting
principles consistently applied; (xii) modify, amend or terminate, or waive,
release or assign any material rights or claims with respect to, any contract
set forth in the MediQual disclosure schedule, any other material contract to
which MediQual is a party or any confidentiality agreement to which MediQual is
a party; (xiii) incur or commit to any capital expenditures, obligations or
liabilities in respect thereof which in the aggregate exceed or would exceed
$50,000; (xiv) make any material changes or modifications to any pricing policy
or investment policy or enter into any new management agreements or leases on
terms different from those in effect in the ordinary and usual course of
business, consistent with past practice; (xv) pay (or agree to become obligated
to pay) any fees and expenses to attorneys, accountants and investment bankers
in connection with the Merger in excess of the amount set forth in the Merger
Agreement; (xvi) take any action to exempt or make not subject to any other
state takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares, any person or entity
(other than Cardinal or its subsidiaries) or any action taken thereby, which
person, entity or action would have otherwise been subject to the restrictive
provisions thereof and not exempt therefrom; (xvii) take any action that could
result in MediQual's representations and warranties set forth in the Merger
Agreement becoming false or inaccurate; (xviii) enter into or carry out any
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other transaction other than in the ordinary and usual course of business; (xix)
permit or cause any subsidiary to do any of the foregoing or agree or commit to
do any of the foregoing; or (xx) agree in writing or otherwise to take any of
the foregoing actions.
NO NEGOTIATIONS OR SOLICITATIONS
Pursuant to the Merger Agreement, MediQual has agreed that, during the term
of the Merger Agreement, it will not, and will not authorize or permit any of
its subsidiaries or any of its or its subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly solicit,
initiate, encourage or facilitate, or furnish or disclose non-public information
in furtherance of, any inquiries or the making of any proposal with respect to
any Competing Transaction, or negotiate, explore or otherwise engage in
discussions with any person (other than Cardinal, Subcorp or their respective
directors, officers, employees, agents and representatives) with respect to any
Competing Transaction or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or any other
transactions contemplated by the Merger Agreement. Further, pursuant to the
Merger Agreement, neither the Board of Directors of MediQual nor any committee
thereof will (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to Cardinal, the MediQual board recommendation in favor of
the Merger, (ii) approve or recommend, or propose publicly to approve or
recommend, any Competing Transaction, or (iii) cause MediQual to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement related to any Competing Transaction, or proposal for a Competing
Transaction. MediQual has also agreed under the Merger Agreement, from and after
the execution of the Merger Agreement, to immediately advise Cardinal in writing
of the receipt, directly or indirectly, of any inquiries, discussions,
negotiations, or proposals relating to a Competing Transaction (including the
specific terms thereof and the identity of the other party or parties involved)
and to promptly furnish to Cardinal a copy of any such proposal or inquiry in
addition to any information provided to or by any third party relating thereto.
CONDITIONS
The obligations of Cardinal and MediQual to consummate the Merger are
subject to fulfillment of the following conditions, among others: (i) no
temporary restraining order, preliminary or permanent injunction or other order
or decree which prevents the consummation of the Merger shall have been issued
and remain in effect, and no statute, rule or regulation shall have been enacted
by any governmental authority which prevents the consummation of the Merger;
(ii) all waiting periods applicable to the consummation of the Merger under the
HSR Act shall have expired or been terminated; (iii) the Merger and the
transactions contemplated by the Merger Agreement shall have been approved by
the MediQual Stockholders in the manner required by any applicable law and by
the MediQual Certificate and the MediQual By-laws; (iv) the Commission shall
have declared the Registration Statement effective, and on the Closing Date and
at the Effective Time, no stop order or similar restraining order prohibiting
the Merger shall have been threatened by the Commission or entered by the
Commission or any state securities administrator; and (v) no Action shall be
instituted by any governmental authority which seeks to prevent consummation of
the Merger or seeking material damages in connection with the transactions
contemplated by the Merger Agreement which continues to be outstanding.
The obligations of MediQual to consummate the Merger and the transactions
contemplated by the Merger Agreement are further subject to the receipt of
certain closing certificates and a legal opinion and fulfillment of the
following conditions: (i) the representations and warranties of each of Cardinal
and Subcorp shall be true and correct in all material respects on the date of
the Merger Agreement and on and as of the Closing Date (except for those made as
of a specified date); (ii) each of Cardinal and Subcorp shall have performed in
all material respects each obligation and agreement and shall have complied in
all material respects with each covenant to be performed and complied with by it
under the Merger Agreement at or prior to the Effective Time; and (iii) the
Cardinal Common Shares to be issued in the Merger shall have been authorized for
inclusion on the NYSE, subject to official notice of issuance.
The obligations of Cardinal and Subcorp to consummate the Merger and the
other transactions contemplated by the Merger Agreement are further subject to
the receipt of certain closing certificates and a
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legal opinion and fulfillment of the following conditions: (i) the
representations and warranties of MediQual shall be true and correct in all
material respects on the date of the Merger Agreement and on and as of the
Closing Date (except for those made as of a specified date); (ii) MediQual shall
have performed in all material respects each obligation and agreement and shall
have complied in all material respects with each covenant to be performed and
complied with by it under the Merger Agreement at or prior to the Effective
Time; (iii) Cardinal shall have received letters at the Effective Time, in form
and substance reasonably satisfactory to Cardinal, from Deloitte & Touche LLP
and Arthur Andersen LLP, stating that the Merger will qualify as a
pooling-of-interests transaction under Opinion 16 of the Accounting Principles
Board; (iv) each person who may be at the Effective Time or was on the date of
the Merger Agreement an "affiliate" of MediQual for purposes of Rule 145 under
the Securities Act shall have executed and delivered to Cardinal at least 45
days prior to the date of the Special Meeting the written undertakings in the
form attached as an exhibit to the Merger Agreement; (v) there shall not have
been a breach of any obligation by any MediQual Stockholder who has entered into
a Support/Voting Agreement; (vi) MediQual shall have received all material
customer, vendor, lessee, licensee, licensor and other third party consents and
approvals required because of the Merger Agreement or the transactions
contemplated by the Merger Agreement; (vii) MediQual, Cardinal, the MediQual
Stockholders Representative and the Escrow Agent shall have executed and
delivered the Escrow Agreement; (viii) MediQual shall not have received notice
from the holder or holders of more than 5%, on a fully diluted common stock
basis, of MediQual Dissenting Stock (as defined in the Merger Agreement) issued
and outstanding on the record date for the determination of MediQual
Stockholders entitled to vote on the Merger that such holders have exercised or
intend to exercise their appraisal rights under Section 262 of the DGCL; (ix)
the book value of MediQual reflected in the most recent Interim Statement (as
defined in the Merger Agreement) shall not be less than the sum of (A)
$3,087,658; and (B) $275,000 for each additional month reflected in the Interim
Statements since April 30, 1997 and a pro rata portion of $275,000 for any
partial month ending on the day prior to the Closing (for purposes of this
condition, book value shall include the MediQual Common Stock and all classes of
MediQual Preferred Stock); (x) the employment agreements referenced in the
Merger Agreement shall have been entered into and shall be in full force and
effect according to their terms as of the Closing; (xi) as of or prior to the
Closing, the certain agreements listed in the Merger Agreement shall have been
effectively terminated and all of MediQual's obligations and liabilities,
contingent or otherwise, under such agreements shall have been satisfied or
irrevocably waived by the other parties thereto; (xii) warrants to purchase at
least 95% of the MediQual Common Stock which is issuable upon the exercise of
all warrants to purchase MediQual Common Stock outstanding on the date of the
Merger Agreement shall have been (A) exercised effective as of or prior to the
Effective Time or (B) duly surrendered in exchange for warrants (in form and
substance reasonably satisfactory to Cardinal with an exercise price equal to
the quotient obtained by dividing the current exercise price of $.80 by the
Common Equivalent Exchange Ratio) to purchase a number of Cardinal Common Shares
equal to the product of (x) the number of shares of MediQual Common Stock
issuable upon the exercise of the warrants being surrendered and (y) the Common
Equivalent Exchange Ratio; provided, however, that this condition will not have
been satisfied if any holder of warrants to purchase MediQual Common Stock who
does not exercise or surrender warrants pursuant to clause (A) or (B) above has
advised MediQual, in writing or otherwise, that such holder will not so exercise
or surrender all of such holder's warrants; (xiii) the ongoing relationship and
economic terms of the Letter Agreement between MediQual and the American Society
of Health-System Pharmacists ("ASHSP") dated July 7, 1995 shall have been
ratified by ASHSP on terms and conditions satisfactory to Cardinal in its
reasonable discretion; provided, that Cardinal shall have rights under this
condition only if Cardinal uses all reasonable efforts to obtain such
ratification by the required time.
MEDIQUAL STOCK OPTIONS
Cardinal and MediQual covenant in the Merger Agreement to take all such
actions as may be necessary to cause unexpired and unexercised MediQual Options
granted by Mediqual to current or former directors, officers, key employees of
MediQual (or others) to be automatically converted at the Effective Time into
Cardinal Exchange Options. See "The Merger -- Interests of Certain Persons in
the Merger--MediQual Options." Cardinal further covenants to use its reasonable
efforts to file with the Commission, within 45 days after the Closing Date, a
registration statement on Form S-8 or other appropriate form under the
Securities
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Act to register the Cardinal Common Shares issuable upon exercise of the
Cardinal Exchange Options and to use its reasonable efforts to cause such
registration statement to remain effective until the exercise or expiration of
such options.
MEDIQUAL WARRANTS
Prior to the Effective Time, MediQual is required to use all reasonable
efforts to cause to be exercised, immediately prior to the Closing and to
satisfy in full all of MediQual's obligations under, all warrants to purchase
MediQual Common Stock which may then remain issued and outstanding. As described
more fully under "The Merger Agreement -- Escrow Agreement; Indemnification,"
6.5% of the aggregate number of Cardinal Common Shares which would otherwise be
issuable to holders of MediQual Stock (including MediQual Stock issued upon
exercise of MediQual Warrants) on the Closing Date will be deposited in an
Escrow Fund.
In addition, it is a condition to Cardinal's obligation to consummate the
Merger and the transactions contemplated by the Merger Agreement that warrants
to purchase at least 95% of the MediQual Common Stock which is issuable upon the
exercise of all MediQual Warrants outstanding on the date of the Merger
Agreement shall have been (A) exercised effective as of or prior to the
Effective Time or (B) duly surrendered in exchange for Cardinal Warrants (in
form and substance reasonably satisfactory to Cardinal with an exercise price
equal to the quotient obtained by dividing the current exercise price of $.80 by
the Common Equivalent Exchange Ratio) to purchase a number of Cardinal Common
Shares equal to the product of (x) the number of shares of MediQual Common Stock
issuable upon the exercise of the MediQual Warrants being surrendered and (y)
the Common Equivalent Exchange Ratio; provided however, that this condition will
not have been satisfied if any holder of MediQual Warrants who does not exercise
or surrender MediQual Warrants pursuant to clause (A) or (B) above has advised
MediQual, in writing or otherwise, that such holder will not surrender or
exercise all of such holder's MediQual Warrants. The form of the Cardinal
Warrant, which is filed as an exhibit to the Registration Statement of which
this Proxy Statement/Prospectus is a part, provides that the Cardinal Warrants
may not be exercised after the Effective Time except pursuant to an effective
registration statement under the Securities Act or upon receipt by Cardinal of
an opinion of counsel satisfactory to Cardinal that the issuance of Cardinal
Common Shares upon exercise of the warrants is not in violation of the
registration requirements of the Securities Act or any applicable state
securities law. Cardinal is under no obligation to file, and does not intend to
file, a registration statement covering the issuance of Cardinal Common Shares
upon the exercise of Cardinal Warrants. Accordingly, the Cardinal Warrants will
only be exercisable following the Effective Time if the holder delivers a legal
opinion to Cardinal reasonably satisfactory to Cardinal to the effect that the
issuance of Cardinal Common Shares upon such exercise will be exempt from the
registration requirements of the Securities Act. See "The Merger -- Federal
Securities Law Consequences."
ESCROW AGREEMENT; INDEMNIFICATION
Pursuant to the Merger Agreement, the MediQual Stockholders are required to
indemnify and hold harmless Cardinal from and against any and all losses
suffered by Cardinal as a result of or arising from any inaccuracy in or breach
or nonfulfillment of any of the representations and warranties made by MediQual
in the Merger Agreement or in certain related agreements. Similarly, Cardinal
has agreed in the Merger Agreement to indemnify and hold harmless the MediQual
Stockholders from and against any losses incurred by Mediqual or the MediQual
Stockholders arising from any inaccuracy in or breach or nonfulfillment of any
of the representations and warranties made by Cardinal in the Merger Agreement.
For purposes of indemnification, all losses will be computed net of any
insurance coverage or tax benefit which reduces the losses that would otherwise
be sustained; provided that in all cases the timing of the receipt of
realization of insurance proceeds will be taken into account in determining the
amount of reduction of losses. Cardinal will be deemed to have suffered losses
arising out of or resulting from the matters referred to herein if the same will
be suffered by any parent, subsidiary or affiliate of Cardinal, including
without limitation MediQual after the Effective Time. Cardinal is not entitled
to indemnification from the MediQual Stockholders unless the aggregate amount of
losses for which indemnification may be sought exceeds $100,000, in which case
Cardinal shall be entitled to indemnification for all losses in excess of that
amount up to the amount of the value of the
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Escrow Fund available for such indemnification. Neither MediQual nor the
MediQual Stockholders will be entitled to indemnification unless the aggregate
amount of all losses for which indemnification may be sought by MediQual or the
MediQual Stockholders exceeds $100,000, in which case MediQual or the MediQual
Stockholders will be entitled to indemnification for all losses in excess of
such amount up to the amount of $1.8 million. The indemnification obligations
set forth in the Merger Agreement will terminate on the earlier of (i) the date
on which Cardinal's audited financial statements for the first fiscal year
ending after the Effective Time are issued and (ii) the one-year anniversary of
the Effective Time (such earlier date being hereafter referred to as the
"Release Date").
Pursuant to the Merger Agreement, the Retained Shares, defined in the
Merger Agreement as a number of Cardinal Common Shares equal to 6.5% of the
aggregate number of Cardinal Common Shares which would be issuable to MediQual
Stockholders on the Closing Date if Cardinal Common Shares were not to be issued
into escrow pursuant to the Merger Agreement, will be deposited in escrow with
the Escrow Agent. The Escrow Agreement will be entered into on the Closing Date,
by and among Cardinal, MediQual, the Stockholders Representative and the Escrow
Agent. The Escrow Agreement will be in a form previously agreed to by the
parties and filed as an exhibit to the Registration Statement of which this
Proxy Statement/Prospectus is a part. The Escrow Fund created by the Escrow
Agreement is for the purpose of providing for the payment of the indemnification
obligations of the MediQual Stockholders pursuant to the Merger Agreement and
providing for the payment of the expenses of the MediQual Stockholders
Representative incurred in such capacity. That number of the Retained Shares
equal to 6% of the aggregate number of Cardinal Common Shares which would be
issuable to MediQual Stockholders on the Closing Date (including all of the
Retained Shares) will be available to reimburse Cardinal for any damages
asserted against, resulting to, imposed upon, or incurred or suffered by
Cardinal, directly or indirectly, as a result of or arising from any inaccuracy
in or breach or nonfulfillment of any of the representations and warranties made
by MediQual in the Merger Agreement or any additional documents related to the
Merger Agreement, subject to certain limitations set forth therein
(collectively, "Indemnifiable Claims"). That number of the Retained Shares equal
to 0.5% of the aggregate number of Cardinal Common Shares which would be
issuable to MediQual Stockholders on the Closing Date (including all of the
Retained Shares), and any other Retained Shares which are not subject to
Indemnifiable Claims at the Release Date, shall be available to the MediQual
Stockholders Representative to cover the expenses incurred by the MediQual
Stockholders Representative in serving in such capacity. The Retained Shares are
to be released from escrow to the MediQual Stockholders on the Release Date.
However, if Cardinal makes any claims against the Retained Shares prior to the
Release Date, a number of Retained Shares sufficient to satisfy the claims, if
available, will remain in escrow together with that number of Retained Shares,
if available, that the MediQual Stockholders Representative deems necessary to
cover the expenses of such MediQual Stockholders Representative, until the
resolution of such claim pursuant to the procedures provided in the Escrow
Agreement and the Merger Agreement.
By virtue of the approval and adoption of the Merger Agreement at the
Special Meeting, the MediQual Stockholders will be irrevocably appointing Eric
A. Kriss, the President and a director of MediQual, as the MediQual Stockholders
Representative with respect to all matters relating to the Escrow Agreement and
the indemnification obligations of the MediQual Stockholders following the
Effective Time, including responding to, defending against, agreeing to or
settling claims by Cardinal for indemnification under Article VIII of the Merger
Agreement. Cardinal and the Escrow Agent will have the right to deal exclusively
with the MediQual Stockholders Representative with respect to all matters
arising under the Escrow Agreement. The MediQual Stockholders Representative
shall be entitled to reimbursements from the allocated portion of the Retained
Shares for all reasonable expenses, disbursements and advances (including fees
and disbursements of its counsel, experts and other agents and consultants)
incurred by the MediQual Stockholders Representative in such capacity, and for
indemnification against any loss, liability or expenses arising out of actions
taken or omitted to be taken in its capacity as the MediQual Stockholders
Representative (except for those arising out of the MediQual Stockholders
Representative's gross negligence or willful misconduct), including the costs
and expenses of investigation and defense of claims.
The MediQual Stockholders Representative, on behalf of the MediQual
Stockholders, will have the right to direct the Escrow Agent in a writing signed
by the MediQual Stockholders Representative to exercise the voting rights
pertaining to all or a portion of the Retained Shares. In the absence of
directions, the Escrow
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Agent will vote all of the Retained Shares in accordance with the
recommendations of management of Cardinal. Each MediQual Stockholder will have
the right to receive any dividend or distribution on such stockholder's
proportionate share of the Retained Shares to be delivered concurrently with the
delivery of such stockholder's respective portion of the Retained Shares.
Cardinal's sole remedy for an indemnification claim against the MediQual
Shareholders will be a claim against the Retained Shares held pursuant to the
terms and conditions of the Escrow Agreement. To the extent that the Escrow
Agent distributes any of the Escrow Deposit to the MediQual Stockholders or to
the extent that Cardinal makes an Indemnifiable Claim against the Retained
Shares, and such claim is paid in shares of Cardinal Common Shares, then for the
purposes of such distribution or payment, the shares of Cardinal Common Shares
will have a value equal to the last reported sale price of Cardinal Common
Shares on the NYSE on the trading day immediately preceding the Closing Date
(subject to equitable adjustment for stock splits, reclassifications,
combinations, reorganizations or other similar changes). To the extent that the
Escrow Agent distributes any of the Escrow Deposit to the MediQual Stockholders
Representative, and such claim is paid in Cardinal Common Shares, then for
purposes of such payment, Cardinal Common Shares will have a value equal to the
last reported sale price of Cardinal Common Shares on the trading day
immediately preceding the date of distribution.
TERMINATION; EFFECT OF TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval and adoption of the Merger Agreement by
MediQual Stockholders, (i) by mutual consent of Cardinal and MediQual; (ii) by
either Cardinal or MediQual if any permanent injunction or other order of a
court or other competent governmental authority preventing the consummation of
the Merger becomes final and nonappealable; (iii) by either Cardinal or MediQual
if the Merger is not consummated before November 30, 1997, unless that deadline
is extended by the Boards of Directors of both Cardinal and MediQual (provided
that a party shall not have a right to so terminate the Merger Agreement if such
party's failure or such party's affiliate's failure to perform any material
covenant or obligation under the Merger Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date); (iv) by
Cardinal if the MediQual Board of Directors shall withdraw, modify or change its
recommendation in favor of the Merger in a manner adverse to Cardinal, or if the
MediQual Board shall have refused to affirm such recommendation within two
business days of any written request from Cardinal; (v) by MediQual if the
Cardinal Board of Directors shall withdraw, modify or change its approval of the
Merger Agreement and the transactions related to the Merger Agreement or if the
Cardinal Board shall have refused to affirm such approval within two business
days of any written request from MediQual; (vi) by MediQual or Cardinal, no
earlier than the fifth trading day or later than the third full trading day
immediately preceding the date of the Special Meeting, if the Average Share
Price is less than $46.75, provided that MediQual will have no right to
terminate pursuant to this clause (vi) unless (x) MediQual shall have given,
during the three trading day period referred to above, one full trading day's
prior written notice of its intention to terminate pursuant to this clause (vi)
and (y) Cardinal during such one full trading day notice period shall not have
made an Adjustment Election; (vii) by Cardinal if any party breaches such
party's obligations under the applicable Support/Voting Agreement; (viii) by
MediQual or Cardinal, no earlier than the fifth trading day or later than the
second full trading day immediately preceding the date of the Special Meeting,
if the Average Share Price is less than $44.00; or by Cardinal if at any time
the representations and warranties of MediQual shall not be true and correct or
Cardinal shall have been advised that the condition that Cardinal receive
letters from Deloitte & Touche LLP and Arthur Andersen LLP stating that the
Merger will qualify as a pooling-of-interests transaction under Opinion 16 of
the Accounting Principles Board cannot be satisfied.
The Merger Agreement provides that if the Merger Agreement is terminated
and it is judicially determined that termination was caused by an intentional
breach of the Merger Agreement, then in addition to other remedies at law or
equity for breach of the Merger Agreement, the breaching party shall indemnify
and hold harmless the other parties thereto for their respective reasonable
costs, fees and expenses of their counsel and accountants, as well as fees and
expenses incident to negotiation, preparation and execution of the Merger
Agreement and related documentation and shall pay to the terminating party or
parties a termination fee equal to $1,250,000, which payments will constitute
the terminating party's sole and exclusive remedy with respect to such breach.
If the Merger Agreement is terminated for any of the reasons set forth in the
preceding
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paragraph, the Merger Agreement (other than (i) the provisions of the Letter
Agreement dated April 2, 1997 between Cardinal and Smith Barney on behalf of
MediQual relating to confidentiality; (ii) the remedies provided in the Merger
Agreement for an intentional breach as described above; and (iii) the provisions
of the Merger Agreement providing for the payment of costs and expenses under
the Merger Agreement by the party incurring such expenses (other than those
expenses incurred in connection with filing, printing and mailing the
Registration Statement and the Proxy Statement/Prospectus)) shall become void
and have no effect, without any liability on the part of any party or its
directors, officers or stockholders.
AMENDMENT AND WAIVER
The Merger Agreement may be amended in writing by each of the parties to
the Merger Agreement by action taken or authorized by their respective Boards of
Directors at any time before or after adoption of the Merger Agreement by
MediQual Stockholders; but after any such approval, no amendment shall be made
which by law requires further approval or authorization by MediQual Stockholders
without such further approval or authorization.
At any time prior to the Effective Time, Cardinal (with respect to
MediQual) and MediQual (with respect to Cardinal and Subcorp) by action taken or
authorized by their respective Boards of Directors may, to the extent legally
allowed, (i) extend the time for performance of any of the obligations or other
acts of such party, (ii) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or any document delivered pursuant
thereto, and (iii) waive compliance with any of the agreements or conditions
contained therein; provided that such waiver or extension is set forth in a
written instrument signed on behalf of such party.
EXPENSES
Except as otherwise provided in the Merger Agreement, Cardinal and MediQual
will pay their own costs and expenses associated with the transactions
contemplated by the Merger Agreement, except that those expenses incurred in
connection with filing, printing and mailing the Registration Statement and this
Proxy Statement/Prospectus (including filing fees related thereto) will be
shared equally by Cardinal and MediQual.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of MediQual who follow the procedures specified in Section 262
of the Delaware General Corporation Law ("Section 262") will be entitled to have
their shares of MediQual Common Stock, Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock appraised by the Delaware Court of
Chancery and to receive payment of the "fair value" of such shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, as determined by such Court. In order to take advantage of such rights
the procedures set forth in Section 262 must be strictly complied with. Failure
to follow any of such procedures may result in a termination or waiver of
appraisal rights under Section 262.
The following discussion of the provisions of Section 262 is not intended
to be a complete statement of its provisions and is qualified in its entirety by
reference to the full text of that section, a copy of which is attached as Annex
B to this Proxy Statement/Prospectus.
Under Section 262, a stockholder of MediQual electing to exercise appraisal
rights must both:
(1) deliver to MediQual, before the taking of the vote on the proposal
relating to the Merger Agreement, a written demand for appraisal of his
shares which reasonably informs MediQual of the identity of the
stockholder of record and that such record stockholder intends thereby
to demand the appraisal of his shares of MediQual capital stock. This
written demand is in addition to and separate from any proxy or vote
against the proposal relating to the Merger Agreement. Neither a vote
against the proposal relating to the Merger nor a proxy directing such
a vote shall satisfy the requirement that a written demand for
appraisal be delivered to MediQual before the vote on the proposal
relating to the Merger Agreement. Such written demand for appraisal
should be delivered either in person to the Secretary of MediQual at
the Special Meeting before the vote on the proposal relating to the
Merger Agreement or in person or by mail (certified mail, return
receipt requested, being the
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recommended form of transmittal) to Eric A. Kriss, Secretary, MediQual
Systems, Inc., 1900 West Park Drive, Westborough, Massachusetts 01752,
prior to the Special Meeting, AND
(2) not vote in favor of or consent in writing to the proposal relating to
the Merger Agreement. A failure to vote against the proposal relating
to the Merger Agreement will not constitute a waiver of appraisal
rights. HOWEVER, ANY STOCKHOLDER WHO EXECUTES A PROXY AND WHO DESIRES
TO PERFECT HIS APPRAISAL RIGHTS MUST MARK THE PROXY "AGAINST" THE
PROPOSAL RELATING TO THE MERGER AGREEMENT because if the Proxy is left
blank, it will be voted for the proposal relating to the Merger
Agreement.
The written demand for appraisal must be made by or for the holder of
record of MediQual Stock registered in his name. Accordingly, such demand should
be executed by or for such stockholder of record, fully and correctly, as such
stockholder's name appears on his stock certificates. If the stock is owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in such capacity and if the stock is
owned of record by more than one person as in a joint tenancy or tenancy in
common, such demand should be executed by or for all joint owners. An authorized
agent, including one of two or more joint owners, may execute the demand for
appraisal for a stockholder of record. However, the agent must identify the
record owner or owners and expressly disclose the fact that in executing the
demand he is acting as agent for the record owner.
A record owner, such as a broker, who holds MediQual Stock as nominee for
others may exercise his right of appraisal with respect to the shares held for
all or less than all of the others. In such case the written demand should set
forth the number of shares covered by it. Where no number of shares is expressly
mentioned, the demand will be presumed to cover all shares standing in the name
of such record owner.
Within 10 days after the Effective Time, MediQual as the surviving
corporation in the Merger is required to, and will, notify each stockholder of
MediQual who has satisfied the foregoing conditions of the date on which the
Merger became effective. Within 120 days after such date, MediQual or any such
stockholder who has satisfied the foregoing conditions and is otherwise entitled
to appraisal rights under Section 262, may file a petition in the Delaware Court
of Chancery demanding a determination of the value of the shares of MediQual
capital stock held by all stockholders entitled to appraisal rights. If no such
petition is filed, appraisal rights will be lost for all stockholders who had
previously demanded appraisal of their shares. MediQual Stockholders seeking to
exercise appraisal rights should not assume that MediQual will file a petition
with respect to the appraisal of the value of their shares or that MediQual will
initiate any negotiations with respect to the "fair value" of such shares.
ACCORDINGLY, STOCKHOLDERS OF MEDIQUAL WHO WISH TO EXERCISE THEIR APPRAISAL
RIGHTS SHOULD REGARD IT AS THEIR OBLIGATION TO TAKE ALL STEPS NECESSARY TO
PERFECT THEIR APPRAISAL RIGHTS IN THE MANNER PRESCRIBED IN SECTION 262.
Within 120 days after the day of the Effective Time, any stockholder who
has complied with the provisions of Section 262 is entitled, upon written
request, to receive from MediQual a statement setting forth the aggregate number
of shares of MediQual capital stock not voted in favor of adoption of the Merger
Agreement and with respect to which demands for appraisal were received by
MediQual, and the number of holders of such shares. Such statement must be
mailed within 10 days after a written request therefor has been received by
MediQual or within 10 days after expiration of the time for delivery of demands
for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition the Delaware Court of Chancery will determine the stockholders of
MediQual entitled to appraisal rights and will appraise the value of the
MediQual capital stock owned by such stockholders, determining its "fair value"
exclusive of any element of value arising from the accomplishment or expectation
of the Merger. The Court will direct payment of the fair value of such shares
together with a fair rate of interest, if any, on such fair value to
stockholders entitled thereto upon surrender to MediQual of share certificates
representing such shares. Upon application of a stockholder, the Court may, in
its discretion, order that all or a portion of the expenses incurred by any
stockholder in connection with an appraisal proceeding, including without
limitation, reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all the shares entitled to appraisal.
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Although MediQual believes that the consideration per share to be paid in
the Merger is fair, it cannot make any representation as to the outcome of the
appraisal of fair value as determined by the Delaware Court of Chancery, and
stockholders should recognize that such an appraisal could result in a
determination of a lower, higher or equivalent value. Moreover, MediQual may or
may not argue in an appraisal proceeding for a determination of fair value by
the Delaware Court of Chancery which is lower than the consideration per share
in the Merger Agreement. In determining the fair value of the shares, the Court
is required to take into account all relevant factors. Therefore, such
determination could be based upon considerations in addition to the price paid
in the Merger, the market value of the shares, asset values and earning
capacity. In Weinberger v. UOP, Inc. et al. (decided February 1, 1983), the
Delaware Supreme Court stated with respect to Section 262, among other things,
that "proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
also be considered in an appraisal proceeding.
Any stockholder of MediQual who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, unless and until
he shall deliver a written withdrawal of his demand for appraisal within the
time period specified, be entitled to vote his shares for any purpose nor be
entitled to the payment of dividends or other distributions on his shares (other
than those payable to holders of record as of a date prior to the Effective
Time).
If no petition for an appraisal is filed within the time provided, or if a
stockholder of MediQual delivers to MediQual a written withdrawal of his demand
for an appraisal and an acceptance of the Merger, either within 60 days after
the Effective Time or with the written approval of MediQual thereafter, then the
right of such stockholder to an appraisal will cease and such stockholder shall
be entitled to receive the consideration, without interest, to which he would
have been entitled had he not demanded appraisal of his shares. No appraisal
proceeding in the Court of Chancery will be dismissed as to any stockholder
without the approval of the Court, which approval may be conditioned on such
terms as the Court deems just.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended to provide a summary of certain
federal income tax consequences of the Merger.
The Merger Agreement provides that, for federal income tax purposes,
Cardinal and MediQual intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368 (a) (1) (A) of the Code (a
"Tax-Free Reorganization"), by reason of Section 368 (a)(2)(E) thereof. Cardinal
and MediQual intend to treat the Merger as a Tax-Free Reorganization in their
federal income tax returns. The principal federal income tax consequences of a
Tax-Free Reorganization, under currently applicable law, are as follows: (i) no
gain or loss would be recognized by Cardinal, MediQual or Subcorp as a result of
the Merger, (ii) with the exception of cash received in lieu of fractional
Cardinal Common Shares, no gain or loss would be recognized by the holders of
MediQual Stock upon the exchange of their MediQual Stock (including MediQual
Common Stock acquired upon the exercise of MediQual Warrants) solely for
Cardinal Common Shares, (iii) the tax basis of Cardinal Common Shares to be
received by the holders of MediQual Stock in the Merger would be the same as the
tax basis of MediQual Stock surrendered in exchange therefor (reduced by any
amount allocable to a fractional Cardinal Common Share for which cash is
received); and (iv) the holding period of Cardinal Common Shares to be received
by the holders of MediQual Stock pursuant to the Merger would include the
holding period for which such holders held the MediQual Stock exchanged
therefor, provided that such MediQual Stock is a capital asset in the hands of
such holder of MediQual Stock as of the Effective Time.
Based upon the current ruling position of the Internal Revenue Service,
cash received by a holder of MediQual Stock in lieu of a fractional Cardinal
Common Share in connection with a Tax-Free Reorganization would be treated as
received in exchange for such fractional share interest, and gain or loss would
be recognized for federal income tax purposes, measured by the difference
between the amount of cash received and the portion of such holder's basis in
MediQual Stock that would be allocable to such fractional share interest. Such
gain or loss would be capital gain or loss provided that such MediQual Stock has
been held as a
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capital asset and would be long-term capital gain or loss if such MediQual Stock
has been held for more than one year as of the Effective Time.
Under guidelines published in Revenue Procedure 77-37, 1977-2 C.B. 568 (the
"IRS Guidelines"), the Internal Revenue Service will issue a ruling that a
transaction constitutes a Tax-Free Reorganization if certain factual
representations can be made with respect thereto. In particular, the Internal
Revenue Service Guidelines require a representation that there will be a certain
level of continuity of shareholder interest. Because the assurances sufficient
to satisfy such continuity-of-shareholder-interest requirement have not been
obtained, it is uncertain whether the Merger would satisfy the above-described
IRS Guidelines in this regard. MediQual Stockholders should note, however, that
the IRS Guidelines are intended only to serve as a description of the
circumstances in which the Internal Revenue Service will issue a favorable
ruling and not as a statement of the substantive law regarding the qualification
of a transaction as a Tax-Free Reorganization. While continuity of shareholder
interest is a requirement for tax-free reorganization treatment, Supreme Court
precedent supports a lesser degree of continuity than that required by the IRS
Guidelines. There cannot, however, be any assurance that the treatment of the
Merger by Cardinal, MediQual or MediQual Stockholders as a Tax-Free
Reorganization will not be challenged by the Internal Revenue Service, or that
any such challenge would not be sustained.
If the Merger is not characterized as a Tax-Free Reorganization, the
principal federal income tax consequences, under currently applicable law, would
be as follows: (i) no gain or loss would be recognized by Cardinal or MediQual
as a result of the Merger, (ii) gain or loss would be recognized by each holder
of MediQual Stock upon the exchange of MediQual Stock solely for Cardinal Shares
equal to the difference between such holder's basis in the MediQual Stock being
exchanged and the fair market value of the Cardinal Common Stock Shares received
by such holder; (iii) the tax basis of Cardinal Common Shares to be received by
the holders of MediQual Stock in the Merger would be the fair market value of
such Cardinal Common Shares as of the Effective Time; and (iv) the holding
period of Cardinal Common Shares to be received by the holders of MediQual Stock
pursuant to the Merger would begin the day after the Effective Time.
A dissenting MediQual Stockholder who receives cash pursuant to the
exercise of dissenter's rights will be treated as having had the MediQual Stock
redeemed in exchange for cash. Generally, such dissenting stockholder will
recognize gain or loss measured by the difference between the amount of cash
received and the tax basis of the shares of MediQual Stock redeemed. If such
MediQual Stock was held as a capital asset, such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if such stock was held
for more than one year as of the Effective Time. However, any such dissenting
stockholder that constructively owns shares of MediQual Stock that are exchanged
for Cardinal Common Shares in the Merger or actually or constructively owns
Cardinal Common Shares after the Merger may, in certain circumstances, be
required to treat the cash received as dividend income if the receipt of cash by
such dissenting stockholder has the effect of a dividend distribution. Whether
the receipt of cash has the effect of a dividend distribution would depend upon
the dissenting stockholder's particular circumstances. The IRS has indicated in
published rulings that a distribution that results in any actual reduction in
interest of a small, minority stockholder in a publicly held corporation will
not constitute a dividend if the stockholder exercises no control with respect
to corporate affairs. Dissenting MediQual Stockholders are urged to consult
their tax advisors regarding the tax treatment of any payments they may receive
as a result of the exercise of their dissenter's rights.
Holders of MediQual Warrants should consult with their own tax advisors
with respect to the tax consequences of exchanging their MediQual Warrants for
Cardinal Warrants. However, holders of MediQual Warrants are cautioned that
under current provisions of the Code and current regulations thereunder, the
issuance of Cardinal Warrants in exchange for MediQual Warrants may be a taxable
transaction, even if the Merger constitutes a Tax-Free Reorganization.
THE FOREGOING SUMMARY IS NOT INTENDED, AND SHOULD NOT BE CONSIDERED, AS TAX
ADVICE. NO RULING HAS BEEN REQUESTED FROM THE INTERNAL REVENUE SERVICE AND NO
LEGAL OPINION CONCERNING THE TAX TREATMENT WILL BE RENDERED. HOLDERS OF MEDIQUAL
STOCK AND WARRANTS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE TAX
CONSEQUENCES TO THEM UNDER APPLICABLE, FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS.
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Baker & Hostetler LLP, counsel for Cardinal, has advised Cardinal that,
subject to the limitations stated herein, the foregoing discussion provides a
summary of the material federal income tax consequences to MediQual Stockholders
receiving Cardinal Common Shares in the Merger. Such advice does not constitute
a legal opinion as to whether or not the Merger will constitute a Tax-Free
Reorganization.
THE COMPANIES
BUSINESS OF CARDINAL
Cardinal, a holding company operating through a number of operating
subsidiaries, is a leading health care service provider, offering an array of
value-added pharmaceutical distribution services and pharmaceutical-related
products and services to a broad base of customers. It is one of the nation's
largest wholesale distributors of pharmaceutical and related health care
products to independent and chain drug stores, hospitals, alternate care centers
and the pharmacy departments of supermarkets and mass merchandisers located
throughout the continental United States. Through its Pyxis subsidiary, Cardinal
develops, manufactures, leases, sells and services unique point-of-use systems
which automate the distribution, management and control of medications and
supplies in hospitals and alternate care facilities. Cardinal is also the
largest franchisor of independent retail pharmacies in the United States through
its Medicine Shoppe subsidiary. In addition, through its Owen subsidiary,
Cardinal provides pharmacy management and information services to hospitals.
PCI, another one of Cardinal's subsidiaries, is also a leading international
provider of integrated packaging services to pharmaceutical manufacturers.
As a full-service wholesale distributor, Cardinal complements its
distribution activities by offering a broad range of value-added support
services to assist Cardinal's customers and suppliers in maintaining and
improving their market positions and to strengthen Cardinal's role in the
channel of distribution. These support services include computerized order entry
and order confirmation systems, customized invoicing, generic sourcing programs,
product movement and management reports, consultation on store operation and
merchandising, and customer training. Cardinal's proprietary software systems
feature customized databases specially designed to help its customers order more
efficiently, contain costs, and monitor their purchases which are covered by
group contract purchasing arrangements.
Cardinal operates several specialty health care businesses which offer
value-added services to Cardinal's customers and suppliers while providing
Cardinal with additional opportunities for growth and profitability. For
example, Cardinal operates a pharmaceutical repackaging program for both
independent and chain drugstore customers and serves as a distributor of
therapeutic plasma products and other specialty pharmaceuticals to hospitals,
clinics and other managed care facilities on a nationwide basis through the
utilization of telemarketing and direct mail programs. These specialty
distribution activities are part of Cardinal's overall strategy of developing
diversified products and services to enhance the profitability of its business
and that of its customers and suppliers.
In February 1994, Cardinal combined with Whitmire, a Folsom,
California-based drug wholesaler. The majority of Whitmire's sales were
concentrated in the western and central United States, complementing Cardinal's
former concentration of sales in the eastern United States and positioning the
combined company to service both customers and suppliers on a national basis. As
a result of the Whitmire merger, Cardinal now maintains a network of
pharmaceutical distribution centers enabling it to routinely serve the entire
population of the continental U.S. on a next-day basis.
Cardinal has completed several additional business combinations since the
Whitmire merger. On July 1, 1994, Cardinal acquired Humiston-Keeling, Inc., a
Calumet City, Illinois-based drug wholesaler serving customers located primarily
in the upper midwest region of the United States. On July 18, 1994, Cardinal
completed a merger with Behrens Inc., a Waco, Texas-based drug wholesaler
serving customers located primarily in Texas and adjoining states. On November
13, 1995, Cardinal completed a merger with MSI, a St. Louis, Missouri-based
franchisor of independent apothecary-style retail pharmacies in the United
States and abroad. On May 7, 1996, Cardinal completed a merger with Pyxis, a San
Diego, California-based designer, manufacturer, marketer and servicer of unique,
point-of-use systems which automate the distribution, management and control of
medications and supplies in hospitals and other healthcare facilities. On
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October 11, 1996, Cardinal completed a merger with PCI, a Philadelphia,
Pennsylvania-based provider of integrated packaging services to pharmaceutical
manufacturers. Finally, on March 18, 1997, Cardinal completed a merger with
Owen, a Houston, Texas-based provider of fully integrated pharmacy management
and information services to hospitals.
Additional information concerning Cardinal and its subsidiaries is included
in the Cardinal documents filed with the Commission, which are incorporated by
reference herein. See "Incorporation of Certain Documents by Reference."
SUBCORP
Subcorp is a newly formed, wholly owned subsidiary of Cardinal formed for
the purpose of effecting the Merger.
BUSINESS OF MEDIQUAL
MediQual Systems, Inc. is a leading supplier of clinical information
management ("CIM") systems and services to the health care industry. MediQual's
systems and services combine proprietary clinical knowledge with raw patient
encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care.
Systems and Services. MediQual has addressed the growing demand for this
information by developing its Atlas System, a comprehensive, desktop CIM system.
The Atlas System is comprised of five major components: (i) a standardized
retrospective data repository; (ii) proprietary benchmarking databases; (iii)
embedded clinical knowledge; (iv) comprehensive provider databases; and (v)
on-line analytical processing. The Atlas System, which is designed to
systematically analyze effectiveness (whether a particular treatment helped the
patient); efficiency (whether the proper resources were used to provide care);
and appropriateness (whether the chosen treatment was the best option), enables
users to perform sophisticated, quantitative analyses which may be used for a
variety of applications including:
1. benchmarking internal performance;
2. competitively assessing cost and quality positions in local markets;
3. quantifying the impact of managed care and capitated contracts;
4. developing local integrated delivery networks;
5. evaluating the efficacy of new pharmaceuticals and medical devices;
6. credentialing physicians; and
7. reporting to third parties for regulatory and contract compliance.
MediQual's customers often use the information provided by the Atlas System to
determine the appropriate areas for cost reduction which would not have an
adverse effect on patient care.
Atlas System Components. The Atlas System is a modular CIM System designed
to enhance health care value by performing quantitative analysis of patient
data. The Atlas System provides a comprehensive, cost-effective desktop solution
to the problem of generating sophisticated information from disparate raw data
sources. The Atlas System software is written in Microsoft FoxPro for Windows,
Visual C++ and Visual Basic. The Atlas System supports multiple, concurrent
users in most network environments with personal computers running Microsoft
Windows and uses Microsoft Excel to display results. The modular design of the
Atlas System enables MediQual to integrate additional applications quickly and
easily, in order to be responsive to evolving customer needs. The Atlas System
is comprised of the following major components:
Atlas Repository and Atlas Glossary. The Atlas Repository electronically
interfaces with on-line transaction processing (OLTP) systems maintained by
healthcare providers which serve administrative functions such as patient
admissions and billing. In many cases, the data created by these systems (known
as UB-92 data based on the administrative billing standard developed by Health
Care Financing Administration), includes diagnostic and procedure codes,
treatment charges and patient demographics. The interface with Atlas enables the
electronic capture of data from OLTP systems and from paper medical records and
selects relevant data for analysis from Atlas provider and benchmarking
databases. MediQual has developed the Atlas Glossary, a comprehensive data
dictionary and coding system that covers all aspects of patient
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<PAGE> 55
treatment, including lab tests, pharmaceuticals, vital signs, patient history,
radiology and clinician notes. The Atlas Glossary defines appropriate time
frames, ensures uniform collection and definition of terms, and excludes
irrelevant data. The Atlas Repository also includes Table Maintenance, a tool
for mapping provider-specific codes to Atlas Glossary codes, thereby allowing
benchmarking data to be cost-effectively developed from a wide range of
providers in geographically diverse locations.
Atlas Benchmarking Databases. Atlas users can access more than 40 specially
formatted CD-ROM databases derived principally from MediQual's master database.
These CD-ROM databases enable customers to benchmark by provider location, size
and specialty or by disease. MediQual's master database is comprised of
integrated clinical and administrative data derived from more than 20 million
patient encounters. MediQual routinely receives, as part of its license
agreements, a copy of provider-specific data which is standardized using the
Atlas Glossary and Table Maintenance in the Atlas Repository.
Embedded Clinical Knowledge. The Atlas System contains clinical knowledge
that enables statistically valid conclusions to be reached from a comparison of
different patient populations. More than 200 disease models, covering
substantially all acute conditions such as heart failure, stroke and pneumonia,
were developed using this master database and are embedded in the Atlas System
in the form of software algorithms. Disease models typically contain between 10
and 30 independent variables such as history of prior medical conditions,
laboratory test results, vital signs and physical exam findings. For example,
the model that predicts the probability of death for patients diagnosed with
heart failure contains thirty independent variables, including prior history of
cancer, presence of lethargy, use of mechanical vent, respiration rate, blood
pressure and creatinine level.
Atlas Provider Databases. MediQual creates Atlas provider databases
specially formatted on CD-ROM by validating, classifying and scoring UB-92 data
from the federal government and approximately 20 states and from private data
sharing consortiums comprised of providers and payors. In addition, MediQual
adds embedded clinical knowledge that is based on statistical models derived
from UB-92 data elements. This clinical knowledge enables the user to adjust for
the expected cost of treating differing combinations of diagnoses and
procedures. MediQual has developed more than 125 Atlas provider databases.
On-Line Analytical Processing. The Atlas System provides on-line analytical
processing that enables real-time, drill-down and multi-dimensional viewing of
data contained in the Atlas Repository. The ability to change perspective from
summary to detail level and to add or delete selection criteria is essential to
the iterative analytical power of the Atlas System. The Atlas System also offers
advanced features such as filters, thresholds and built-in statistics, which
provide users with an ability to conduct customized data analysis using more
than 400 variables. These variables can be manipulated based upon the analysis
to be conducted and the particular database in use. For example, the overall
mortality rate for pneumonia patients can be (i) segmented by age, gender and
history of heart failure, (ii) filtered for specific infecting organisms, and
(iii) refined with a minimum threshold to eliminate rare occurrences. In this
manner, users can test various hypotheses quickly using a comprehensive
iterative methodology.
Atlas System Modules. The Atlas System is comprised of three modules: Atlas
Market View, Atlas Resources and Atlas Outcomes. These modules are defined
primarily by the type of data they are designed to analyze. Atlas Market View
analyzes Atlas provider databases to enable competitive assessments of
physicians and hospitals. Atlas Resources and Atlas Outcomes analyze
provider-specific patient encounter data together with benchmarking databases
derived from MediQual's proprietary master database. Atlas Outcomes encompasses
all the functionality of Atlas Resources, and adds certain clinical applications
that address effectiveness, efficiency and appropriateness. Atlas Outcomes
includes optional disease and peer group benchmarking databases and adds the
ability to collect clinical data from paper medical records. Clients may upgrade
from Atlas Resources to Atlas Outcomes at any time. Each module is packaged with
at least one of the more than 150 different CD-ROM databases that MediQual has
developed. Each module (and optional CD-ROM databases) contains application
frameworks, called MQ Analyses, and also includes standard reports, called MQ
Templates, which may be modified by the user to build a custom library of
reports and applications.
Atlas Market View provides competitive assessments of physicians and
hospitals on their relative efficiency, effectiveness and appropriateness of
care. These assessments include profiles of charges, lengths of
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<PAGE> 56
treatment, mortality and admission criteria. Atlas Market View analyzes federal,
state and private UB-92 data that has been specially prepared and formatted on
CD-ROM. This module contains embedded clinical knowledge, based on statistical
models derived from UB-92 data, that enables the user to adjust for diverse
patient populations under study, including differing combinations of diagnoses
and procedures. Atlas Market View also contains a benchmark for overnight
admission appropriateness, based on norms derived from MediQual's master
database.
Atlas Resources provides management assessments of the efficiency and
resource utilization of clinical processes and physicians. These assessments
include summaries of various patient populations and extensive ad hoc analysis
of the related underlying costs. Atlas Resources analyzes downloaded OLTP data
that has been specially prepared for the Atlas Repository with a national
benchmark derived from MediQual's master database. This module shares the same
embedded clinical knowledge that is contained in Atlas Market View.
Atlas Outcomes, which expands the functionality of Atlas Resources by
incorporating additional databases and applications, is designed to provide
comprehensive internal assessments of clinical processes and providers. These
assessments include profiles of specific procedures, clinical summaries of
various patient populations and extensive ad hoc analysis of efficiency,
effectiveness and appropriateness. Atlas Outcomes combines provider data
downloaded from OLTP systems with data obtained directly from paper medical
records that has been specially prepared for the Atlas Repository and analyzes
such data against multiple disease and peer benchmarks derived from MediQual's
master database. This module contains additional embedded clinical knowledge,
based on statistical models derived from both UB-92 and clinical data elements,
that enables the user to adjust for differing combinations of diagnoses,
procedures, on-admission severity, length of stay, complications and other
factors.
Web Applications.
MediQual has developed a large World Wide Web site (www.mediqual.com) to
promote the concept of quantitative analysis as applied to heath care issues. As
part of its promotion efforts, MediQual has published several collections of
linked Web pages, called eBooks, as well as an interactive Heart Attack Survival
Calculator. MediQual intends to expand its activities in Web-related
technologies and publications.
Under Development
Physician Report Card. To remain competitive, providers increasingly need
to be differentiated based on cost and quality parameters. Physician Report Card
is a new application that will provide a statistical basis for making
credentialing and managed care decisions. MediQual expects that Physician Report
Card, currently in beta test, will be released in late 1997.
Atlas Scanning. MediQual is planning to automate part of the process of
collecting paper-based data by scanning specially-designed data forms. Scanning
will significantly reduce data entry errors as well as the time required to
enter data. MediQual expects that scanning, currently in beta test, will be
introduced in late 1997.
Atlas Specialized Versions. MediQual is developing specialized versions of
Atlas modules for use in new applications such as materials management. MediQual
expects that the first of these specialized versions will be introduced in early
1998. MediQual has also modified Atlas modules for various regional data sharing
consortiums that desire additional analytical or reporting features.
Services. For providers, payors and suppliers who prefer a service solution
to address their information needs, MediQual provides analytic services for the
management of various diseases, data abstraction services and development of
custom databases. MediQual also conducts research for pharmaceutical
manufacturers and develops customized eBooks and other applications for use with
Web browsers.
Competition. The market for health care information systems and services is
intensely competitive. Most of MediQual's competitors and potential competitors
have significantly greater financial, technical, system development and
marketing resources than MediQual. MediQual competes directly with other vendors
of health care information and consultants who provide related services.
MediQual also competes with MIS departments of large hospital networks, some of
which have developed, or plan to develop, their own CIM capabilities. In
addition, potential competitors include OLTP vendors who may wish to build,
rather than buy, CIM technology. Many of these competitors and potential
competitors have substantial installed customer
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<PAGE> 57
bases in the health care industry and the ability to fund significant system
development and acquisition efforts. MediQual believes that the principal
competitive factors in its market are system functionality and features, price,
training and support, customer references and firm reputation. Management seeks
to differentiate MediQual's systems from those of its competitors by developing
and maintaining technological advantages, including the availability of
MediQual's large and expanding proprietary database and the capability to
perform sophisticated on-line analytical processing, which contribute to the
comprehensive nature of MediQual's Atlas System and the modular design of
MediQual's systems which permits MediQual to license additional databases and
applications to existing customers.
Government Regulation. The health care industry is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of health care industry participants. During the past
several years, the U.S. health care industry has been subject to changes in
governmental regulation of, among other things, reimbursement rates and certain
capital expenditures. Health care industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for MediQual's systems and services.
Additionally, although the FDA does not currently regulate MediQual's systems or
services, if authorized to extend its regulation of software, the FDA could
impose extensive requirements that might negatively impact the time and expense
necessary to develop new systems. MediQual cannot predict what impact, if any,
such events might have on its business, results of operations and financial
condition. Further, many health care providers are consolidating to create
larger health care delivery enterprises with greater regional market power. As a
result, the remaining enterprises could have greater bargaining power, which may
lead to price erosion of MediQual's systems and services.
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<PAGE> 58
SELECTED FINANCIAL DATA OF MEDIQUAL
The selected financial data set forth below for each of the three years
ended December 31, 1994, 1995 and 1996, and at December 31, 1995 and 1996, are
derived from financial statements of MediQual audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this Proxy
Statement/Prospectus. The selected financial data for the years ended December
31, 1992 and 1993, and at December 31, 1992, 1993 and 1994, are derived from
financial statements of MediQual audited by Arthur Andersen LLP, which are not
included in this Proxy Statement/Prospectus. The financial data for the three
months ended March 31, 1996 and 1997 are derived from unaudited financial
statements included elsewhere in this Proxy Statement/Prospectus. The unaudited
financial statements include all adjustments, consisting of normal recurring
adjustments, which MediQual considers necessary for a fair presentation of its
financial position and results of operations for these periods. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1997. The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations of MediQual" and the Financial Statements of MediQual and Notes
thereto included elsewhere in this Proxy Statement/Prospectus.
MEDIQUAL SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Revenues................................... $14,700 $13,097 $12,084 $10,974 $11,002 $2,739 $3,098
Operating expenses
Cost of revenues........................... 3,605 2,852 2,998 2,445 2,067 378 750
Sales and marketing........................ 3,997 2,505 1,927 1,970 1,039 256 202
Research and development................... 4,204 4,152 3,626 4,013 2,413 628 583
General and administrative................. 2,515 2,198 3,401 3,358 2,759 787 500
Restructuring charge (credit).............. 604 1,623 -- 580 (153) -- --
------- ------- ------- ------- ------- ------ -------
Total operating expenses................. 14,925 13,330 11,952 12,366 8,125 2,049 2,035
------- ------- ------- ------- ------- ------ -------
Operating income (loss)...................... (225) (233) 132 (1,392) 2,877 690 1,063
Interest and other expense (income), net..... 31 (55) (173) 70 (137) 27 (97)
Non-recurring expenses of terminated IPO..... -- -- -- -- 600 -- --
------- ------- ------- ------- ------- ------ -------
Income (loss) before income taxes............ (256) (178) 305 (1,462) 2,414 663 1,160
Provision for income taxes................... 18 8 23 -- 115 77 87
------- ------- ------- ------- ------- ------ -------
Net income (loss)............................ (274) (186) 282 (1,462) 2,299 586 1,073
Accretion of preferred stock dividends....... 72 205 392 295 461 114 119
------- ------- ------- ------- ------- ------ -------
Net income (loss) to common stockholders..... $ (346) $ (391) $ (109) $(1,757) $ 1,838 $ 472 $ 954
======= ======= ======= ======= ======= ====== =======
Pro forma earnings (loss) per common share(1)
Primary.................................... $ (0.08) $ (0.08) $ (0.02) $ (0.31) $ 0.31 $ 0.08 $ 0.16
Fully diluted.............................. (0.08) (0.08) (0.02) (0.31) 0.29 0.08 0.15
Pro forma weighted average number of common
shares outstanding(1)
Primary.................................... 4,392 5,150 5,603 5,663 5,956 5,701 6,084
Fully diluted.............................. 4,698 5,307 5,982 5,878 6,401 5,782 6,467
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $ 4,760 $ 6,483 $ 4,865 $ 3,231 $ 4,696 $ 3,878 $ 5,017
Long-term debt, less current portion... 256 331 267 605 75 141 --
Redeemable preferred stock............. 8,389 10,594 10,986 11,281 11,741 11,395 11,861
Stockholders' deficit.................. (10,184) (10,441) (10,485) (12,227) (9,696) (11,453) (8,741)
</TABLE>
- ---------------
(1) See Note 2 of MediQual's Notes to Financial Statements for an explanation of
the basis used to calculate pro forma earnings (loss) per Common Share and
pro forma weighted average number of Common Shares. See "Financial
Statements of MediQual Systems, Inc."
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<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MEDIQUAL
OVERVIEW
MediQual is a leading supplier of clinical information management ("CIM")
systems and services to the health care industry. MediQual's systems and
services combine proprietary clinical knowledge with raw patient encounter data
to create valuable information that providers, payors and suppliers use to
monitor and enhance the effectiveness, efficiency and appropriateness of care.
The initial version of MediQual's CIM system, MedisGroups, was introduced
in 1987. In April 1994, MediQual began replacing MedisGroups, which was rapidly
becoming obsolete, with a series of integrated modules marketed as the Atlas
System. Over the four-year period beginning in January 1991, revenues derived
from MedisGroups declined as a result of both fewer unit licenses and price
reductions, reflecting, in part, the advancing obsolescence of that system. In
April 1994, MediQual released the first module of its Atlas System. Over the
two-year period ended April 1996, MediQual released two additional Atlas System
modules, thereby fully replacing the MedisGroups system and significantly
expanding the capabilities of MediQual's systems. Concurrently, MediQual began
the process of converting existing MedisGroups licenses to licenses for the
Atlas System. MediQual no longer directs any efforts toward developing,
licensing or supporting MedisGroups, because MediQual has successfully converted
over 90% of MedisGroups users to the Atlas System. Such former MedisGroups users
have renewed Atlas System licenses at a rate approximately equal to MediQual's
historical customer renewal rate.
MediQual also provides analytic services for the management of various
diseases, data collection services and development of custom databases.
Prior to 1994, substantially all of MediQual's revenues were derived from
licensing the MedisGroups system. Since 1993, MedisGroups revenues have
significantly declined while revenues derived from licensing the Atlas System
and from services have significantly increased. The following table shows the
amounts and percentages of MediQual's total revenues represented by MedisGroups,
the Atlas System and services for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- --- ------ --- ------ ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
MedisGroups.... $ 8,459 70% $ 4,674 42% $ 683 6% $ 683 25% $ -- 0%
Atlas System... 3,150 26% 5,131 47% 8,007 73% 1,590 58% 2,451 79%
Services....... 475 4% 1,169 11% 2,312 21% 466 17% 647 21%
------- --- ------- --- ------- --- ------ --- ------ ---
$12,084 100% $10,974 100% $11,002 100% $2,739 100% $3,098 100%
======= === ======= === ======= === ====== === ====== ===
</TABLE>
MediQual believes that as the market for Atlas Systems and services
matures, the continued growth of MediQual will require the successful
introduction, development or acquisition of new applications and further
enhancements to its existing systems and services. In order to achieve increased
market penetration of the Atlas System, MediQual plans to continue to (i)
develop complementary application modules and databases to license to new
customers and cross-market to existing customers, (ii) develop improved user
interfaces to simplify customer use of the Atlas System, (iii) provide ongoing
training seminars to help customers improve their analytical use of the Atlas
System and (iv) expand the Atlas System to collect new types of data which will
allow MediQual to develop and license additional applications and comparative
databases to its customers.
MediQual licenses its systems pursuant to annual agreements that provide
for the payment of license fees at the beginning of the term. The sales cycle,
which may vary depending on the extent of a prospective customer's planned scope
of usage, generally ranges from three to nine months. Customer renewal rates
were 90%, 92% and 90% in 1994, 1995 and 1996, respectively. Annual license fee
revenues are recognized upon shipment of the systems or on the annual renewal
date. A portion of the annual fee (ranging from 5% to 20%,
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<PAGE> 60
depending on the number of Atlas System modules licensed by a customer)
attributable to customer support is recognized ratably over the term of the
agreement. Service revenue is recognized when services are rendered.
MediQual's operating expenses consist primarily of personnel costs,
including compensation, sales commissions and employee benefits. Between 1993
and 1995, MediQual invested approximately $11 million in the development of the
Atlas System while maintaining the MedisGroups system. As of March 31, 1997,
MediQual had completed development of the Atlas System, but intends to continue
to develop enhancements and new applications, including three enhancements that
MediQual expects to introduce by early 1998. See "Business -- Systems and
Services; Atlas System Enhancements and Specialized Versions Under Development."
As a result, MediQual believes the aggregate amount of research and development
expenses, including personnel costs, for the Atlas System in the future will be
substantially lower than that incurred in 1995 when MediQual was required to
expend substantial amounts in connection with the introduction of the Atlas
System. The following table shows the research and development expenses
attributable to each of MediQual's systems for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ -------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT
MedisGroups....................................... $725... $ 401 $ -- $ -- $ --
Atlas System and services......................... $2,901 $3,612 $2,413 $628 $583
------ ------ ------ ---- ----
$3,626 $4,013 $2,413 $628 $583
====== ====== ====== ==== ====
</TABLE>
MedisGroups required a significant amount of installation, custom
programming and other support costs. The Atlas System eliminated the need for a
substantial portion of these expenses through technological improvements.
However, because the conversion of MediQual's customers to the Atlas System
occurred gradually since April 1994, MediQual was required to maintain
significant levels of support for both MedisGroups and the Atlas System during
that period. As a result, MediQual incurred substantially higher expenses during
this two-year period than MediQual expects to incur in the future to support the
Atlas System alone. In addition, MediQual consolidated customer support into a
central location between late 1993 and early 1994. MediQual intends to expand
fee-based seminar services to help customers improve their analytical use of the
Atlas System. The following table shows the cost of revenues (including customer
support expenses) attributable to each of MediQual's systems for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ -------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COST OF REVENUES
MedisGroups....................................... $1,800 $ 978 $ 28 $ 28 $ --
Atlas System and services......................... $1,198 $1,467 $2,039 $350 $750
------ ------ ------ ---- ----
$2,998 $2,445 $2,067 $378 $750
====== ====== ====== ==== ====
</TABLE>
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statement of operations of MediQual as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ -------------------
1994 1995 1996 1996 1997
---- ---- ---- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100% 100% 100% 100% 100%
Operating expenses
Cost of revenues..................................... 25% 22% 19% 14% 24%
Sales and marketing.................................. 16% 18% 9% 9% 7%
Research and development............................. 30% 37% 22% 23% 19%
General and administrative........................... 28% 31% 25% 29% 16%
Restructuring charge (credit)........................ 0% 5% -1% 0% 0%
---- ---- ---- ---- ----
Total operating expenses.......................... 99% 113% 74% 75% 66%
---- ---- ---- ---- ----
Operating income (loss)................................ 1% -13% 26% 25% 34%
Interest expense (income), net......................... -1% 1% -1% 1% -3%
Non-recurring expenses of terminated IPO............... 0% 0% 5% 0% 0%
---- ---- ---- ---- ----
Income (loss) before income taxes...................... 2% -14% 22% 24% 37%
Provision for income taxes............................. 0% 0% 1% 3% 3%
---- ---- ---- ---- ----
Net income (loss)...................................... 2% -14% 21% 21% 34%
Accretion of preferred stock dividends................. 3% 3% 4% 4% 4%
---- ---- ---- ---- ----
Net income (loss) to common stockholders............... -1% -17% 17% 17% 30%
==== ==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues. Total revenues for the three-month period ended March 31, 1997
increased by 13% to $3,098,000 from $2,739,000 for the same period of the prior
year. The overall growth is attributable to a combination of a 54% increase in
Atlas System license fees and a 39% increase in service revenue offset by an
elimination of MedisGroups license fees of $683,000.
Cost of Revenues. Cost of revenues for the three-month period ended March
31, 1997 increased by 98% to $750,000 from $378,000 for the same period of the
prior year. The overall increase resulted primarily from the hiring of
additional employees to provide data collection services to Atlas System
clients. Service revenues from data collection increased 43% during the
three-month period ended March 31, 1997 compared to the same period of the prior
year.
Sales and Marketing. Sales and marketing expenses for the three-month
period ended March 31, 1997 decreased by 21% to $202,000 from $256,000 for the
same period of the prior year. During 1996, MediQual made a transition from
relying solely on field sales representatives to a combination of telemarketing
and direct field sales to reduce the costs of its direct sales force and improve
operating margins.
Research and Development. Research and development expenses for the
three-month period ended March 31, 1997 decreased by 7% to $583,000 from
$628,000 for the same period of the prior year. The overall decrease is the
combination of a decline in support required to maintain MedisGroups and the
planned development enhancements relating to the Atlas System.
General and Administrative. General and administrative expenses for the
three-month period ended March 31, 1997 decreased by 36% to $500,000 from
$787,000 for the same period of the prior year. MediQual attributes the decrease
to general efficiencies derived from improved office automation and the
consolidation of field offices. In addition, during the three-month period ended
March 31, 1996, MediQual accrued for approximately $150,000 of compensation
expense relating to an incentive arrangement with MediQual's chief executive
officer. No comparable expense was recorded during the same period in 1997.
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Interest Expense (Income), Net. Interest expense (income), net increased by
459% from interest expense of $27,000 to interest income of ($97,000) for the
three-month periods ended March 31, 1996 and 1997, respectively. The increase
was primarily due to reduced interest on MediQual's bank borrowing during 1997
and an increase in interest income on additional cash flow from operations.
Income Taxes. The provision for income taxes for the three-month period
ended March 31, 1997 of $87,000 represents minimum federal and state income
taxes. MediQual has available net operating loss and tax credit carryforwards to
be used to minimize income taxes payable to the federal government and certain
states.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues. Total revenues decreased by 9% from $12,084,000 in 1994 to
$10,974,000 in 1995 and increased to $11,002,000 in 1996. The overall decrease
is a combination of a decline of $8,459,000, or 70%, in MedisGroups license fees
between 1994 and 1996 which was not entirely offset by an approximately $7
million increase in revenues derived from the introduction of the Atlas System
and related services during 1994 through 1996. MediQual attributes the decline
in MedisGroups license fees to the expiration of state mandates in several
markets, the absence of new MedisGroups applications which could be
cross-marketed to existing customers and the conversion of MedisGroups customers
to the Atlas System. A mandate in Iowa for MedisGroups expired in 1994,
resulting in a decline of approximately $370,000 in MedisGroups Iowa renewals in
1995. A similar mandate in Colorado for MedisGroups expired in 1995; however,
all Colorado customers were subsequently converted to the Atlas System during
1995.
Cost of Revenues. Cost of revenues decreased by 18% from $2,998,000 in 1994
to $2,445,000 in 1995, and by 15% to $2,067,000 in 1996. The decrease in 1995
and 1996 reflected a combination of the phase-out of support required by
MedisGroups offset in part by an increase in support related to the Atlas
System.
Sales and Marketing. Sales and marketing expenses increased 2% from
$1,927,000 in 1994 to $1,970,000 in 1995 and decreased by 47% to $1,039,000 in
1996. MediQual attributes the decrease in sales and marketing expenses in 1996
to significant product packaging design costs incurred in 1995 for new Atlas
System modules. In addition, in 1996, MediQual transitioned its marketing
efforts from expensive direct mail campaigns to product showcase seminars
provided in conjunction with revenue generating seminars.
Research and Development. Research and development expenses increased by
11% from $3,626,000 in 1994 to $4,013,000 in 1995 and decreased by 40% to
$2,413,000 in 1996. The overall decrease is a combination of the decline in
research and development required to maintain MedisGroups and the planned
development cycle relating to the Atlas System. In late 1994, MediQual also made
capital improvements in its data center to begin the conversion from a VMS to a
UNIX operating environment. For 1995, the overall increase in research and
development expenses can be attributed to expenses for software license fees,
employee training and consultants relating to these capital investments.
General and Administrative. General and administrative expenses decreased
by 1% from $3,401,000 in 1994 to $3,358,000 in 1995 and by 18% to $2,759,000 in
1996. MediQual attributes the decrease in general and administrative expenses in
1996 to reduced rent expense under a new lease agreement in May 1996 covering
less corporate office space and lower depreciation expense.
Restructuring Charge (Credit). In 1995, MediQual recorded a $580,000 charge
to reflect a staff reduction and office space consolidation. The provision
includes severance payments, rent payments for idle office space and asset
write-offs in connection with the staff reduction. MediQual's policy is to write
off assets disposed of or deemed to be excess or obsolete at the time the assets
no longer have value to MediQual's ongoing operations. During 1996, MediQual was
able to negotiate a favorable settlement for certain excess leased facilities,
resulting in a restructuring credit of approximately $153,000.
Interest Expense (Income), Net. Interest expense (income), net decreased by
140% from income of ($173,000) in 1994 to expense of $70,000 in 1995, and
increased by 296% to income of ($137,000) in 1996. The decrease in 1995 was
primarily due to additional interest expense incurred on MediQual's bank
borrowings during 1995 and a favorable settlement of a lawsuit with a former
employee regarding repayment of a loan to the employee. The receivable from the
employee was written off in 1993. The increase in 1996 was
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due to amounts received for the sale of obsolete furniture and equipment and as
subrogation for prior year medical claims paid.
Income Taxes. The provision for income taxes in 1994 and 1996 primarily
represents minimum federal and state income taxes. MediQual had available net
operating loss and tax credit carryforwards of $8,314,000 and $204,000 at
December 31, 1996, which have been fully reserved due to the uncertainty
relating to the utilization of the carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
MediQual has financed its operations and met its capital requirements
through approximately $10 million generated by private placements of securities,
the utilization of bank lines of credit and capital leases. At March 31, 1997,
MediQual's principal sources of liquidity consisted of cash and cash equivalents
and trade accounts receivables. MediQual has a working capital line of credit
with Silicon Valley Bank (the "Bank") under which it may borrow up to
$1,500,000, subject to eligible accounts receivable. At March 31, 1997, MediQual
had no borrowings under this line of credit. The working capital line of credit
is secured by all MediQual's assets and requires MediQual to maintain certain
financial ratios and adhere to certain covenants (including covenants not to
participate in any merger or consolidation, pay any dividends or dispose of any
material assets without the Bank's consent). As of March 31, 1997, MediQual was
in compliance with the covenants under its working capital line of credit with
the Bank.
MediQual's profitability for the three months ended March 31, 1997 has
resulted in an increase in net cash of approximately $469,000. In addition,
MediQual has used approximately $125,000 for the purchase of property and
equipment and for the repayment of bank debt.
As of December 31, 1996, MediQual had, for tax purposes, net operating loss
carryforwards of approximately $8,314,000 and federal tax credit carryforwards
of approximately $204,000, which can be used to offset future taxable income and
tax liabilities. The Code includes provisions that may limit MediQual's ability
to utilize such carryforwards in connection with a change in ownership (as
defined therein). MediQual believes that the Merger will result in a change in
ownership for this purpose.
MediQual does not currently have any significant capital commitments.
MediQual believes that the combination of existing cash balances, funds
available under MediQual's credit lines and funds expected to be generated from
future operations, will be sufficient to fund its operations and satisfy its
working capital needs for the foreseeable future.
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PRINCIPAL STOCKHOLDERS OF MEDIQUAL
The following table sets forth the beneficial ownership of the MediQual
Common Stock as of May 31, 1997 by (i) each person or entity know to MediQual to
beneficially own 5% or more of the outstanding shares of each class of
MediQual's capital stock, (ii) each of MediQual's directors, (iii) MediQual's
Chief Executive Officer and each of the other four most highly compensated
executive officers of MediQual ("Named Executive Officers") and (iv) all
directors and executive officers of MediQual as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
----------------------------------------------------------------------------------
MEDIQUAL CLASS A CLASS B CLASS C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ---------------- ------------------- ----------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
--------- ------- ------ ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
William D. Ryan (2)
2 Woodbury Place
Rochester, NY 14618................... 855,833 21.9% 229 100% -- -- -- --
David Dominik (3)....................... 733,179 18.7% -- -- -- -- 2,022 100%
Information Partners, L.P. (4)
2 Copley Place
Boston, MA 02116...................... 733,179 18.7% -- -- -- -- 2,022 100%
Eric A. Kriss (5)
c/o MediQual Systems, Inc.
1900 West Park Drive
Westborough, MA 01581................. 551,903 14.1% -- -- -- -- -- --
Charles M. Jacobs
c/o InterQual, Inc.
295 Boston Post Road
Marlborough, MA 01752................. 341,250 8.7% -- -- -- -- -- --
TA Associates (6)
125 High Street
Boston, MA 02110...................... 103,382 2.6% -- -- 4,134,980 65.5% -- --
OTHER DIRECTORS AND NAMED EXECUTIVE
OFFICERS
William C. Price (7).................... 41,214 1.0% -- -- -- -- -- --
Peter Nessen (8)........................ 7,000 * -- -- -- -- -- --
James Corum (9)......................... 24,084 * -- -- -- -- -- --
Elizabeth A. Endyke (10)................ 19,137 * -- -- -- -- -- --
Diane M. Throop (11).................... 26,188 * -- -- -- -- -- --
All Directors and executive officers as
a group (9 persons)(12)............... 2,599,786 64.8% 229 100% -- -- 2,022 100%
</TABLE>
- ---------------
* Denotes less than one percent (1%)
(1) The number of shares of capital stock outstanding as of May 31, 1997 is as
follows: (i) 3,915,411 shares of MediQual Common Stock, (ii) 229 shares of
Class A Preferred Stock, (iii) 6,316,726 shares of Class B Convertible
Preferred Stock, and (iv) 2,022 shares of Class C Convertible Preferred
Stock.
(2) Consists of 557,500 shares of MediQual Common Stock and 30 shares of Class
A Preferred Stock held by NAYR Enterprises, a limited partnership of which
Mr. Ryan is a general partner. Mr. Ryan disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
(3) Consists of an aggregate of 733,179 shares of MediQual Common Stock and
2,022 shares of Class C Convertible Preferred Stock held by Information
Partners Capital Fund, L.P. and certain related entities. Mr. Dominik is a
general partner of Information Partners Capital Fund L.P. and, as such, may
be deemed to beneficially own all such shares. Mr. Dominik disclaims
beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest therein. The address of Mr. Dominik is c/o
Information Partners, L.P., 2 Copley Place, Boston, Massachusetts 02116.
(4) Consists of an aggregate of 733,179 shares of MediQual Common Stock and
2,022 shares of Class C Convertible Preferred Stock held by the following
entities related to Information Partners, L.P.
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(Common Stock/Class C Convertible Preferred Stock); Information Partners
Capital Fund, L.P. (678,215/1,870); BCIP Trust Associates, L.P.
(11,225/104) and BCIP Associates (43,739/48).
(5) Includes 12,500 shares of MediQual Common Stock held in trust for Mr.
Kriss' minor children. Mr. Kriss disclaims beneficial ownership of such
shares.
(6) Consists of an aggregate of 4,134,980 shares of Class B Convertible
Preferred Stock and immediately exercisable warrants to acquire 103,382
shares of Common Stock held by the following entities related to TA
Associates (shares/warrants): Advent V Limited Partnership
(2,432,049/60,806); Advent Atlantic & Pacific Limited Partnership
(1,163,939/29,101); Advent Industrial Limited Partnership (387,980/9,700);
TA Associates V Limited Partnership (93,356/16,824); and TA Investors
(57,656/2,334).
(7) Includes 28,268 shares issuable pursuant to options exercisable within 60
days after May 31, 1997.
(8) Consists of shares issuable pursuant to options exercisable within 60 days
after May 31, 1997.
(9) Includes 20,513 shares issuable pursuant to options exercisable within 60
days after May 31, 1997.
(10) Includes 16,813 shares issuable pursuant to options exercisable within 60
days after May 31, 1997.
(11) Includes 25,438 shares issuable pursuant to options exercisable within 60
days after May 31, 1997.
(12) Includes 98,030 shares issuable pursuant to options exercisable within 60
days after May 31, 1997.
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COMPARISON OF SHAREHOLDER RIGHTS
As a result of the Merger, MediQual Stockholders will receive common shares
of Cardinal, an Ohio corporation, in exchange for their shares of stock in
MediQual, a Delaware corporation. The following is a summary of certain material
differences between the rights of holders of MediQual Stock and the rights of
holders of Cardinal Common Shares. These differences arise in part from the
differences between the Delaware Law and the Ohio Revised Code (the "Ohio Law").
Additional differences arise from the governing instruments of the two companies
(in the case of MediQual, the MediQual Certificate and the MediQual By-laws and,
in the case of Cardinal, the Cardinal Articles and the Cardinal Regulations).
Although it is impractical to compare all of the aspects in which the Delaware
Law and the Ohio Law and the companies' governing instruments differ with
respect to stockholders' rights, the following discussion summarizes certain
significant differences between them.
PREFERENCES
The holders of Class A Preferred Stock, Class B Preferred Stock, and Class
C Preferred Stock of MediQual are entitled to certain preferences over the
MediQual Common Stock in connection with the liquidation, dissolution and
winding up of MediQual. Such holders are also entitled to certain preferences
with respect to the declaration and payment of dividends before dividends may be
declared and paid on the MediQual Common Stock. In addition, the MediQual
Certificate grants the holders of Class B Preferred Stock and Class C Preferred
Stock certain preferential approval rights over significant corporate
transactions. In the Merger, each share of Preferred Stock of MediQual will be
converted into the right to receive Cardinal Common Shares. Cardinal has only
one outstanding class of capital stock. As a result, the current holders of
MediQual Preferred Stock will not retain any of their preferential rights
following the Effective Time of the Merger.
AMENDMENT OF CHARTER DOCUMENTS
In order to amend the MediQual Certificate, Delaware Law and the MediQual
Certificate require the approval of MediQual Stockholders holding a majority of
the voting power of MediQual Common Stock, a majority of the Class B Preferred
Stock and a majority of the Class C Preferred Stock. In addition, as long as at
least 1,263,345 shares of the Class B Preferred Stock remain outstanding, the
MediQual Certificate requires the affirmative vote of a majority of the
outstanding Class B Preferred Stock and a majority of the outstanding Shares of
Class C Preferred Stock entitled to vote to (i) redeem, purchase or otherwise
acquire for value any Preferred Stock other than pursuant to the MediQual
Certificate, (ii) redeem, purchase or otherwise acquire any shares of MediQual
Common Stock other than specified repurchases from MediQual directors, officers,
consultants or employees pursuant to stock purchase or stock option plans, (iii)
authorize or issue, or obligate itself to issue any other equity security senior
to or on a parity with the Preferred Stock as to liquidation preferences,
conversion rights, voting rights or otherwise; (iv) increase the total number of
authorized Shares of Preferred Stock; (v) authorize any merger or consolidation
of MediQual with or into another corporation or entity or authorize the sale of
substantially all of the assets of MediQual; (vi) amend the MediQual Certificate
or MediQual By-laws; or (vii) increase the number of MediQual directors other
than according to the MediQual Certificate.
To amend an Ohio corporation's articles of incorporation, the Ohio Law
requires the approval of shareholders holding two-thirds of the voting power of
the corporation or, in cases in which class voting is required, of shareholders
holding two-thirds of the voting power of each class, unless otherwise specified
in such corporation's articles of incorporation. The Cardinal Articles specify
that the holders of a majority of the voting power of Cardinal or, when
appropriate, any class of shareholders, may amend the Cardinal Articles.
AMENDMENT AND REPEAL OF BY-LAWS AND REGULATIONS
Under the Delaware Law, holders of a majority of the voting power of a
corporation and, when provided in the certificate of incorporation, the
directors of the corporation, have the power to adopt, amend and repeal the
by-laws of a corporation. The MediQual Certificate grants the Directors of
MediQual such power, provided that, as long as at least 1,263,345 shares of the
Class B Preferred Stock remain outstanding, such
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amendment is also approved by both the holders of a majority of the then
outstanding Class B Preferred Stock and the holders of a majority of the then
outstanding Class C Preferred Stock.
The Ohio Law provides that only shareholders of a corporation have the
power to amend and repeal that corporation's code of regulations. The Cardinal
Regulations require that such amendments be approved by the affirmative vote of
the holders of a majority of the voting power entitled to vote on such matter,
except that the affirmative vote of the holders of not less than 75% of the
shares having voting power is required to amend, change, adopt any provision
inconsistent with, or repeal the provisions of the Cardinal Regulations dealing
with the number and classification of directors, the term of office of directors
or the removal of directors, or the provision relating to amendments to the
Cardinal Regulations.
REMOVAL OF DIRECTORS
The Delaware Law provides that directors may be removed from office with or
without cause, by the holders of a majority of the voting power of all
outstanding voting stock, unless the corporation has a classified board and its
certificate of incorporation does not otherwise provide, in which case directors
may be removed only for cause. The MediQual Board of Directors is classified and
the MediQual Certificate does not otherwise so provide.
The Ohio Law provides that, unless the governing documents of a corporation
provide otherwise, directors may be removed, with or without cause, by the
affirmative vote of the holders of a majority of the voting power of the
corporation with respect to the election of directors, except that, unless all
the directors or all the directors of a particular class are removed, no
individual director may be removed if the votes of a sufficient number of shares
are cast against his removal which, if cumulatively voted at an election of all
the directors, or all the directors of a particular class, as the case may be,
would be sufficient to elect at least one director. The Cardinal Regulations
provide that such removal requires the affirmative votes of holders of at least
75% of such voting power. In addition, the Cardinal Regulations provide that any
director may be removed by the Board of Directors for certain causes specified
in Section 1701.58(B) of the Ohio Law (if a director is found by order of court
to be of unsound mind, if he is adjudicated a bankrupt or if he fails to meet
any qualifications for office).
VACANCIES ON THE BOARD
The Delaware Law provides that unless the governing documents of a
corporation provide otherwise, vacancies and newly created directorships
resulting from a resignation or any increase in the authorized number of
directors elected by all of the stockholders having the right to vote as a
single class may be filled by a majority of the directors then in office. The
MediQual Certificate does not otherwise provide.
The Ohio Law provides that unless the governing documents of a corporation
provide otherwise, vacancies on the board of directors may be filled by a
majority of the remaining directors of a corporation. The Cardinal Regulations
provide that vacancies may be filled by the Board of Directors until Cardinal
Shareholders hold a meeting to fill such vacancy. In addition, Cardinal
Shareholders may elect a director to fill a vacancy (including any vacancy that
previously has been filled by the Board of Directors) at any meeting of Cardinal
Shareholders called for that purpose.
RIGHT TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
The Delaware Law permits special meetings of stockholders to be called by
the board of directors and such other persons, including stockholders, as the
certificate of incorporation or bylaws may provide. The Delaware Law does not
require that stockholders be given the right to call special meetings. The
MediQual Certificate provides that special meetings may be called by the
Chairman of the Board of Directors, by the President or by a majority of the
Board of Directors of MediQual.
Under the Ohio Law, the holders of at least 25% of the outstanding shares
of a corporation, unless the corporation's regulations specify another
percentage, which may in no case be greater than 50%, the directors by action at
a meeting or a majority of the directors acting without a meeting, the chairman
of the board, the president or, in case of the president's death or disability,
the vice president authorized to exercise the authority of the president have
the authority to call special meetings of shareholders. The Cardinal
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Regulations expressly provide that special meetings of Cardinal Shareholders may
be called by the Chairman of the Board, the President, a majority of the
directors acting with or without a meeting or the holders of at least 25% of the
outstanding Cardinal Common Shares.
SHAREHOLDER ACTION WITHOUT A MEETING
The Delaware Law provides that any action that may be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if the holders of common stock having not less than the minimum number of
votes otherwise required to approve such action at a meeting of stockholders
consent in writing. Under the Ohio Law, any action that may be taken by
shareholders at a meeting may be taken without a meeting with the unanimous
written consent of all shareholders entitled to vote at such meeting.
CLASS VOTING
The Delaware Law requires voting by separate classes only with respect to
amendments to a corporation's certificate of incorporation that adversely affect
the holders of those classes or that increase or decrease the aggregate number
of authorized shares or the par value of the shares of any of those classes. The
MediQual Certificate provides that each share of Class B Preferred Stock and
each share of Class C Preferred Stock shall entitle the holder thereof to such
number of votes per share as shall equal the number of shares of MediQual Common
Stock into which each share of Class B Preferred Stock or each share of Class C
Preferred Stock, as the case may be, is then convertible. Pursuant to the
MediQual Certificate, the holders of the Class B Preferred Stock, the Class C
Preferred Stock and the MediQual Common Stock shall vote together on the Merger
Proposal as a single class and, further, that the Series 1986 Class B Preferred
Stock and the Series 1987 Class B Preferred Stock shall be treated as one class
for all purposes including voting. The MediQual Certificate also provides that,
as long as at least 1,263,345 shares of the Class B Preferred Stock remain
outstanding, certain corporate actions (including authorization of any merger of
MediQual with or into any other corporation or entity) requires approval of such
actions by the holders of a majority of the Class B Preferred Stock and the
holders of a majority of the Class C Preferred Stock, each voting separately as
a class. Under the Ohio Law, holders of a particular class of shares are
entitled to vote as a separate class if the rights of that class are affected in
certain respects by mergers, consolidations or amendments to the articles of
incorporation.
CUMULATIVE VOTING
Under the Delaware Law, stockholders do not have the right to cumulate
their votes in the election of directors unless such right is granted in the
certificate of incorporation. The MediQual Certificate does not grant such
rights. Under the Ohio Law, unless the articles of incorporation are amended to
eliminate cumulative voting for directors following their initial filing with
the Ohio Secretary of State, each shareholder has the right to vote cumulatively
in the election of directors if certain notice requirements are satisfied. The
Cardinal Articles have not been amended to eliminate the rights of Cardinal
Shareholders to vote cumulatively in the election of directors.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS
Chapter 1704 of the Ohio Law provides generally that any person who
acquires 10% or more of a corporation's voting stock (thereby becoming an
"interested shareholder") may not engage in a wide range of "business
combinations" with the corporation for a period of three years following the
date the person became an interested stockholder, unless the directors of the
corporation have approved the transactions or the interested shareholder's
acquisition of shares of the corporation prior to the date the interested
shareholder became a shareholder of the corporation.
These restrictions on interested shareholders do not apply under certain
circumstances, including, but not limited to, the following (i) if the
corporation's original articles of incorporation contains a provision expressly
electing not to be governed by Chapter 1704 of the Ohio Law; (ii) if the
corporation, by action of its shareholders, adopts an amendment to its articles
of incorporation expressly electing not to be governed by such section or (iii)
if, on the date the interested shareholder became a shareholder of the
corporation, the
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corporation did not have a class of voting shares registered or traded on a
national securities exchange. The Cardinal Articles do not contain a provision
electing not to be governed by such section.
Under Section 1701.831 of the Ohio Law, unless the articles of
incorporation or regulations of a corporation otherwise provide, any "control
share acquisition" of an "issuing public corporation" can be made only with the
prior approval of the corporation's shareholders. A "control share acquisition"
is defined as any acquisition of shares of a corporation that, when added to all
other shares of that corporation owned by the acquiring person, would enable
that person to exercise levels of voting power in any of the following ranges:
at least 20% but less than 33 1/3%, at least 33 1/3% but less than 50%, 50% or
more. The Cardinal Regulations expressly provide that the provisions of Section
1701.831 of the Ohio Law shall not apply.
Although Section 203 of the Delaware Law is similar to Chapter 1704 of the
Ohio Law, Section 203 is not applicable to corporations, such as MediQual, that
do not have a class of voting stock that is listed on a national securities
exchange.
MERGERS, ACQUISITIONS AND CERTAIN OTHER TRANSACTIONS
The Delaware Law requires approval of mergers, consolidations and
dispositions of all or substantially all of a corporation's assets (other than
so-called parent-subsidiary mergers) by a majority of the voting power of the
corporation, unless the certificate of incorporation specifies a different
percentage. The MediQual Certificate does not provide for a different
percentage. However, as long as at least 1,263,345 shares of the Class B
Preferred Stock remain outstanding, the MediQual Certificate requires the
affirmative vote of a majority of the outstanding Class B Preferred Shares and a
majority of the outstanding shares of Class C Preferred Stock entitled to vote
to authorize any merger or consolidation of MediQual. The Delaware Law does not
require stockholder approval for majority share acquisitions or for combinations
involving the issuance of less than 20% of the voting power of the corporation.
The Ohio Law generally requires approval of mergers, dissolutions,
dispositions of all or substantially all of a corporation's assets, and majority
share acquisitions and combinations involving issuance of shares representing
one-sixth or more of the voting power of the corporation immediately after the
consummation of the transaction (other than so-called parent-subsidiary
mergers), by two-thirds of the voting power of the corporation, unless the
articles of incorporation specify a different proportion (not less than a
majority). The Cardinal Articles provide that the vote of a majority of the
voting power of Cardinal is required to approve such actions.
CONSIDERATION OF CONSTITUENCIES
Section 1701.59 of the Ohio Law permits a director, in determining what he
reasonably believes to be in the best interests of the corporation, to consider,
in addition to the interests of the corporation's shareholders, any of the
following (i) the interests of the corporation's employees, suppliers,
creditors, and customers; (ii) the economy of the state and nation, (iii)
community and societal considerations; and (iv) the long-term as well as
short-term interests of the corporation and its shareholders, including the
possibility that these interests may be best served by the continued
independence of the corporation. The Delaware Law contains no comparable
provision. However, the MediQual Certificate provides that the MediQual Board of
Directors, when considering a tender offer or merger or acquisition proposal,
may take into account factors in addition to potential economic benefits to
MediQual Stockholders, including without limitation (i) comparison of the
proposed consideration to be received by MediQual Stockholders in relation to
the then current market price of MediQual's capital stock, the estimated current
value of MediQual in a freely negotiated transaction, and the estimated future
value of MediQual as an independent entity and (ii) the impact of such a
transaction on the employees, suppliers and customers of MediQual and its effect
on the communities in which MediQual operates.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the Delaware Law, appraisal rights are available to dissenting
stockholders in connection with certain mergers or consolidations. However,
unless the certificate of incorporation otherwise provides, the Delaware Law
does not provide for appraisal rights (i) if the shares of the corporation are
listed on a national securities exchange or designated as a national market
systems security on an interdealer quotations system by
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the National Association of Securities Dealers, Inc. or held of record by more
than 2,000 stockholders (as long as the stockholders receive in the merger
shares of the surviving corporation or of any other corporation the shares of
which are listed on a national securities exchange or designated as a national
market systems security on an interdealer quotations system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
stockholders) or (ii) if the corporation is the surviving corporation and no
vote of its stockholders is required for the merger. The MediQual Certificate
does not provide otherwise. See "Rights of Dissenting Stockholders." The
Delaware Law does not provide appraisal rights to stockholders who dissent from
the sale of all or substantially all of a corporation's assets or an amendment
to the corporation's certificate of incorporation, although a corporation's
certificate of incorporation may so provide.
Under the Ohio Law, dissenting shareholders are entitled to appraisal
rights in connection with the lease, sale, exchange, transfer, or other
disposition of all or substantially all of the assets of a corporation and in
connection with certain amendments to the corporation's articles of
incorporation. Shareholders of an Ohio corporation being merged into or
consolidated with another corporation are also entitled to appraisal rights. In
addition, shareholders of an acquiring corporation are entitled to appraisal
rights in any merger, combination or majority share acquisition in which such
shareholders are entitled to voting rights. The Ohio Law provides shareholders
of an acquiring corporation with voting rights if the acquisition (a "majority
share acquisition") involves the transfer of shares of the acquiring corporation
entitling the recipients thereof to exercise one-sixth or more of the voting
power of such acquiring corporation immediately after the consummation of the
transaction.
Under the Delaware Law, among other procedural requirements, a
stockholder's written demand for appraisal of shares must be received before the
taking of the vote on the matter giving rise to appraisal rights. Under the Ohio
Law, a shareholder's written demand must be delivered to the corporation not
later than ten days after the taking of the vote on the matter giving rise to
appraisal rights.
DIVIDENDS
Both the Delaware Law and the Ohio Law provide that dividends may be paid
in cash, property or shares of a corporation's capital stock. The Delaware Law
provides that a corporation may pay dividends out of any surplus and, if it has
no surplus, out of any net profits for the fiscal year in which the dividend was
declared or for the preceding fiscal year (provided that such payment will not
reduce capital below the amount of capital represented by all classes of shares
having a preference upon the distribution of assets). The Ohio Law provides that
a corporation may pay dividends out of surplus and must notify its shareholders
if a dividend is paid out of capital surplus.
PREEMPTIVE RIGHTS OF SHAREHOLDERS
The Delaware Law provides that no stockholder shall have any preemptive
rights to purchase additional securities of the corporation unless the
certificate of incorporation expressly grants such rights. The MediQual
Certificate does not provide for preemptive rights.
The Ohio Law provides that, subject to certain limitations and conditions
contained in the Ohio Law and unless the articles of incorporation provide
otherwise, shareholders shall have preemptive rights to purchase additional
securities of the corporation. The Cardinal Articles expressly eliminate any
preemptive rights.
DIRECTOR LIABILITY AND INDEMNIFICATION
The Delaware Law allows a Delaware corporation to include in its
certificate of incorporation, and the MediQual Certificate contains, a provision
eliminating the liability of a director for monetary damages for a breach of his
fiduciary duties as a director, except liability (i) for any breach of the
Director's duty of loyalty to MediQual or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law; (iii) under Section 174 of the Delaware Law (which deals
generally with unlawful payments of dividends, stock repurchases and
redemptions); and (iv) for any transaction from which the director derived an
improper personal benefit.
There is, under the Ohio Law, no comparable provision limiting the
liability of officers, employees or agents of the corporation and the Cardinal
Articles contain no such provision. However, under the Ohio Law,
67
<PAGE> 71
a director is not liable for monetary damages unless it is proved by clear and
convincing evidence that his action or failure to act was undertaken with
deliberate intent to cause injury to the corporation or with reckless disregard
for the best interests of the corporation.
The MediQual Certificate and the MediQual By-laws provide for
indemnification of any and all persons (including MediQual Directors) whom it
shall have power to indemnify under and to the fullest extent permitted by the
Delaware Law. The Delaware Law permits a Delaware corporation to indemnify
directors, officers, employees, and agents under certain circumstances and
mandates indemnification under certain circumstances. The Delaware Law permits a
corporation to indemnify an officer, director, employee or agent for fines,
judgments, or settlements, as well as expenses in the context of actions other
than derivative actions, if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification against expenses incurred by a director, officer,
employee, or agent in connection with a proceeding against such person for
actions in such capacity is mandatory to the extent that such person has been
successful on the merits. If a director, officer, employee, or agent is
determined to be liable to the corporation, indemnification for expenses is not
allowable, subject to limited exceptions when a court deems the award of
expenses appropriate. The Delaware Law grants express power to a Delaware
corporation to purchase liability insurance for its directors, officers,
employees, and agents, regardless of whether any such person is otherwise
eligible for indemnification by the corporation. Advancement of expenses is
permitted, but a person receiving such advances must repay those expenses if it
is ultimately determined that he is not entitled to indemnification.
Under the Ohio Law, Ohio corporations are permitted to indemnify directors,
officers, employees, and agents within prescribed limits and must indemnify them
under certain circumstances. The Ohio Law does not authorize payment by a
corporation of judgments against a director, officer, employee, or agent after a
finding of negligence or misconduct in a derivative suit absent a court order.
Indemnification is required, however, to the extent such person succeeds on the
merits. In all other cases, if it is determined that a director, officer,
employee, or agent acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, indemnification
is discretionary, except as otherwise provided by a corporation's articles of
incorporation, code of regulations, or by contract, except with respect to the
advancement of expenses of directors (as discussed in the next paragraph). The
statutory right to indemnification is not exclusive in Ohio, and Ohio
corporations may, among other things, purchase insurance to indemnify those
persons.
The Ohio Law provides that a director (but not an officer, employee, or
agent) is entitled to mandatory advancement of expenses, including attorneys'
fees, incurred in defending any action, including derivative actions, brought
against the director, provided the director agrees to cooperate with the
corporation concerning the matter and to repay the amount advanced if it is
proved by clear and convincing evidence that his act or failure to act was done
with deliberate intent to cause injury to the corporation or with reckless
disregard for the corporation's best interests.
The Cardinal Articles provide for indemnification by Cardinal to the
fullest extent expressly permitted by the Ohio Law of any person made or
threatened to be made a party to any action, suit, or proceeding by reason of
the fact that he is or was a director, officer, employee, or agent of Cardinal
or of any other corporation for which he was serving as a director, officer,
employee, or agent at the request of Cardinal. See also "The Merger -- Interests
of Certain Persons in the Merger."
Cardinal has entered into indemnification contracts with each of its
directors and executive officers. These contracts generally: (i) confirm the
existing indemnity provided to them under the Cardinal Regulations and assure
that this indemnity will continue to be provided; (ii) provide that if Cardinal
does not maintain directors' and officers' liability insurance, Cardinal will,
in effect, become a self-insurer of the coverage; and (iii) provide that, in
addition, the directors and officers shall be indemnified to the fullest extent
permitted by law against all expenses (including legal fees), judgments, fines,
and settlement amounts paid or incurred by them in any action or proceeding,
including any action by or in the right of Cardinal, on account of their service
as a director, officer, employee or agent of Cardinal or at the request of
Cardinal as a director, officer, employee or agent of another corporation or
enterprise.
68
<PAGE> 72
Indemnification; Insurance. In the Merger Agreement, Cardinal has agreed
that, from and after the Effective Time, it will cause the Surviving Corporation
to indemnify and hold harmless the present and former officers and directors of
MediQual in respect of acts or omissions occurring prior to the Effective Time
to the extent provided under the MediQual Certificate and the MediQual By-laws
in effect on the date of the Merger Agreement. Cardinal has also agreed to use
its reasonable efforts to cause the Surviving Corporation to maintain in effect
for not less than one year after the Effective Time MediQual's current policy of
director's and officer's insurance with respect to matters occurring prior to
the Effective Time. However, the Surviving Corporation may substitute therefor
policies containing terms and conditions which are no less advantageous to
covered officers and directors and the Surviving Corporation is not required to
pay a premium for such insurance in excess of $18,000, but in such case is
required to purchase as much insurance as possible for such $18,000.
DESCRIPTION OF CARDINAL CAPITAL STOCK
As of June 13, 1997, the authorized capital stock of Cardinal consisted of:
(i) 150,000,000 Cardinal Common Shares, of which 108,815,461 were issued and
outstanding, 236,454 were issued and held in treasury, and 4,758,261 were
reserved for issuance pursuant to options outstanding under stock incentive
plans (with approximately 1,521,068 additional Cardinal Common Shares available
for issuance under such plans), (ii) 5,000,000 Class B common shares, without
par value, none of which was outstanding or reserved for issuance, and (iii)
500,000 Nonvoting Preferred Shares, without par value ("Preferred Shares"), none
of which has been issued or reserved for issuance.
The holders of Cardinal Common Shares do not have preemptive rights and
have no rights to convert their shares into any other security. All Cardinal
Common Shares are entitled to participate equally, and ratably in dividends on
Cardinal Common Shares as may be declared by Cardinal's Board of Directors. In
the event of the liquidation of Cardinal, holders of Cardinal Common Shares are
entitled to share ratably in assets remaining after payment of all liabilities,
subject to prior distribution rights of any Preferred Shares then outstanding.
Holders of Cardinal Common Shares are entitled to one vote per share for the
election of directors and upon all matters on which shareholders are entitled to
vote. Cardinal Shareholders are afforded the right to vote their shares
cumulatively for the election of the nominees to fill the particular class of
directors to be elected at each annual meeting, subject to compliance with
certain procedural requirements.
The Cardinal Articles provide that the Cardinal Board is authorized to
approve the issuance of the Preferred Shares from time to time in one or more
series without future authorization of its shareholders. The Board of Directors
is authorized to adopt amendments to the Cardinal Articles from time to time
fixing or changing the terms and designations of the Preferred Shares, including
(i) division of such shares into series and the designation and authorized
number of shares of each series, (ii) dividend rate, (iii) dates of payment of
dividends and the dates from which they are cumulative, (iv) liquidation price,
(v) redemption rights and price, (vi) sinking fund requirements, (vii)
conversion rights, and (viii) restrictions on the issuance of such shares.
Holders of Preferred Shares will have no voting rights, except as required by
law. Holders of Preferred Shares will have no preemptive rights to subscribe to
or for any additional capital shares of Cardinal. Cardinal has no present plans
to issue any Preferred Shares.
The Cardinal Regulations provide that the Board of Directors shall consist
of that number of directors as determined by action of the Board of Directors,
but in no case fewer than nine or more than fourteen members, divided into three
classes, and require that any proposal to either remove a director during his
term of office or to further amend the Cardinal Regulations relating to the
classification, number, or removal of directors be approved by the affirmative
vote of the holders of not less than 75% of the shares having voting power with
respect to such proposal. The Board of Directors may fill any vacancy with a
person who shall serve until the Cardinal Shareholders hold an election to fill
the vacancy. The purpose of these provisions is to prevent directors from being
removed from office prior to the expiration of their respective terms, thus
protecting the safeguards inherent in the classified board structure unless
dissatisfaction with the performance of one or more directors is widely shared
by Cardinal Shareholders. However, these provisions could also have the effect
of increasing from one year to two or three years (depending upon the number of
Cardinal Common Shares held) the amount of time required for an acquiror to
obtain control of Cardinal by electing a majority
69
<PAGE> 73
of the Board of Directors, and may also make the removal of incumbent management
more difficult and discourage or render more difficult certain mergers, tender
offers, proxy contests, or other potential takeover proposals. To the extent
that these provisions have the effect of giving management more bargaining power
in negotiations with a potential acquiror, they could result in management's
using the bargaining power not only to try to negotiate a favorable price for an
acquisition, but also to negotiate more favorable terms for management.
LEGAL MATTERS
The validity of the Cardinal Common Shares to be issued in the Merger, any
Cardinal Warrants that may be issued in connection therewith and any Cardinal
Common Shares issuable upon exercise of the Cardinal Warrants will be passed
upon for Cardinal by Baker & Hostetler LLP, Cleveland, Ohio, counsel to
Cardinal.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of Cardinal and its consolidated subsidiaries as of June 30, 1996 and
1995, and for each of the three years in the period ended June 30, 1996, have
been incorporated in this Proxy Statement/Prospectus by reference from the June
1997 Cardinal Form 8-K. Such consolidated financial statements and schedule of
Cardinal and its subsidiaries, except Pyxis and Owen, have been audited by
Deloitte & Touche LLP as stated in their report which is incorporated herein by
reference from the June 1997 Cardinal Form 8-K. The financial statements of
Pyxis and Owen (consolidated with those of Cardinal in the consolidated
financial statements) have been audited by Ernst & Young LLP and Price
Waterhouse LLP, respectively, as stated in their reports which are incorporated
herein by reference from the June 1997 Cardinal Form 8-K. Such consolidated
financial statements of Cardinal and its consolidated subsidiaries are
incorporated by reference or contained herein in reliance upon the respective
reports of such firms given upon their authority as experts in accounting and
auditing. All of the foregoing firms are independent auditors.
The MediQual audited financial statements included in this Proxy
Statement/Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, 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.
OTHER MATTERS
Representatives of Arthur Andersen LLP are expected to be present at the
Special Meeting with the opportunity to make statements if they so desire. Such
representatives are also expected to be available to respond to appropriate
questions.
70
<PAGE> 74
FINANCIAL STATEMENTS
OF MEDIQUAL SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets at December 31, 1995 and 1996 and March 31, 1997 (unaudited)........... F-3
Statements of Operations for the three years ended December 31, 1994, 1995 and 1996
and for the three months ended March 31, 1996 and 1997 (unaudited).................. F-4
Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the
three years ended December 31, 1994, 1995 and 1996 and for the three months ended
March 31, 1997 (unaudited).......................................................... F-5
Statements of Cash Flows for the three years ended December 31, 1994, 1995 and 1996
and for the three months ended March 31, 1996 and 1997 (unaudited).................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MEDIQUAL SYSTEMS, INC.:
We have audited the accompanying balance sheets of MediQual Systems, Inc.
(a Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of operations, redeemable preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 MediQual Systems, Inc. as of
December 31, 1995 and 1996, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 13, 1997
(except for the matter
discussed in Note 9 as to
which the date is
July 7, 1997)
F-2
<PAGE> 76
MEDIQUAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 1,006,477 $ 2,520,189 $ 2,860,662
Accounts receivable, less reserve of
$200,000.................................... 1,025,358 1,024,735 1,084,666
Prepaid expenses............................... 115,725 115,389 69,400
------------ ------------ ------------
Total current assets................... 2,147,560 3,660,313 4,014,728
------------ ------------ ------------
Property and equipment, net.................... 950,402 1,029,977 992,511
Other assets................................... 132,753 5,619 9,979
------------ ------------ ------------
$ 3,230,715 $ 4,695,909 $ 5,017,218
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................... $ 389,231 $ 231,746 $ 188,099
Accrued employee compensation and benefits..... 1,121,963 979,827 566,816
Accrued expenses............................... 588,014 577,277 524,853
Deferred revenue............................... 1,058,606 681,051 477,279
Current portion of long-term debt.............. 414,172 105,223 141,036
------------ ------------ ------------
Total current liabilities.............. 3,571,986 2,575,124 1,898,083
------------ ------------ ------------
Long-term debt, less current portion........... 605,223 75,000 --
------------ ------------ ------------
Class A Redeemable preferred stock, nonvoting, no
par value -- 500 shares authorized, 229 shares
issued and outstanding (at redemption value)... 3,473,190 3,663,545 3,710,777
Class B Redeemable convertible preferred stock,
$.01 par value -- 6,500,000 shares authorized,
6,316,726 shares issued and outstanding (at
redemption value).............................. 5,204,880 5,204,880 5,204,880
Class C Redeemable convertible preferred stock,
$.01 par value -- 2,100 shares authorized,
2,022 shares issued and outstanding (at
redemption value).............................. 2,602,839 2,873,046 2,944,872
------------ ------------ ------------
Total redeemable preferred stock....... 11,280,909 11,741,471 11,860,529
------------ ------------ ------------
Commitments (Notes 4 and 8)
Stockholders' Equity (Deficit):
Common stock, $.001 par value -- 7,500,000
shares authorized, 3,523,662 shares issued
at December 31, 1995 and 3,880,852 shares
issued at December 31, 1996 and March 31,
1997........................................ 3,523 3,881 3,881
Additional paid-in capital..................... 1,483,194 2,135,974 2,135,974
Accumulated deficit............................ (13,452,883) (11,614,804) (10,660,512)
Treasury stock, at cost, 21,451 shares at
December 31, 1995 and 6,987 shares at
December 31, 1996 and March 31, 1997........ (59,714) (19,214) (19,214)
Subscription receivable........................ (201,523) (201,523) (201,523)
------------ ------------ ------------
Total stockholders' equity (deficit)... (12,227,403) (9,695,686) (8,741,394)
------------ ------------ ------------
$ 3,230,715 $ 4,695,909 $ 5,017,218
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 77
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
System license fees..... $11,609,205 $ 9,804,895 $ 8,689,678 $2,272,359 $2,451,403
Services................ 475,166 1,168,944 2,312,227 $ 466,500 $ 646,707
----------- ----------- ----------- ---------- ----------
Total revenues....... 12,084,371 10,973,839 11,001,905 2,738,859 3,098,110
----------- ----------- ----------- ---------- ----------
Operating expenses:
Cost of revenues........ 2,997,535 2,444,884 2,067,325 378,040 750,437
Sales and marketing..... 1,927,657 1,970,522 1,038,846 256,180 202,270
Research and
development.......... 3,625,785 4,012,870 2,413,076 628,110 582,547
General and
administration....... 3,401,164 3,357,912 2,758,300 787,085 499,965
Restructuring charge
(credit)............. -- 580,000 (152,676) -- --
----------- ----------- ----------- ---------- ----------
Total operating
expenses........... 11,952,141 12,366,188 8,124,871 2,049,415 2,035,219
----------- ----------- ----------- ---------- ----------
Operating income
(loss)............. 132,230 (1,392,349) 2,877,034 689,444 1,062,891
Interest expense.......... 46,535 89,161 59,258 24,716 8,568
Interest and other
(income) expense, net... (219,685) (19,222) (195,865) 2,282 (105,857)
Non-recurring expenses of
terminated IPO.......... -- -- 600,000 -- --
----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes....... 305,380 (1,462,288) 2,413,641 662,446 1,160,180
Provision for income
taxes................... 22,500 -- 115,000 77,209 86,830
----------- ----------- ----------- ---------- ----------
Net income (loss).... 282,880 (1,462,288) 2,298,641 585,237 1,073,350
Accretion of preferred
stock dividends......... 392,091 294,890 460,562 113,734 119,058
----------- ----------- ----------- ---------- ----------
Net income (loss) to
common
stockholders....... $ (109,211) $(1,757,178) $ 1,838,079 $ 471,503 $ 954,292
=========== =========== =========== ========== ==========
Pro forma earnings (loss)
per Common Share:
Primary................. ($0.02) ($0.31) $0.31 $0.08 $0.16
Fully Diluted........... ($0.02) ($0.31) $0.29 $0.08 $0.15
Pro forma weighted average
number of Common Shares
outstanding:
Primary................. 5,603,302 5,663,292 5,956,246 5,701,134 6,084,413
Fully Diluted........... 5,982,019 5,877,823 6,400,690 5,782,486 6,467,023
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 78
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE ---------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ----------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ---------- --------- ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............ 229 $3,252,777 6,318,748 $7,341,151 3,386,530 $3,386 $1,343,674
Exercise of stock options and
warrants........................... -- -- -- -- 122,038 122 124,441
Purchase of treasury stock........... -- -- -- -- -- -- --
Net income........................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.......................... -- 170,319 -- 221,772 -- -- --
--- ---------- --------- ---------- --------- ------ ----------
BALANCE, DECEMBER 31, 1994............ 229 3,423,096 6,318,748 7,562,923 3,508,568 3,508 1,468,115
Exercise of stock options............ -- -- -- -- 15,094 15 15,079
Net loss............................. -- -- -- -- -- -- --
Accretion of preferred stock
dividends.......................... -- 50,094 -- 244,796 -- -- --
--- ---------- --------- ---------- --------- ------ ----------
BALANCE, DECEMBER 31, 1995............ 229 3,473,190 6,318,748 7,807,719 3,523,662 3,523 1,483,194
Exercise of stock options............ -- -- -- -- 271,050 272 270,780
Exercise of convertible debt and
options............................ -- -- -- -- 86,140 86 382,000
Sale of treasury stock............... -- -- -- -- -- -- --
Net income........................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.......................... -- 190,355 -- 270,207 -- -- --
--- ---------- --------- ---------- --------- ------ ----------
BALANCE, DECEMBER 31, 1996............ 229 3,663,545 6,318,748 8,077,926 3,880,852 3,881 2,135,974
Net income (unaudited)............... -- -- -- -- -- -- --
Accretion of preferred stock
dividends (unaudited).............. -- 47,232 -- 71,826 -- -- --
--- ---------- --------- ---------- --------- ------ ----------
BALANCE, MARCH 31, 1997 (UNAUDITED)... 229 $3,710,777 6,318,748 $8,149,752 3,880,852 $3,881 $2,135,974
=== ========== ========= ========== ========= ====== ==========
<CAPTION>
TREASURY STOCK
ACCUMULATED ------------------- SUBSCRIPTION
DEFICIT SHARES AMOUNT RECEIVABLE TOTAL
------------ ------- -------- ------------ ------------
BALANCE, DECEMBER 31, 1993............ $(11,586,494) -- $ -- $ (201,523) $(10,440,957)
Exercise of stock options and
warrants........................... -- -- -- -- 124,563
Purchase of treasury stock........... -- 21,451 (59,714) -- (59,714)
Net income........................... 282,880 -- -- -- 282,880
Accretion of preferred stock
dividends.......................... (392,091) -- -- -- (392,091)
------------ ----- -------- --------- -----------
BALANCE, DECEMBER 31, 1994............ (11,695,705) 21,451 (59,714) (201,523) (10,485,319)
Exercise of stock options............ -- -- -- -- 15,094
Net loss............................. (1,462,288) -- -- -- (1,462,288)
Accretion of preferred stock
dividends.......................... (294,890) -- -- -- (294,890)
------------ ----- -------- --------- -----------
BALANCE, DECEMBER 31, 1995............ (13,452,883) 21,451 (59,714) (201,523) (12,227,403)
Exercise of stock options............ -- -- -- -- 271,052
Exercise of convertible debt and
options............................ -- -- -- -- 382,086
Sale of treasury stock............... -- (14,464) 40,500 -- 40,500
Net income........................... 2,298,641 -- -- -- 2,298,641
Accretion of preferred stock
dividends.......................... (460,562) -- -- -- (460,562)
------------ ----- -------- --------- -----------
BALANCE, DECEMBER 31, 1996............ (11,614,804) 6,987 (19,214) (201,523) (9,695,686)
Net income (unaudited)............... 1,073,350 -- -- -- 1,073,350
Accretion of preferred stock
dividends (unaudited).............. (119,058) -- -- -- (119,058)
------------ ----- -------- --------- -----------
BALANCE, MARCH 31, 1997 (UNAUDITED)... $(10,660,512) 6,967 $(19,214) $ (201,523) $ (8,741,394)
============ ===== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 79
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
----------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 282,880 $(1,462,288) $2,298,641 $ 585,237 $1,073,350
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation..................... 700,074 786,022 536,650 119,554 122,614
Non-cash portion of restructuring
charges (credits) (Note 7)..... -- 132,485 (152,676) -- --
Changes in current assets and
liabilities:
Accounts receivable.............. 753,539 121,559 623 (157,570) (59,931)
Prepaid expenses................. (49,366) 493,151 336 (3,678) 45,989
Accounts payable................. (172,897) 16,785 (157,485) (188,758) (43,647)
Accrued employee compensation and
benefits....................... 132,829 (76,065) (142,136) (199,512) (413,011)
Accrued expenses................. (383,917) (122,350) 141,939 1,960 (52,424)
Deferred revenue................. (1,893,954) (274,307) (377,555) 115,394 (203,772)
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities........ (630,812) (385,008) 2,148,337 272,627 469,168
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (909,548) (181,297) (616,225) -- (85,148)
(Increase) decrease in other
assets........................... (51,624) 62,807 127,134 6,956 (4,360)
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities........ (961,172) (118,490) (489,091) 6,956 (89,508)
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt.... 470,246 500,000 75,000 75,000 --
Repayments of long-term debt....... (118,832) (230,811) (662,154) (44,594) (39,187)
Proceeds from exercise of stock
options.......................... 124,563 15,094 401,120 262,656 --
Proceeds (payments) from sale
(purchase) of treasury stock..... (59,714) -- 40,500 40,500 --
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities........ 416,263 284,283 (145,534) 333,562 (39,187)
----------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents................... (1,175,721) (219,215) 1,513,712 613,145 340,473
Cash and cash equivalents, beginning
of period.......................... 2,401,413 1,225,692 1,006,477 1,006,477 2,520,189
----------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of
period............................. $ 1,225,692 $ 1,006,477 $2,520,189 $1,619,622 $2,860,662
=========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for --
Interest......................... $ 41,564 $ 59,445 $ (3,686) $ 19,745 $ 4,136
=========== ========== ========== ========== ==========
Income taxes, net of refunds
received....................... $ 174,425 $ (209,250) $ 69,361 $ 1,150 $ 10,250
=========== ========== ========== ========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1996, the Company issued 52,070 shares of common stock upon the exercise
of a convertible debenture with a principal balance of $252,018
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 80
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) DESCRIPTION OF BUSINESS
MediQual Systems, Inc. (the Company) is a leading supplier of clinical
information management systems (the Atlas System) and services to the health
care industry. The Company's systems and services combine proprietary clinical
knowledge with raw patient encounter data to create valuable information that
providers, payors and suppliers use to monitor and enhance the effectiveness,
efficiency and appropriateness of care.
The Company is subject to certain risks, including but not limited to
dependence on the Atlas System and a Pennsylvania government mandate for a
majority of the Company's revenues, dependence on continued access to data,
dependence on systems development introduction and enhancements, competition
from other service providers, and dependence on key personnel. The Company has
also experienced a limited history of profitability.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
significant accounting policies described below and elsewhere in these notes to
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 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. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the March 31, 1996 and 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of results of
this interim period. The results of operations for the three months ended March
31, 1996 and 1997 are not necessarily indicative of the results to be expected
for the full year or for any future period.
Cash and Cash Equivalents
The Company considers all highly liquid investments, if any, with an
original maturity of less than three months to be cash equivalents. Cash
equivalents consist mainly of money market funds.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its temporary cash investments in highly rated
financial institutions. The Company has not experienced any losses on these
investments to date. The Company has not experienced significant losses related
to receivables from individual customers or groups of customers in the health
care industry or by geographic area. Due to these factors, no additional credit
risk beyond amounts provided for collection losses is believed by management to
be inherent in the Company's accounts receivable.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and long-term obligations.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payables approximate fair value due to the short-term
nature of these instruments. The Company's long-term obligations, which bear
interest at a variable market rate, accordingly have a carrying amount that
approximates fair value. These long-term obligations, which carry a
F-7
<PAGE> 81
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
fixed rate of interest, also approximate fair value, based on rates available to
the Company for debt with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on a straight line basis over a three to five year estimated useful
life. Repairs and maintenance costs are charged to expense as incurred.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment..................................... $2,051,921 $2,668,146 $2,753,294
Furniture and fixtures................................. 270,369 270,369 270,369
Equipment under capital lease.......................... 204,149 204,149 204,149
Leasehold improvements................................. 19,253 19,253 19,253
---------- ---------- ----------
2,545,692 3,161,917 3,247,065
Less-Accumulated depreciation.......................... 1,595,290 2,131,940 2,254,554
---------- ---------- ----------
$ 950,402 $1,029,977 $ 992,511
========== ========== ==========
</TABLE>
Software Development Costs
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No.86, Accounting For the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. The Company
licenses software in a market that is subject to rapid technological change, new
product introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's financial position or results of operations. Therefore, the Company
charges all research and development expenses to operations in the period
incurred.
Other Assets
Other assets at December 31, 1995 include restricted cash of approximately
$120,000 held in escrow in connection with an operating lease. These funds were
released from escrow in June 1996.
Revenue Recognition
The Company licenses its Atlas systems pursuant to annual agreements that
provide for the payment of licenses fees at the beginning of the term. System
license fees cover software and database upgrades and enhancements and telephone
customer support. Renewal of these Agreements is subject to annual price
increases. Revenues from system licenses are recognized upon shipment of the
system to the customer or the anniversary of the original shipment if collection
is probable and remaining Company obligations are insignificant. The portion of
license fees relating to system maintenance is deferred and recognized over the
annual maintenance period. CIM service revenues, including analytical and data
collection services are recognized as the services are performed. Unrecognized
amounts are recorded as deferred revenue in the accompanying balance sheets.
F-8
<PAGE> 82
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Income Taxes
The Company follows SFAS No. 109, Accounting for Income Taxes, by providing
for federal and state income taxes under the liability method. Deferred taxes
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, as measured by the current statutory tax rates.
The Company's deferred income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Tax assets
Net operating loss carryforwards................................ $ 3,656,000 $ 2,993,000
Reserves not yet deductible for tax purposes.................... 340,000 314,000
Deferred revenue................................................ 174,000 146,000
Federal tax carryforwards....................................... 204,000 204,000
----------- -----------
Total tax assets............................................. 4,374,000 3,657,000
Tax liabilities
Property basis differences...................................... (79,000) 18,000
Other........................................................... (5,000) (6,000)
----------- -----------
Total tax liabilities........................................ (84,000) 12,000
----------- -----------
Net tax asset................................................ 4,290,000 3,669,000
Less: valuation allowance.................................... (4,290,000) (3,669,000)
----------- -----------
Amount recorded in financial statements...................... $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Current
Federal................................. $ -- $ -- $ 43,000
State................................... 22,500 -- 72,000
------- ------- --------
$22,500 $ -- $115,000
======= ======= ========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of $8,313,900 expiring through the year 2009. The
Company also has available federal tax credits of approximately $204,000
expiring through the year 2003. Under SFAS No. 109 the Company cannot recognize
a deferred tax asset for the future benefit of its net operating loss
carryforwards unless it concludes that it is "more likely than not" that the
deferred tax asset would be realized. Due to its history of operating losses and
possible limitations of utilization of net operating losses discussed below, the
Company has recorded a full valuation allowance against its otherwise
recognizable net deferred tax asset, in accordance with SFAS No. 109.
Section 382 of the Internal Revenue Code relates to the use of corporate
tax attributes following a change in ownership. Under this Section, a defined
ownership change can result from the issuance of new equity securities. The
Company's net operating loss and tax credit carryforwards available to be used
in any given year may be limited in the event of such ownership changes.
Pro Forma Earnings (Loss) Per Share
Pro forma earnings (loss) per share is computed based on the weighted
average number of common shares outstanding and dilutive common stock
equivalents. For purposes of this calculation, dilutive stock
F-9
<PAGE> 83
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
options and warrants are considered common stock equivalents using the treasury
stock method. All outstanding shares of Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock, which will be converted into common
stock in contemplation of the merger discussed in Note 9, are assumed to be
converted to common stock at the initial time of issuance.
(3) DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
---------- -------- --------
<S> <C> <C> <C>
Line of credit.................................. $ 500,000 $ -- $ --
Equipment term note............................. 261,970 105,223 66,036
Obligations under capital lease................. 5,407 -- --
Convertible debenture........................... 252,018 -- --
Note payable to an officer...................... -- 75,000 75,000
---------- -------- --------
1,019,395 180,223 141,036
Less: current portion........................... 414,172 105,223 141,036
---------- -------- --------
$ 605,223 $ 75,000 $ --
========== ======== ========
</TABLE>
Line of Credit
The Company has a working capital line-of-credit agreement with a bank
expiring on January 5, 1998, unless renewed. Borrowings under the line of credit
are collateralized by substantially all of the Company's assets and may not
exceed the lesser of $1,500,000 or eligible accounts receivable. Interest is
payable monthly at the bank's prime rate (8.25% at December 31, 1995 and 1996
and 8.50% at March 31, 1997) plus 1/2%.
Equipment Term Note
Borrowings through June 30, 1994 under a previous equipment line of credit
converted to a term note, payable in 36 equal monthly installments of principal
beginning on July 5, 1994. Interest is payable monthly at the bank's prime rate
(8.25% at December 31, 1996 and 8.50% at March 31, 1997) plus 1.5%. Borrowings
are secured by substantially all assets of the Company.
The line of credit and the equipment term note both have restrictive
covenants that require the Company to achieve certain levels of profitability
and tangible net worth and to meet certain financial ratios at December 31,
1996. The Company was in compliance with all such covenants at March 31, 1997.
Obligations under Capital Leases
In connection with a capital lease obligation, the Company issued warrants
to the lessor to purchase 105,661 shares of the Company's Series 1987 Class B
convertible preferred stock, subject to certain antidilution provisions. The
warrants, exercisable at $.66 per share, expired in December 1996. As of March
31, 1997, the cost of the equipment under capital lease of $204,149 had been
fully depreciated.
Convertible Debenture
In November 1991, in connection with the settlement of certain royalty
obligations with a former product development partner, the Company issued an 8%
convertible debenture with interest due quarterly, commencing on December 31,
1991 and issued an option to purchase 34,068 shares of common stock at an
exercise price of $4.84 per share to an affiliate of the holder of the
convertible debenture. The principal balance, plus any accrued interest , was
due on November 20, 1995. In June 1996, the note was converted into 52,070
shares of common stock and the option was exercised.
F-10
<PAGE> 84
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under operating
leases that expire through November 1999. The future minimum annual lease
payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------- --------
<S> <C>
1997........................ $444,324
1998........................ 423,692
1999........................ 112,525
--------
$981,329
========
</TABLE>
Total rent expense included in the accompanying statements of operations is
$584,000, $674,000 and $521,000 for the years ended December 31, 1994, 1995 and
1996, respectively, and $173,300 and $128,372 for the three months ended March
31, 1996 and 1997, respectively.
(5) REDEEMABLE PREFERRED STOCK
Class A Redeemable Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class A preferred stock:
LIQUIDATION
Holders of Class A preferred stock are entitled to be paid $10,000 per
share plus accrued but unpaid dividends in the event of a liquidation or
dissolution of the Company before any amount is paid to common stockholders, but
after any distribution to Class B and Class C preferred stockholders.
DIVIDENDS
Holders of Class A preferred stock are entitled to receive quarterly
dividends, as defined, from net profits, if any. Dividends are cumulative. At
December 31, 1996 and March 31, 1997, the Company had cumulative dividends in
arrears of $1,373,545 and $1,420,777, respectively on the Class A preferred
stock.
REDEMPTION
The Class A preferred stock is redeemable on or after January 1, 1997 at
the option of the holder for $10,000 per share plus accrued dividends. Class A
preferred stock redemptions and dividends are payable only from one third of
legally available funds of the Company, only after all Class C convertible
preferred stock redemptions have been paid. All of the holders of Class A
preferred stock have waived their redemptions rights until January 2, 1998.
VOTING RIGHTS
Class A preferred stock is nonvoting.
Class B Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Series 1986 and 1987 Class B convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Series 1986 and 1987 Class B convertible preferred stock shall be
entitled to receive $.70 and $2.00 per share, respectively, prior to
F-11
<PAGE> 85
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
any distributions to the holders of Class A preferred stock or common stock but
after any distribution to the holders of the Class C convertible preferred
stock.
CONVERSION
Each share of Class B convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public stock offering,
as defined, into one share of common stock, based on original issue price. This
conversion rate is adjusted upon the occurrence of certain dilutive events.
REDEMPTION
The Class B convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997, at the option of the holders for any number of
shares issued and outstanding at that time. The redemption price for Series 1986
and 1987 convertible preferred stock is $.70 and $2.00 per share, respectively,
plus any accrued and unpaid dividends. Class B convertible preferred stock
redemptions and dividends are payable only from two thirds of legally available
funds of the Company only after all convertible preferred stock redemptions have
been paid. A majority of the holders of Class B preferred stock have waived
their redemptions rights until January 2, 1998.
DIVIDENDS
The Class B convertible preferred stockholders are entitled to any
dividends that may be declared on the common stock. The amount of the dividend
is equal to the dividend per common share multiplied by the number of common
shares that each preferred stockholder would receive upon conversion.
VOTING RIGHTS
Holders of Class B convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class B convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their Class B
convertible preferred stock into common stock at the applicable conversion rate.
Also, provided that 1,263,345 shares of the Class B convertible preferred stock
remain outstanding, the Company is restricted from taking certain actions
without the vote or written consent of the holders of a majority of the Class B
convertible preferred stock.
Class C Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class C convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Class C convertible preferred stock shall be entitled to receive $990.00
per share plus all accrued but unpaid dividends prior to any distribution to the
holders of Class A preferred stock, Class B convertible preferred stock or
common stock.
CONVERSION
Each share of Class C convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public offering, as
defined. The conversion rate is equal to 250 shares of common stock plus 50% of
accrued and unpaid dividends. This conversion rate is adjusted upon the
occurrence of certain dilutive events.
F-12
<PAGE> 86
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
REDEMPTION
The Class C convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997 at the option of the holders. The redemption price
for Class C convertible preferred stock is $1,000 per share plus any accrued and
unpaid dividends. Class C convertible preferred stock redemptions and dividends
are payable from legally available funds of the Company prior to any redemption
of Class A and Class B preferred stock. A majority of the holders of Class C
preferred stock have waived their redemptions rights until January 2, 1998.
DIVIDENDS
The Class C convertible preferred stockholders are entitled to receive
quarterly dividends. Dividends are cumulative at 2.5% per quarter of the Class C
convertible preferred stock liquidation value. At December 31, 1996 and March
31, 1997, the Company had cumulative dividends in arrears of $873,046 and
$944,872, respectively, on the Class C convertible preferred stock. Dividends on
the Class C convertible preferred stock shall be paid before any dividends for
any other class of stock.
VOTING RIGHTS
Holders of Class C convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class C convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their stock to
common stock. The Company is restricted from taking certain action without the
vote or written consent of the holders of a majority of the outstanding Class C
convertible preferred stock.
(6) STOCKHOLDERS' EQUITY
Stock Split
On June 19, 1996, the stockholders of the Company approved a 1-for-4
reverse stock split of the Company's common stock. Accordingly, all share and
per share amounts have been adjusted to reflect the reverse stock split as
though it had occurred at the beginning of the initial period presented.
Common Stock
The Company has reserved 1,769,767 shares of common stock for issuance to
employees, directors and others pursuant to the granting of stock options and
restricted stock awards under the Company's stock option plans (see below). The
Company is also required to reserve a sufficient number of shares to effect the
conversion of the Class B convertible preferred stock, Class C convertible
preferred stock and warrants (2,364,817 at March 31, 1997).
Subscription Receivable
Subscriptions receivable represents a note receivable from an officer for
$201,523 that was issued in connection with his purchase of 314,403 shares of
common stock in 1993. The note bears interest at 3.92% per year. In connection
with the employment agreement and incentive arrangement discussed in Note 8, the
note receivable will be forgiven upon completion of a public offering or a sale
of the Company at a minimum valuation, as defined.
Stock Incentive Plans
In May 1996, the Company's Board of Directors and stockholders approved the
Company's 1996 Stock Incentive Plan (the "1996 Plan"), which provides for the
grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees of the Company (including officers and employee
directors). A maximum of 1,500,000 shares are currently reserved for issuance
pursuant to the 1996 Plan. This maximum number of shares will increase,
effective as of January 1, 1998 and each January 1 thereafter during the term
F-13
<PAGE> 87
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
of the plan, by an additional number of shares of Common Stock equal to ten
percent of the difference between (I) the total number of shares of Common Stock
and Common Stock equivalents issued and outstanding as of the close of business
on December 31 of the preceding year and (ii) the total number of shares of
Common Stock and Common Stock equivalents issued and outstanding as of the close
of business on December 31 of the year prior to such preceding year. No
participant in the 1996 Plan may in any year be granted stock options or awards
with respect to more than 500,000 shares of Common Stock, and no more than an
aggregate of 3,000,000 shares of Common Stock may be issued pursuant to the
exercise of incentive stock options granted under the 1996 Plan. At March 31,
1997, 1,386,171 shares remained available for future grants under the 1996 Plan.
The Company maintains outstanding options under a 1987 Nonqualified Stock
Option Plan (the "1987 Plan"). The majority of the grants vest ratably over 50
months. In May 1996, the Board of Directors of the Company terminated the 1987
Plan with respect to the granting of any further options thereunder.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation costs has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
would not have been materially different than that reported in the accompanying
statement of operations.
The following table summarizes all stock option activity :
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- -------------------------
<S> <C> <C>
Outstanding, December 31, 1993.............................. 500,547 $1.04
Granted................................................... 21,250 2.80
Exercised................................................. (120,888) 1.02
Canceled.................................................. (42,459) 1.19
--------
Outstanding, December 31, 1994.............................. 358,450 1.10
Granted................................................... 97,200 1.00
Exercised................................................. (15,094) 1.00
Canceled.................................................. (213,825) 1.36
--------
Outstanding, December 31, 1995.............................. 226,731 1.00
Granted................................................... 566,266 1.84
Exercised................................................. (271,050) 1.00
Canceled.................................................. (122,980) 4.49
--------
Outstanding, December 31, 1996.............................. 398,967 1.30
Granted................................................... -- --
Exercised................................................. -- --
Canceled.................................................. (15,370) 1.24
--------
Outstanding, March 31, 1997................................. 383,597 1.29
========
Exercisable, March 31, 1997................................. 171,991 $1.08
========
</TABLE>
The option price range for outstanding and exercisable shares as of March 31,
1997 was $1.00 - $2.00.
Warrants
On April 29, 1993, the Company issued one warrant for each 10 shares of
Class B convertible preferred stock to existing Class B convertible preferred
stockholders, or an aggregate of warrants to purchase 158,069 shares of Common
Stock. Each warrant entitles the holder to purchase one share of the Company's
common stock for $.80 per share, the fair market value on date of grant, as
determined by the Board of Directors. The exercise price is adjusted upon the
occurrence of certain dilutive events. The warrants are exercisable at the
F-14
<PAGE> 88
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
option of the holder through April 29, 2003. Warrants to purchase 1,150 shares
of common stock were exercised in 1994.
(7) RESTRUCTURING CHARGES
In 1995, the Company recorded a $580,000 charge to reflect a staff
reduction of 15 research and development employees, 1 general and administrative
employee, 11 customer support employees, and 4 sales employees, as well as
office space consolidation which occurred on December 13, 1995. The components
of the restructuring charge are as follows:
<TABLE>
<S> <C>
Severance and benefits................................................... $294,839
Obsolete fixed asset disposals and write-offs............................ 112,986
Excess facility rent and office closings................................. 172,175
--------
$580,000
========
</TABLE>
At December 31, 1995, $292,600 and $153,000 was included in accrued
compensation and benefits and accrued expenses, respectively, related to
restructuring costs. During 1996, the Company was able to negotiate a favorable
settlement for certain excess leased facilities and reduced the related accrued
liability by $152,676, which has been recorded in the accompanying statement of
operations as a restructuring credit. The Company does not anticipate any
further adjustments relating to the restructuring effected in December 1995.
Included in the 1995 statements of cash flows as an adjustment to reconcile net
loss to net cash provided by (used in) operating activities is $132,485 related
to the asset write-offs and rent reserves, respectively.
(8) EMPLOYEE BENEFITS
401(k) Plan
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees to make contributions up to
15% of their compensation. Under the plan, the Company may, but is not obligated
to, match a portion of the employees' contributions up to a defined maximum.
There were no matching contributions in 1994, 1995, or 1996.
Employment Agreements
In January 1996, the Company and its chief executive officer entered into
an employment agreement and incentive arrangement. Pursuant to the agreements,
the officer received a note payable for $75,000 representing his 1995 incentive
pay. The note bears interest at 10% per year and is payable upon the earlier of
January 2, 1998, the officer's voluntary termination, or the sale of the
Company. The note is included in long-term debt at March 31, 1997.
Under the incentive arrangement, the chief executive officer received an
option to purchase up to 225,000 shares of common stock and a cash bonus of up
to $200,000. The cash bonus is contingent on completion of an initial public
offering at a minimum valuation. The option is exercisable at a price of $1.00
per share, the then fair market value of the common stock and is exercisable
immediately, subject to a right of the Company to repurchase such shares until
the earlier of five years of the date of grant or the closing of an initial
public offering or sale of the Company based on specific valuation. The officer
exercised the option for 225,000 shares of common stock in full on March 29,
1996. The shares are subject to repurchase by the Company in accordance with the
terms noted above.
In 1995, the Company entered into stay agreements with certain key officers
under which the Company guarantees the officer who is a party thereto a
severance payment in an amount equal to such officer's twelve-month base salary
in the event that the officer's employment is terminated other than at such
officer's volition.
F-15
<PAGE> 89
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) SUBSEQUENT EVENT
On July 7, 1997, the Company entered into an Amended and Restated Agreement
and Plan of Merger among Cardinal Health, Inc., Hub Merger Corp. and the Company
(the "Merger Agreement") pursuant to which holders of MediQual Common Stock,
Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, stock
options and warrants (in each case, as defined in the Proxy
Statement/Prospectus) will be entitled to receive a number of Cardinal Health,
Inc. common shares or options or warrants for Cardinal Health, Inc. common
shares, without par value, as determined pursuant to the share exchange formulas
set forth in the Merger Agreement. The Merger Agreement is subject to MediQual
stockholder approval.
F-16
<PAGE> 90
ANNEX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
CARDINAL HEALTH, INC.
("Cardinal"),
HUB MERGER CORP.
a wholly owned direct subsidiary of Cardinal
("Subcorp")
and
MEDIQUAL SYSTEMS, INC.
("MediQual")
July 7, 1997
<PAGE> 91
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER........................................ A-1
PRELIMINARY STATEMENTS................................................................... A-1
AGREEMENT................................................................................ A-1
ARTICLE I THE MERGER..................................................................... A-1
A-1
1.1 The Merger...............................................................
A-1
1.2 Effective Time...........................................................
A-2
1.3 Effects of the Merger....................................................
A-2
1.4 Certificate of Incorporation and Bylaws..................................
A-2
1.5 Directors and Officers...................................................
A-2
1.6 Additional Actions.......................................................
ARTICLE II CONVERSION OF SECURITIES...................................................... A-2
A-2
2.1 Conversion of Capital Stock..............................................
A-3
2.2 Exchange Ratios; Fractional Shares; Dissenting Shares....................
A-5
2.3 Exchange of Certificates.................................................
A-6
2.4 Treatment of Stock Options; Stock Purchase Plan..........................
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CARDINAL AND SUBCORP.......................
A-7
A-7
3.1 Organization and Standing................................................
A-7
3.2 Corporate Power and Authority............................................
A-7
3.3 Capitalization of Cardinal and Subcorp...................................
A-8
3.4 Conflicts; Consents and Approval.........................................
A-8
3.5 Brokerage and Finder's Fees..............................................
A-8
3.6 Cardinal SEC Documents...................................................
A-9
3.7 Registration Statement...................................................
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MEDIQUAL.................................... A-9
A-9
4.1 Organization and Standing................................................
A-9
4.2 Subsidiaries.............................................................
A-9
4.3 Corporate Power and Authority............................................
A-10
4.4 Capitalization of MediQual...............................................
A-10
4.5 Conflicts; Consents and Approvals........................................
A-11
4.6 Absence of Certain Changes...............................................
A-12
4.7 Officers, Employees and Compensation.....................................
A-13
4.8 Financial Statements.....................................................
A-13
4.9 Taxes....................................................................
A-14
4.10 Compliance with Law......................................................
A-14
4.11 Intellectual Property....................................................
A-16
4.12 Title to and Condition of Properties.....................................
A-17
4.13 Registration Statement; Prospectus/Proxy Statement.......................
A-17
4.14 Litigation...............................................................
A-17
4.15 Brokerage and Finder's Fees; Expenses....................................
A-17
4.16 Accounting Matters.......................................................
4.17 Employee Benefit Plans................................................... A-17
A-19
4.18 Contracts................................................................
A-20
4.19 Accounts Receivable......................................................
A-20
4.20 Labor Matters............................................................
</TABLE>
i
<PAGE> 92
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
4.21 Undisclosed Liabilities.................................................. A-20
A-20
4.22 Operation of MediQual's Business; Relationships..........................
A-21
4.23 Product Warranties and Liabilities.......................................
A-21
4.24 Environmental Matters....................................................
A-22
4.25 [Intentionally Omitted]..................................................
A-22
4.26 Board Recommendation.....................................................
A-22
4.27 DGCL and State Takeover Laws.............................................
A-22
4.28 Insurance................................................................
A-22
4.29 Lease Arrangements.......................................................
A-22
4.30 Books of Account; Records................................................
ARTICLE V COVENANTS OF THE PARTIES...................................................... A-23
A-23
5.1 Mutual Covenants.........................................................
A-23
5.2 Covenants of Cardinal....................................................
A-24
5.3 Covenants of MediQual....................................................
ARTICLE VI CONDITIONS................................................................... A-27
A-27
6.1 Mutual Conditions........................................................
A-28
6.2 Conditions to Obligations of MediQual....................................
A-28
6.3 Conditions to Obligations of Cardinal and Subcorp........................
ARTICLE VII TERMINATION AND AMENDMENT................................................... A-29
A-29
7.1 Termination..............................................................
A-30
7.2 Effect of Termination....................................................
A-31
7.3 Amendment................................................................
A-31
7.4 Extension; Waiver........................................................
ARTICLE VIII INDEMNIFICATION............................................................ A-31
A-31
8.1 Survival of Representations, Warranties and Agreements...................
A-31
8.2 Indemnification..........................................................
A-32
8.3 Limitations on Indemnification...........................................
A-32
8.4 Procedure for Indemnification with Respect to Third Party Claims.........
A-33
8.5 Procedure For Indemnification with Respect to Non-Third Party Claims.....
A-33
8.6 MediQual Stockholders Representative.....................................
A-35
8.7 Satisfaction of Obligations; Release from Escrow.........................
A-35
8.8 Termination of MediQual's Warranties.....................................
ARTICLE IX MISCELLANEOUS................................................................ A-35
A-35
9.1 Notices..................................................................
A-36
9.2 Interpretation...........................................................
A-36
9.3 Counterparts.............................................................
A-36
9.4 Entire Agreement.........................................................
A-36
9.5 Third Party Beneficiaries................................................
A-36
9.6 Governing Law............................................................
A-36
9.7 Consent to Jurisdiction; Venue...........................................
A-36
9.8 Specific Performance.....................................................
A-36
9.9 Assignment...............................................................
A-36
9.10 Expenses.................................................................
</TABLE>
Exhibit A -- Form of Affiliate Letter
Exhibit B -- Form of Opinion of Cardinal and Subcorp's Counsel
Exhibit C -- Form of Opinion of MediQual's Counsel
ii
<PAGE> 93
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger (this "Agreement")
is made and entered into as of the 7th day of July, 1997, by and among Cardinal
Health, Inc., an Ohio corporation ("Cardinal"), Hub Merger Corp., a Delaware
corporation and a wholly owned subsidiary of Cardinal ("Subcorp"), and MediQual
Systems, Inc., a Delaware corporation ("MediQual") to amend and restate the
Agreement and Plan of Merger, dated as of May 27, 1997, among Cardinal, Subcorp
and MediQual.
PRELIMINARY STATEMENTS
A. Cardinal desires to acquire the clinical information management systems
and services business and other businesses operated by MediQual through the
merger of Subcorp with and into MediQual, with MediQual as the surviving
corporation (the "Merger"), pursuant to which each share of MediQual Common
Stock, MediQual Class A Preferred Stock, MediQual Class B Preferred Stock and
MediQual Class C Preferred Stock (each as defined in Section 4.4, collectively,
"MediQual Conversion Stock") outstanding at the Effective Time (as defined in
Section 1.2) will be converted into the right to receive Cardinal Common Shares
(as defined in Section 3.3) as more fully provided herein.
B. MediQual desires to combine its clinical information management systems
and services business and other businesses with the healthcare service
businesses operated by Cardinal and for the holders of shares of MediQual
Conversion Stock ("MediQual Stockholders") to have a continuing equity interest
in the combined Cardinal/MediQual businesses.
C. The parties intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"), by reason of Section 368(a)(2)(E)
thereof.
D. The parties intend that the Merger be accounted for as a
pooling-of-interests for financial reporting purposes.
E. The respective Boards of Directors of Cardinal, Subcorp and MediQual
have determined the Merger in the manner contemplated herein to be desirable and
in the best interests of their respective shareholders and, by resolutions duly
adopted, have approved and adopted this Agreement.
AGREEMENT
Now, therefore, in consideration of these premises and the mutual and
dependent promises hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, and in
accordance with the provisions of the Delaware General Corporation Law (the
"DGCL"), Subcorp shall be merged with and into MediQual following the
satisfaction or waiver of the conditions set forth in Article VI. Following the
Merger, the separate corporate existence of Subcorp shall cease and MediQual
shall continue its existence under the laws of the State of Delaware. MediQual,
in its capacity as the corporation surviving the Merger, is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. The Merger shall be consummated by filing with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
a certificate of merger (the "Certificate of Merger") in such form as is
required by and executed in accordance with Section 251(c) of the DGCL. The
Merger shall become effective (the "Effective Time") when the Certificate of
Merger has been filed with the Delaware Secretary of State or at such later time
as shall be specified in the Certificate of Merger. Prior to the filing referred
to in this Section 1.2, a closing (the "Closing") shall be held at the offices
of Cardinal, 5555 Glendon
A-1
<PAGE> 94
Court, Dublin, Ohio 43016, or such other place as the parties may agree on a
date (the "Closing Date") specified by Cardinal, which date shall be within ten
business days following the date upon which all conditions set forth in Article
VI hereof have been satisfied or waived.
1.3 Effects of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
1.4 Certificate of Incorporation and Bylaws. The Certificate of Merger
shall provide that at the Effective Time (i) the Certificate of Incorporation of
the Surviving Corporation as in effect immediately prior to the Effective Time
shall be amended as of the Effective Time so as to contain the provisions, and
only the provisions, contained immediately prior thereto in the Certificate of
Incorporation of Subcorp, except for Article FIRST thereof which shall continue
to read "The name of the corporation is MediQual Systems, Inc.", and (ii) the
Bylaws of Subcorp in effect immediately prior to the Effective Time shall be the
Bylaws of the Surviving Corporation; in each case until amended in accordance
with applicable law.
1.5 Directors and Officers. From and after the Effective Time, the officers
of MediQual shall be the officers of the Surviving Corporation and the directors
of Subcorp shall be the directors of the Surviving Corporation, in each case
until their respective successors are duly elected and qualified. On the Closing
Date, MediQual shall deliver to Cardinal evidence satisfactory to Cardinal of
the resignations of the directors of MediQual, such resignations to be effective
as of the Effective Time.
1.6 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are reasonably necessary or
desirable to (a) vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of MediQual, or (b) otherwise carry out the
provisions of this Agreement, MediQual shall execute and deliver all such deeds,
assignments or assurances in law and to take all acts necessary, proper or
desirable to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to carry out the
provisions of this Agreement, and the officers and directors of the Surviving
Corporation are authorized in the name of MediQual or otherwise to take any and
all such action.
ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Cardinal, Subcorp or MediQual:
(a) Each share of common stock, $0.01 par value, of Subcorp issued and
outstanding immediately prior to the Effective Time shall be converted into
one share of common stock, $0.01 par value, of the Surviving Corporation.
Such newly issued shares shall thereafter constitute all of the issued and
outstanding capital stock of the Surviving Corporation.
(b) Each share of MediQual Common Stock (as defined in Section 4.4)
issued and outstanding immediately prior to the Effective Time (other than
Dissenting Shares (as defined in Section 2.2)) shall be converted into and
represent a number of Cardinal Common Shares equal to the Common Equivalent
Exchange Ratio (as defined in Section 2.2).
(c) Each share of MediQual Class A Preferred Stock (as defined in
Section 4.4) issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares) shall be converted into and represent a
number of Cardinal Common Shares equal to the Class A Preferred Exchange
Ratio (as defined in Section 2.2(a)(ii)).
(d) Each share of MediQual 1986 Class B Preferred Stock (as defined in
Section 4.4) issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares) shall be converted into and represent a
number of Cardinal Common Shares equal to the product obtained by
multiplying (x) the maximum number of shares of MediQual Common Stock into
which such share of MediQual 1986 Class B Preferred Stock is then
convertible by (y) the Common Equivalent Exchange Ratio.
A-2
<PAGE> 95
(e) Each share of MediQual 1987 Class B Preferred Stock (as defined in
Section 4.4) issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares) shall be converted into and represent a
number of Cardinal Common Shares equal to the product obtained by
multiplying (x) the maximum number of shares of MediQual Common Stock into
which such share of MediQual 1987 Class B Preferred Stock is then
convertible by (y) the Common Equivalent Exchange Ratio.
(f) Each share of MediQual Class C Preferred Stock (as defined in
Section 4.4) issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares) shall be converted into and represent a
number of Cardinal Common Shares equal to the product obtained by
multiplying (x) the maximum number of shares of MediQual Common Stock into
which such share of MediQual Class C Preferred Stock is then convertible
(taking into account, in determining such maximum number of shares, the
one-half of the accrued and unpaid dividends referenced in Section 4(d) of
the MediQual Certificate, which conversion shall satisfy MediQual's
obligations for accrued and unpaid dividends with respect to such shares)
by (y) the Common Equivalent Exchange Ratio.
(g) Each share of capital stock of MediQual held in the treasury of
MediQual shall be cancelled and retired and no payment shall be made in
respect thereof.
(h) Notwithstanding anything in this Section 2.1 to the contrary,
Cardinal shall retain a number of Cardinal Common Shares otherwise issuable
to MediQual Stockholders in the Merger, from such MediQual Stockholders on
a proportionate basis (based on the respective numbers of Cardinal Common
Shares into which their MediQual Conversion Stock (other than any
Dissenting Shares) will be convertible upon the Effective Time), equal to
6.5% of the aggregate number of Cardinal Common Shares which would be
issuable to MediQual Stockholders on the Closing Date if Cardinal Common
Shares were not to be issued into escrow pursuant to this Section 2.1(h)
(the "Retained Shares"), by withholding the Retained Shares from the
Cardinal Common Shares issuable in the Merger and depositing such Retained
Shares in escrow pursuant to the Escrow Agreement in the form previously
agreed to by Cardinal, MediQual, the Escrow Agent (as defined therein) and
the MediQual Stockholders Representative (as defined therein) (the "Escrow
Agreement"). The escrow created by the Escrow Agreement shall be for the
purpose of providing for the payment of the indemnification obligations of
the MediQual Stockholders and expenses of the MediQual Stockholders
Representative (as defined below) pursuant to Article VIII hereof, all in
accordance with the terms and conditions contained herein and in the Escrow
Agreement.
2.2 Exchange Ratios; Fractional Shares; Dissenting Shares.
(a) (i) For purposes hereof, the "Common Equivalent Exchange Ratio"
(rounded to the nearest ten-thousandth of a share) shall be equal to (x)
the quotient obtained by dividing (A) the quotient obtained by dividing
(I) $30.8 million by (II) the Average Share Price (as defined below)
(provided, however, that for purposes of this clause (II) only, if the
Average Share Price is less than $52.25, then the Average Share Price
shall be deemed to be equal to $52.25, and if the Average Share Price is
greater than $57.75, then the Average Share Price shall be deemed to be
equal to $57.75) by (B) the number of Fully Diluted MediQual Shares (as
defined below) issued and outstanding immediately prior to the Effective
Time; or (y) if Cardinal has made an Adjustment Election (as defined in
Section 7.1), then the quotient obtained by dividing (A) the quotient
obtained by dividing (I) $27,557,895 by (II) the Average Share Price by
(B) the number of Fully Diluted MediQual Shares issued and outstanding
immediately prior to the Effective Time.
(ii) For purposes hereof, the "Class A Preferred Exchange
Ratio" (rounded to the nearest ten-thousandth of a share) shall be equal
to (x) the quotient obtained by dividing (A) the quotient obtained by
dividing (I) the stated value of $2,290,000 for all outstanding shares
of MediQual Class A Preferred Stock plus all accrued but unpaid
dividends thereon (which amount was $1,420,777 at March 31, 1997) as of
the Effective Time (collectively, the "Class A Exchange Amount") by (II)
the Average Share Price (as defined below) (provided, however, that for
purposes of this clause (II) only, if the Average Share Price is less
than $52.25, then the Average Share Price shall be deemed to be equal to
$52.25, and if the Average Share Price is greater than
A-3
<PAGE> 96
$57.75, then the Average Share Price shall be deemed to be equal to
$57.75) by (B) 229; or (y) if Cardinal has made an Adjustment Election
(as defined in Section 7.1), then the quotient obtained by dividing (A)
the quotient obtained by dividing (I) the product of the Class A
Exchange Amount and .8947 by (II) the Average Share Price by (B) 229.
For purposes hereof, "Average Share Price" shall mean the average of
the closing prices of Cardinal Common Shares as reported on the New York
Stock Exchange ("NYSE") Composite Tape ("NYSE Composite Tape") on each of
the last twenty trading days ending on the sixth trading day prior to the
meeting of MediQual Stockholders at which the vote to approve the Merger
occurs. For purposes hereof, "Fully Diluted MediQual Shares" means the sum
obtained by adding (r) the number of shares of MediQual Common Stock
(including fractions thereof) actually issued and outstanding, (s) the
maximum number of shares of MediQual Common Stock (including fractions
thereof) issuable upon the exercise of all outstanding warrants to purchase
shares of MediQual Common Stock, (t) the maximum number of shares of
MediQual Common Stock (including fractions thereof) issuable upon the
exercise of all outstanding options to purchase shares of MediQual Common
Stock (including both vested and unvested options), and (u) the maximum
number of shares of MediQual Common Stock (including fractions thereof)
issuable upon the conversion of all issued and outstanding shares of
MediQual 1986 Class B Preferred Stock, MediQual 1987 Class B Preferred
Stock and MediQual Class C Preferred Stock. The final number of "Fully
Diluted MediQual Shares," as well as the underlying calculations for such
number, will be stipulated to Cardinal in writing by MediQual's chief
financial officer not later than the end of business on the fifth trading
day prior to the meeting of MediQual Stockholders at which the vote to
approve the Merger occurs.
(b) No certificates for fractional Cardinal Common Shares shall be
issued as a result of the conversion provided for in Section 2.1. To the
extent that an outstanding share of MediQual Conversion Stock would
otherwise have become a fractional Cardinal Common Share, the holder
thereof, upon presentation of such fractional interest represented by an
appropriate certificate for MediQual Conversion Stock to the Exchange Agent
pursuant to Section 2.3, shall be entitled to receive a cash payment
therefor in an amount equal to the value (determined with reference to the
closing price of Cardinal Common Shares as reported on the NYSE Composite
Tape on the last full trading day immediately prior to the Effective Time)
of such fractional interest. Such payment with respect to fractional shares
is merely intended to provide a mechanical rounding off of, and is not a
separately bargained for, consideration. If more than one certificate
representing shares of MediQual Conversion Stock shall be surrendered for
the account of the same holder, the number of Cardinal Common Shares for
which certificates have been surrendered shall be computed on the basis of
the aggregate number of shares represented by the certificates so
surrendered. In the event that prior to the Effective Time Cardinal shall
declare a stock dividend or other distribution payable in Cardinal Common
Shares or securities convertible into Cardinal Common Shares, or effect a
stock split, reclassification, combination or other change with respect to
Cardinal Common Shares, the exchange ratios set forth in this Section 2.2
shall be adjusted to reflect such dividend, distribution, stock split,
reclassification, combination or other change.
(c) The holder of any shares ("Dissenting Shares") of Conversion Stock
(collectively, "MediQual Dissenting Stock") outstanding immediately prior
to the Merger that has validly exercised such holder's dissenters' rights,
if any, under the DGCL shall not be entitled to receive, in respect of the
shares of MediQual Dissenting Stock as to which such holder has validly
exercised dissenters' rights, Cardinal Common Shares unless and until such
holder shall have failed to perfect, or shall have effectively withdrawn or
lost, such holder's right to payment for such holder's shares of MediQual
Dissenting Stock under the DGCL. In such event, such holder shall be
entitled to receive, without interest, the Cardinal Common Shares such
holder would have been entitled to receive had such holder not exercised
dissenters' rights.
(d) In the event any Certificate shall have been lost, stolen or
destroyed, upon receipt of appropriate evidence as to such loss, theft or
destruction and to the ownership of such Certificate by the person claiming
such Certificate to be lost, stolen or destroyed, and the receipt by
Cardinal and the Exchange Agent of reasonably appropriate and customary
indemnification (which may include the posting of a
A-4
<PAGE> 97
bond or similar security), the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed Certificate Cardinal Common Shares and the
fractional share payment, if any, deliverable in respect thereof as
determined in accordance with Section 2.1 and this Section 2.2.
2.3 Exchange of Certificates.
(a) Exchange Agent. Promptly following the Effective Time, subject to
Section 2.1(g), Cardinal shall deposit with Boatmen's Trust Company or such
other exchange agent as may be designated by Cardinal (the "Exchange Agent"),
for the benefit of MediQual Stockholders, for exchange in accordance with this
Section 2.3, certificates representing Cardinal Common Shares issuable pursuant
to Section 2.1 in exchange for outstanding shares of MediQual Conversion Stock
(other than Retained Shares) and shall from time to time deposit cash in an
amount reasonably expected to be paid pursuant to Section 2.2 (such Cardinal
Common Shares and cash, together with any dividends or distributions with
respect thereto, being hereinafter referred to as the "Exchange Fund"). The fees
and expenses of the Exchange Agent will be paid by Cardinal.
(b) Exchange Procedures. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates (the "Certificates") which immediately prior to the Effective Time
represented outstanding shares of MediQual Conversion Stock whose shares were
converted into the right to receive Cardinal Common Shares pursuant to Section
2.1 (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Cardinal may reasonably specify, including waivers
and releases of liability) and (ii) instructions for effecting the surrender of
the Certificates in exchange for certificates representing Cardinal Common
Shares. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with a duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor (x) a certificate
representing that number of Cardinal Common Shares which such holder has the
right to receive pursuant to Section 2.1 and (y) a check representing the amount
of cash in lieu of fractional shares, if any, and unpaid dividends and
distributions with respect to such Cardinal Common Shares, if any, which such
holder has the right to receive pursuant to the provisions of this Article II,
after giving effect to any required withholding tax, and the shares represented
by the Certificate so surrendered shall forthwith be cancelled. No interest will
be paid or accrued on the cash in lieu of fractional shares, if any, and unpaid
dividends and distributions with respect to such Cardinal Common Shares, if any,
payable to holders of shares of MediQual Conversion Stock. In the event of a
transfer of ownership of shares of MediQual Conversion Stock which is not
registered on the transfer records of MediQual, a certificate representing the
proper number of Cardinal Common Shares, together with a check for the cash to
be paid in lieu of fractional shares, if any, and unpaid dividends and
distributions with respect to such Cardinal Common Shares, if any, may be issued
to such transferee if the Certificate representing such shares of MediQual
Conversion Stock held by such transferee is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.3, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon surrender a certificate representing Cardinal Common Shares and
cash in lieu of fractional shares, if any, and unpaid dividends and
distributions with respect to such Cardinal Common Shares, if any, as provided
in this Article II.
(c) Distributions with Respect to Unexchanged Shares. Notwithstanding any
other provisions of this Agreement, no dividends or other distributions declared
or made after the Effective Time with respect to Cardinal Common Shares having a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate, and no cash payment in lieu of fractional shares
shall be paid to any such holder, until the holder shall surrender such
Certificate as provided in this Section 2.3. Until any such Certificate has been
surrendered as provided in this Section 2.3, Cardinal shall deposit the amount
of any dividends or other distributions thereon with the Exchange Agent. Subject
to the effect of Applicable Laws (as defined in Section 4.10), following
surrender of any such Certificate, the Exchange Agent shall pay to the holder of
the certificates representing whole Cardinal Common Shares issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole Cardinal Common Shares and not
paid, less the amount
A-5
<PAGE> 98
of any withholding taxes which may be required thereon, and (ii) at the
appropriate payment date subsequent to surrender, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole Cardinal Common Shares, less the amount of any withholding taxes
which may be required thereon.
(d) No Further Ownership Rights in MediQual Conversion Stock. All Cardinal
Common Shares issued upon surrender of Certificates in accordance with the terms
hereof (including any cash paid pursuant to this Article II) shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares of
MediQual Conversion Stock represented thereby, and there shall be no further
registration of transfers on the stock transfer books of MediQual of shares of
MediQual Conversion Stock outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided in
this Section 2.3. Certificates surrendered for exchange by any person
constituting an "affiliate" of MediQual for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "Securities Act"), shall not be
exchanged until Cardinal has received written undertakings from such person in
the form attached hereto as Exhibit A.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to MediQual Stockholders for one year after the Effective
Time shall be delivered to Cardinal, upon demand thereby, and holders of shares
of MediQual Conversion Stock who have not theretofore complied with this Section
2.3 shall thereafter look only to Cardinal for payment of any claim to Cardinal
Common Shares, cash in lieu of fractional shares thereof, or dividends or
distributions, if any, in respect thereof.
(f) No Liability. None of Cardinal, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any shares of
MediQual Conversion Stock (or dividends or distributions with respect thereto)
or cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to seven years after the Effective Time of the
Merger (or immediately prior to such earlier date on which any cash, any cash in
lieu of fractional shares or any dividends or distributions with respect to
whole shares of MediQual Conversion Stock in respect of such Certificate would
otherwise escheat to or become the property of any Governmental Authority (as
defined in Section 3.4)), any such cash, dividends or distributions in respect
of such Certificate shall, to the extent permitted by Applicable Laws, become
the property of Cardinal, free and clear of all claims or interest of any person
previously entitled thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Cardinal, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Cardinal upon termination of the Exchange Fund pursuant to Section 2.3(e).
2.4 Treatment of Stock Options; Stock Purchase Plan.
(a) Prior to the Effective Time, Cardinal and MediQual shall take all such
actions as may be necessary to cause each unexpired and unexercised option under
stock option plans of MediQual in effect on the date hereof which has been
granted to current or former directors, officers, key employees or others of
MediQual by MediQual (each, a "MediQual Option") to be automatically converted
at the Effective Time into an option (a "Cardinal Exchange Option") to purchase
that number of Cardinal Common Shares equal to the number of shares of MediQual
Common Stock issuable immediately prior to the Effective Time upon exercise of
the MediQual Option (without regard to actual restrictions on exercisability)
multiplied by the Common Equivalent Exchange Ratio, with an exercise price equal
to the exercise price which existed under the corresponding MediQual Option
divided by the Common Equivalent Exchange Ratio, and with other terms and
conditions that are the same as the terms and conditions of such MediQual Option
immediately before the Effective Time; provided that with respect to any
MediQual Option that is an "incentive stock option" within the meaning of
Section 422 of the Code, the foregoing conversion shall be carried out in a
manner satisfying the requirements of Section 424(a) of the Code. In connection
with the issuance of Cardinal Exchange Options, Cardinal shall (i) reserve for
issuance the number of Cardinal Common Shares that will become subject to
Cardinal Exchange Options pursuant to this Section 2.4 and (ii) from and after
the Effective Time, upon exercise of Cardinal Exchange Options, make available
for issuance all Cardinal Common Shares covered thereby, subject to the terms
and conditions applicable thereto.
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<PAGE> 99
(b) MediQual agrees to issue treasury shares of MediQual, to the extent
available, upon the exercise of MediQual Options prior to the Effective Time.
(c) Cardinal agrees to file with the Securities and Exchange Commission
(the "Commission") within forty-five days after the Closing Date a registration
statement on Form S-8 or other appropriate form under the Securities Act to
register Cardinal Common Shares issuable upon exercise of the Cardinal Exchange
Options and use its reasonable efforts to cause such registration statement to
remain effective until the exercise or expiration of such options.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CARDINAL AND SUBCORP
In order to induce MediQual to enter into this Agreement, Cardinal and
Subcorp hereby represent and warrant to MediQual that the statements contained
in this Article III are true, correct and complete.
3.1 Organization and Standing. Each of Cardinal and Subcorp is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation with full power and authority (corporate and
other) to own, lease, use and operate its properties and to conduct its business
as and where now owned, leased, used, operated and conducted. Each of Cardinal
and Subcorp is duly qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it or the property
it owns, leases or operates, makes such qualification necessary, except where
the failure to be so qualified or in good standing in such jurisdiction would
not have a Material Adverse Effect (as defined in Section 9.2) on Cardinal.
Cardinal is not in default in the performance, observance or fulfillment of any
provision of its Articles of Incorporation, as amended and restated (the
"Cardinal Articles"), or Code of Regulations, as amended and restated (the
"Cardinal Code of Regulations"), and Subcorp is not in default in the
performance, observance or fulfillment of any provisions of its Certificate of
Incorporation or Bylaws.
3.2 Corporate Power and Authority. Each of Cardinal and Subcorp has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of each of Cardinal and Subcorp (and are not required to be authorized or
adopted by Cardinal's shareholders). This Agreement has been duly executed and
delivered by each of Cardinal and Subcorp, and constitutes the legal, valid and
binding obligation of each of Subcorp and Cardinal enforceable against each of
them in accordance with its terms.
3.3 Capitalization of Cardinal and Subcorp.
(a) As of May 16, 1997, Cardinal's authorized capital stock consisted
solely of (a) 150,000,000 common shares, without par value ("Cardinal Common
Shares"), of which (i) 108,563,843 shares were issued and outstanding, (ii)
233,294 shares were issued and held in treasury (which does not include the
shares reserved for issuance as set forth in clause (a)(iii) below) and (iii)
6,538,930 shares were reserved for issuance upon the exercise or conversion of
options, warrants or convertible securities granted or issuable by Cardinal, (b)
5,000,000 Class B common shares, without par value, none of which was issued and
outstanding or reserved for issuance, and (c) 500,000 Non-Voting Preferred
Shares, without par value, none of which was issued and outstanding or reserved
for issuance. Each outstanding Cardinal Common Share is, and all Cardinal Common
Shares to be issued in connection with the Merger will be, duly authorized and
validly issued, fully paid and nonassessable, and each outstanding share of
Cardinal capital stock has not been, and all Cardinal Common Shares to be issued
in connection with the Merger will not be, issued in violation of any preemptive
or similar rights. As of May 16, 1997, other than as set forth in the first
sentence hereof or in Section 3.3 to the disclosure schedule delivered by
Cardinal to MediQual and dated the date hereof (the "Cardinal Disclosure
Schedule"), there are no outstanding subscriptions, options, warrants, puts,
calls, agreements, claims or other commitments or rights of any type relating to
the issuance, sale or transfer by Cardinal of any equity securities of Cardinal,
nor are there outstanding any securities which are convertible into or
exchangeable for any shares of capital stock of Cardinal. The Cardinal Common
Shares (including
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those shares to be issued in the Merger) are registered under the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
thereunder, the "Exchange Act").
(b) Subcorp's authorized capital stock consists solely of 1,000 shares of
Common Stock, par value $.01 per share ("Subcorp Common Stock"), of which, as of
the date hereof, 100 were issued and outstanding and none were reserved for
issuance. As of the date hereof, all of the outstanding shares of Subcorp Common
Stock are owned free and clear of any liens, claims or encumbrances by Cardinal.
3.4 Conflicts; Consents and Approval. Neither the execution and delivery of
this Agreement by Cardinal or Subcorp nor the consummation of the transactions
contemplated hereby will:
(a) conflict with, or result in a breach of any provision of, the
Cardinal Articles or Cardinal Code of Regulations or the Certificate of
Incorporation or Bylaws of Subcorp;
(b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with the giving of notice,
the passage of time or otherwise, would constitute a default) under, or
entitle any party (with the giving of notice, the passage of time or
otherwise) to terminate, accelerate, modify or call a default under, or
result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Cardinal or any of its
subsidiaries under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, contract, undertaking,
agreement, lease or other instrument or obligation to which Cardinal or any
of its subsidiaries is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Cardinal or any of its subsidiaries or their
respective properties or assets; or
(d) require any action or consent or approval of, or review by, or
registration or filing by Cardinal or any of its affiliates with, any third
party or any local, domestic, foreign or multi-national court, arbitral
tribunal, administrative agency or commission or other governmental or
regulatory body, agency, instrumentality or authority (a "Governmental
Authority"), other than (i) authorization for inclusion of the Cardinal
Common Shares to be issued in the Merger and the transactions contemplated
hereby on the NYSE, subject to official notice of issuance, (ii) actions
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the "HSR
Act"), (iii) registrations or other actions required under federal and
state securities laws as are contemplated by this Agreement, or (iv)
consents or approvals of any Governmental Authority set forth in Section
3.4 to the Cardinal Disclosure Schedule;
except in the case of (b), (c) and (d) for any of the foregoing that would not,
individually or in the aggregate, have a Material Adverse Effect on Cardinal or
upon the ability of the parties to consummate the transactions contemplated
hereby.
3.5 Brokerage and Finder's Fees. Neither Cardinal nor any of its
shareholders, directors, officers or employees has incurred, or will incur, on
behalf of Cardinal, any brokerage, finder's or similar fee in connection with
the transactions contemplated by this Agreement.
3.6 Cardinal SEC Documents. Cardinal has timely filed and will timely file
with the Commission all forms, reports, schedules, statements and other
documents required to be filed by it since July 1, 1996 through the Closing Date
under the Exchange Act or the Securities Act (such documents, as supplemented
and amended since the time of filing, collectively, the "Cardinal SEC
Documents"). The Cardinal SEC Documents, including, without limitation, any
financial statements or schedules included therein, at the time filed (and, in
the case of registration statements and proxy statements, on the dates of
effectiveness and the dates of mailing, respectively) (a) did not (and, in the
case of Cardinal SEC Documents filed after the date hereof, will not) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) complied (and, in the case of Cardinal SEC Documents filed
after the date hereof, will comply) in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be. The
financial statements of Cardinal included in the Cardinal SEC
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Documents at the time filed (and, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively) complied (and, in the case of Cardinal SEC Documents filed after
the date hereof, will comply) as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto, were (and, in the case of Cardinal SEC
Documents filed after the date hereof, will be) prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-Q of the Commission), and
fairly present (and, in the case of Cardinal SEC Documents filed after the date
hereof, will fairly present) (subject in the case of unaudited statements to
normal, recurring audit adjustments) the consolidated financial position of
Cardinal and its consolidated subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
3.7 Registration Statement. None of the information provided by Cardinal
for inclusion in the registration statement on Form S-4 (such registration
statement as amended, supplemented or modified, the "Registration Statement") to
be filed with the Commission by Cardinal under the Securities Act, including the
prospectus relating to Cardinal Common Shares to be issued in the Merger which
shall also constitute the proxy statement and form of proxy relating to the vote
of MediQual Stockholders with respect to the Merger (such prospectus and proxy
statement as amended, supplemented or modified, the "Prospectus/Proxy
Statement"), at the time the Registration Statement becomes effective or, in the
case of the Prospectus/Proxy Statement, at the date of mailing, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Registration Statement will comply as to form in all material respects with the
provisions of the Securities Act.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MEDIQUAL
In order to induce Subcorp and Cardinal to enter into this Agreement,
MediQual hereby represents and warrants to Cardinal and Subcorp that the
statements contained in this Article IV are true, correct and complete.
4.1 Organization and Standing. MediQual is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with full power and authority (corporate and other) to own, lease, use and
operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. MediQual is duly qualified to do business
and in good standing in each jurisdiction listed in Section 4.1 to the
disclosure schedule delivered by MediQual to Cardinal and dated the date hereof
(the "MediQual Disclosure Schedule"), is not qualified to do business in any
other jurisdiction and neither the nature of the business conducted by it nor
the property it owns, leases or operates requires it to qualify to do business
as a foreign corporation in any other jurisdiction, except where the failure to
be so qualified or in good standing in such jurisdiction would not have a
Material Adverse Effect on MediQual. MediQual is not in default in the
performance, observance or fulfillment of any provision of its Certificate of
Incorporation, as amended and restated (the "MediQual Certificate"), or its
Bylaws, as in effect on the date hereof (the "MediQual Bylaws"). MediQual has
heretofore furnished to Cardinal a complete and correct copy of the MediQual
Certificate and the MediQual Bylaws.
4.2 Subsidiaries. MediQual does not own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, joint
venture or other entity or enterprise. MediQual is not subject to any obligation
or requirement to provide funds to or make any investment (in the form of a
loan, capital contribution or otherwise) in any such entity.
4.3 Corporate Power and Authority. MediQual has all requisite corporate
power and authority to enter into this Agreement and, subject to authorization
and adoption of the Merger and the transactions contemplated hereby by MediQual
Stockholders, to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement and the consummation of the
transactions
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contemplated hereby have been duly authorized by all necessary corporate action
on the part of MediQual, subject to authorization and adoption of the Merger and
the transactions contemplated hereby by the MediQual Stockholders. This
Agreement has been duly executed and delivered by MediQual and constitutes the
legal, valid and binding obligation of MediQual, enforceable against MediQual in
accordance with its terms.
4.4 Capitalization of MediQual. As of May 23, 1997, MediQual's authorized
capital stock consisted solely of (a) 30,000,000 shares of common stock, $.001
par value per share ("MediQual Common Stock"), of which (i) 3,915,411 shares
were issued and outstanding, (ii) 6,987 shares were issued and held in treasury
(which does not include the shares reserved for issuance set forth in clauses
(iii) through (vii) below), (iii) 336,152 shares were reserved for issuance upon
the exercise or conversion of outstanding options granted or issued by MediQual,
(iv) 1,432,328 shares were reserved for issuance upon the conversion of
outstanding shares of MediQual 1986 Class B Preferred Stock, (v) 152,648 shares
were reserved for issuance upon the conversion of outstanding shares of MediQual
1987 Class B Preferred Stock, (vi) 641,563 shares were reserved for issuance
upon the conversion of outstanding shares of MediQual Class C Preferred Stock,
and (vii) 156,918 shares were reserved for issuance upon the exercise of
warrants to purchase MediQual Common Stock as described in Section 4.4 of the
MediQual Disclosure Schedule, and (b) 7,000,000 shares of preferred stock, $.01
per share (the "MediQual Preferred Stock"), of which (i) 500 shares have been
designated Class A Preferred Shares ("MediQual Class A Preferred Stock") (229 of
which were issued and outstanding), (ii) 5,714,286 shares have been designated
Series 1986 Class B Preferred Shares ("MediQual 1986 Class B Preferred Stock")
(5,714,286 of which were issued and outstanding), (iii) 785,714 shares have been
designated Series 1987 Class B Preferred Shares ("MediQual 1987 Class B
Preferred Stock") (602,440 of which were issued and outstanding), and (iii)
2,500 have been designated Class C Preferred Shares ("MediQual Class C Preferred
Stock") (2,022 of which were issued and outstanding). Each outstanding share of
MediQual capital stock is duly authorized and validly issued, fully paid and
nonassessable, and has not been issued in violation of any preemptive or similar
rights. Section 4.4 of the MediQual Disclosure Schedule sets forth for each
class and series of capital stock of MediQual outstanding, the following, as of
the date hereof (assuming compliance by MediQual with Section 5.3(c)): (a) the
number of shares of such class and series outstanding, (b) the liquidation
preference for such class and series, including accumulated and unpaid
dividends, and (c) the applicable Conversion Value (as defined in the MediQual
Certificate) for such class or series (showing any adjustment to the Conversion
Value since June 19, 1996 as a result of any Extraordinary Common Shares Event
(as defined in the MediQual Certificate)). Other than as set forth in the first
sentence hereof or in Section 4.4 to the MediQual Disclosure Schedule, there are
no outstanding subscriptions, options, warrants, puts, calls, agreements,
understandings, claims or other commitments or rights of any type relating to
the issuance, sale or transfer of any securities of MediQual by MediQual or, to
the knowledge of MediQual, any other person or entity, nor are there outstanding
any securities which are convertible into or exchangeable for any shares of
capital stock of MediQual, and MediQual has no obligation of any kind to issue
any additional securities or to pay for securities of MediQual or any
predecessor. The issuance and sale of all of the shares of capital stock
described in this Section 4.4 have been in compliance with federal and state
securities laws. The MediQual Disclosure Schedule accurately sets forth the
names of, and the number of shares of each class (including the number of shares
issuable upon exercise of MediQual Options and the exercise price and vesting
schedule with respect thereto) and the number of options held by, all holders of
options to purchase MediQual capital stock. Except as set forth in Section 4.4
to the MediQual Disclosure Schedule, MediQual has not agreed to register any
securities under the Securities Act or under any state securities law or granted
registration rights to any person or entity. No holder of any warrant or right
to purchase MediQual Common Stock will have any right to acquire any Common
Stock or other equity interest of the Surviving Corporation following the
Effective Time.
4.5 Conflicts; Consents and Approvals. Neither the execution and delivery
of this Agreement by MediQual nor the consummation of the transactions
contemplated hereby will:
(a) conflict with, or result in a breach of any provision of, the
MediQual Certificate or the MediQual Bylaws;
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(b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with the giving of notice,
the passage of time or otherwise, would constitute a default) under, or
entitle any party (with the giving of notice, the passage of time or
otherwise) to terminate, accelerate, modify or call a default under, or
result in the creation of any material lien, security interest, charge or
encumbrance upon any of the properties or assets of MediQual or any of its
subsidiaries under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, contract, undertaking,
agreement, lease or other instrument or obligation to which MediQual is a
party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to MediQual; or
(d) require any action or consent or approval of, or review by, or
registration or filing by MediQual or any of its affiliates with, any third
party or any Governmental Authority, other than (i) authorization of the
Merger and the transactions contemplated hereby by the MediQual
Stockholders, (ii) actions required by the HSR Act, (iii) registrations or
other actions required under federal and state securities laws and (iv)
consents or approvals of any Governmental Authority set forth in Section
4.5 to the MediQual Disclosure Schedule;
except in the case of clause (b) or (d) for any of the foregoing that are set
forth in Section 4.5 of the MediQual Disclosure Schedule, and in the case of
clauses (b) through (d) for any of the foregoing that would not, individually or
in the aggregate, have a Material Adverse Effect on MediQual.
4.6 Absence of Certain Changes.
Except as expressly provided for or permitted under Section 5.3(c) of this
Agreement, or as set forth in Section 4.6 to the MediQual Disclosure Schedule,
since December 31, 1996 there has not been:
(a) Any material adverse change in the business, operations, assets,
properties, customer base, prospects, rights or condition (financial or
otherwise) of MediQual or any occurrence, circumstance, or combination
thereof which reasonably could be expected to result in any such material
adverse change, including, without limitation, (i) any material adverse
change relating to MediQual's relationship with any material customer, (ii)
to the knowledge of MediQual, any action by the Commonwealth of
Pennsylvania toward repealing, modifying in any manner adverse to MediQual
or revoking any aspect of Public Law 783 No. 123, known as the Health Care
Cost Containment Act, or (iii) to the knowledge of MediQual, any action
toward determination by the Joint Commission on Accreditation of Healthcare
Organizations (JCAHO) to remove MediQual's product from the published list
of performance measurement systems acceptable for the JCAHO's new
accreditation initiative, or any event or occurrence which may cause such
product to fail to meet each of the four performance categories designated
by the JCAHO, or any determination by the JCAHO to terminate or abandon its
initiative to integrate the use of outcomes and other performance measures
into JCAHO's accreditation process.
(b) Any declaration, setting aside or payment of any dividend or any
distribution (in cash or in kind) to any stockholder of MediQual, or any
direct or indirect redemption, purchase or other acquisition by MediQual of
any of its capital stock or any options, warrants, rights or agreements to
purchase or acquire such stock;
(c) Any increase of more than 4% in amounts payable by MediQual to or
for the benefit of, or committed to be paid by MediQual to or for the
benefit of, any stockholder, director, officer or other consultant, agent
or employee of MediQual whose total annual compensation exceeds $75,000 or
any relatives of such person, or any increase in any benefits granted under
any bonus, stock option, profit-sharing, pension, retirement, severance,
deferred compensation, group health, insurance, or other direct or indirect
benefit plan, payment or arrangement made to, with or for the benefit of
any such person;
(d) Any material transaction entered into or carried out by MediQual
other than in the ordinary and usual course of business consistent with
past practices;
(e) Any material borrowing or agreement to borrow funds by MediQual,
any incurring by MediQual of any other obligation or liability (contingent
or otherwise), except liabilities incurred in the usual and ordinary course
of MediQual' business (consistent with past practices), or any endorsement,
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assumption or guarantee of payment or performance of any loan or obligation
of any other person by MediQual;
(f) Any material change in MediQual's method of doing business or any
change in its accounting principles or practices or its method of
application of such principles or practices;
(g) Any material mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be imposed
on or with respect to the property or assets of MediQual;
(h) Any sale, lease or other disposition of, or any agreement to sell,
lease or otherwise dispose of any of the properties or assets of MediQual,
other than sales in the usual and ordinary course of business for fair
equivalent value to persons other than directors, officers, stockholders,
or other affiliates of MediQual;
(i) Any purchase of or any agreement to purchase assets (other than
purchases in the ordinary course of business consistent with past
practices) for an amount in excess of $50,000 for any one purchase or
$100,000 for all such purchases made by MediQual or any lease or any
agreement to lease, as lessee, any capital assets with payments over the
term thereof to be made by MediQual exceeding an aggregate of $100,000;
(j) Any loan or advance made by MediQual to any person other than
loans made to MediQual's customers in the ordinary course of business
consistent with past practices not exceeding $50,000, in the aggregate, to
any customer;
(k) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to, any material
term, condition or provision of any material contract, agreement, license
or other instrument to which MediQual is a party, other than any
satisfaction by performance in accordance with the terms thereof in the
usual and ordinary course of business; or
(l) Any labor dispute or disturbance adversely affecting the business
operations or condition (financial or otherwise) of MediQual, including
without limitation the filing of any petition or charge of unfair labor
practice with any governmental or regulatory authority, efforts to effect a
union representation election, actual or threatened employee strike, work
stoppage or slow down.
4.7 Officers, Employees and Compensation. Section 4.7 to the MediQual
Disclosure Schedule sets forth the names of all directors and officers of
MediQual, the total salary, bonus, fringe benefits and perquisites each received
from MediQual in the year ended December 31, 1996, and any changes to the
foregoing which have occurred subsequent to December 31, 1996. Section 4.7 to
the MediQual Disclosure Schedule also lists and describes the current
compensation of the ten most highly compensated managers of MediQual and any
other employee of MediQual whose total current salary and bonus exceeds $75,000.
Except as disclosed in Section 4.7 to the MediQual Disclosure Schedule, there
are no other forms of compensation paid to any such director, officer or
employee of MediQual. Except as disclosed in Section 4.7 to the MediQual
Disclosure Schedule, the amounts accrued on the books and records of MediQual
for vacation pay, sick pay, and all commissions and other fees payable to
agents, salesmen and representatives will be adequate to cover MediQual's
liabilities for all such items. Except as set forth in Section 4.7 to the
MediQual Disclosure Schedule, MediQual has not become obligated, directly or
indirectly, to any stockholder, director or officer of MediQual or any person
related to such person by blood or marriage, except for current liability for
such compensation. Except as set forth in Section 4.7 to the MediQual Disclosure
Schedule, to the knowledge of MediQual, no stockholder, director, officer, agent
or employee of MediQual or any person related to such person by blood or
marriage holds any position or office with or has any material financial
interest, direct or indirect, in any supplier, customer or account of, or other
outside business which has material transactions with, MediQual. MediQual has no
agreement or understanding with any stockholder, director, officer, employee or
representative of MediQual which would influence any such person not to become
associated with Cardinal from and after the Closing or from serving MediQual
after the Closing in a capacity similar to the capacity presently held.
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4.8 Financial Statements.
(a) MediQual has furnished to Cardinal the balance sheet of MediQual as of
December 31, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for the fiscal year then ended, including,
in each case, the related notes (collectively, the "Audited Statements"), which
are accompanied by the unqualified audit report of Arthur Andersen LLP. The
Audited Statements, which have been initialed for identification by the
president of MediQual, have been prepared from and are in accordance with the
books and records of MediQual, and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis, and
fairly present the financial condition of MediQual as of the date stated and the
results of operations of MediQual for the period then ended in accordance with
such practices.
(b) When delivered in accordance with Section 5.3(g), the balance sheet for
MediQual as of the end of each calendar month after the date hereof, and the
related statements of income, changes in stockholders' equity, and cash flows
for the period beginning January 1, 1997 and then ended, including the related
notes (the "Interim Statements") shall have been prepared from and in accordance
with the books and records of MediQual and in accordance with generally accepted
accounting principles applied on a basis consistent with that used in the
Audited Statements, and shall fairly present the financial condition of MediQual
as of such date and the results of operations of MediQual for such period in
accordance with such practices, except for normal recurring audit adjustments.
4.9 Taxes.
(a) MediQual and its subsidiaries have duly filed all federal, state, local
and foreign income, franchise, excise, real and personal property and other Tax
Returns and reports (including, but not limited to, those filed on a
consolidated, combined or unitary basis) required to have been filed by MediQual
or its subsidiaries prior to the date hereof. All of the foregoing Tax Returns
and reports are true and correct, and MediQual and its subsidiaries have paid
or, prior to the Effective Time, will pay all Taxes, interest and penalties
required to be paid in respect of the periods covered by such returns or reports
or otherwise due to any federal, state, foreign, local or other taxing
authority. The unpaid Taxes of MediQual and its subsidiaries do not, as of the
date hereof and as of the Closing Date, exceed the reserve for Tax liability (as
distinguished from any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the balance
sheet of MediQual included in the Audited Statements (as distinguished from in
any notes thereto). Neither MediQual nor any of its subsidiaries will have any
material liability for any Taxes for any periods ending on or prior to the
Effective Time in excess of the amounts so paid or reserves so established and
neither MediQual nor any of its subsidiaries is delinquent in the payment of any
material Tax, assessment or governmental charge and none of them has requested
or filed any document having the effect of causing any extension of time within
which to file any returns in respect of any fiscal year which have not since
been filed. No deficiencies for any Tax, assessment or governmental charge have
been proposed in writing, asserted or assessed (tentatively or definitely), in
each case, by any taxing authority, against MediQual or any of its subsidiaries
for which there are not adequate reserves. Except as set forth in Section 4.9 to
the MediQual Disclosure Schedule, neither MediQual nor any of its subsidiaries
is the subject of any Tax audit. As of the date of this Agreement, there are no
pending requests for waivers of the time to assess any such Tax, other than
those made in the ordinary course and for which payment has been made or there
are adequate reserves. Neither MediQual nor any of its subsidiaries has waived
any statute of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency. There are no liens with
respect to Taxes upon any of the properties or assets, real or personal,
tangible or intangible of MediQual or any of its subsidiaries (other than liens
for Taxes not yet due). No claim has ever been made by an authority in a
jurisdiction where none of MediQual and its subsidiaries files Tax Returns that
MediQual or any of its subsidiaries is or may be subject to taxation by that
jurisdiction. MediQual has not filed an election under Section 341(f) of the
Code to be treated as a consenting corporation. As of the date of this
Agreement, neither MediQual nor any of its subsidiaries has previously undergone
an "Ownership Change" as defined by Section 382(g) of the Code which would limit
the amount of pre-change losses, credits and recognition of built-in losses to
offset post change income.
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(b) Neither MediQual nor any of its subsidiaries is obligated by any
contract, agreement or other arrangement to indemnify any other person with
respect to Taxes. Neither MediQual nor any of its subsidiaries are now or have
ever been a party to or bound by any agreement or arrangement (whether or not
written and including, without limitation, any arrangement required or permitted
by law) binding MediQual or any of its subsidiaries which (i) requires MediQual
or any of its subsidiaries to make any Tax payment to or for the account of any
other person, (ii) affords any other person the benefit of any net operating
loss, net capital loss, investment Tax credit, foreign Tax credit, charitable
deduction or any other credit or Tax attribute which could reduce Taxes
(including, without limitation, deductions and credits related to alternative
minimum Taxes) of MediQual or any of its subsidiaries, (iii) requires or permits
the transfer or assignment of income, revenues, receipts or gains to MediQual or
any of its subsidiaries, from any other person, or (iv) otherwise requires
MediQual or any of its subsidiaries to indemnify any other person in respect of
Taxes.
(c) Section 4.9(c) to the MediQual Disclosure Schedule sets forth (i) a
list of all jurisdictions (whether foreign or domestic) to which any material
Tax is or has been properly payable by MediQual or any of its subsidiaries
within the past five years, (ii) all sales for which gain has been reported
under the installment method of accounting for Tax purposes and for which gain
has to be recognized for Tax purposes by MediQual or any of its subsidiaries
subsequent to the Closing Date, (iii) all rulings or determinations obtained by
MediQual or any of its subsidiaries from any Governmental Authority responsible
for the imposition of any Tax that may affect MediQual or any of its
subsidiaries subsequent to the Closing Date, (iv) all MediQual returns with
respect to which the applicable period for assessment under Applicable Law,
after giving effect to extensions or waivers, has not expired, (v) any material
intercompany items (as described in Treasury Regulations Section 1.1502-13(b)(2)
or in similar state or local income Tax provisions) resulting from any
intercompany transaction to which either MediQual or any of its subsidiaries is
a party, (vi) any excess loss accounts (as described in Treasury Regulations
Section 1.1502-19 or in similar state or local income Tax provisions) in the
stock of any of MediQual's subsidiaries, (vii) a list of all pending Tax audits
or inquiries, and (viii) any Tax reserves included in the "Deferred Taxes" or
similar line item in MediQual's financial statements included in the MediQual
SEC Documents, separately identified and itemized by dollar amount.
(d) MediQual and its subsidiaries have withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder or other third party.
(e) "Tax Returns" means returns, reports and forms required to be filed
with any Governmental Authority of the United States or any other jurisdiction
responsible for the imposition or collection of Taxes.
(f) "Taxes" means (i) all Taxes (whether federal, state, local or foreign)
based upon or measured by income and any other tax whatsoever, including,
without limitation, gross receipts, profits, sales, use, occupation, value
added, ad valorem, transfer, franchise, withholding, payroll, employment,
excise, or property taxes, together with any interest or penalties imposed with
respect thereto and (ii) any obligations under any agreements or arrangements
with respect to any Taxes described in clause (i) above.
4.10 Compliance with Law. Except as set forth in Section 4.10 to the
MediQual Disclosure Schedule, MediQual is in compliance with, and at all times
since March 31, 1994 has been in compliance with, all applicable laws, statutes,
orders, rules, regulations, policies or guidelines promulgated, or judgments,
decisions or orders entered by any Governmental Authority (collectively,
"Applicable Laws") relating to MediQual or its business or properties,
including, without limitation, the Food, Drug and Cosmetic Act and similar state
laws, any federal or state Pharmacy Practice Acts, the Occupational Safety and
Health Act and the regulations promulgated thereunder ("OSHA"), the Securities
Act, the Exchange Act, any state or federal laws respecting rights of privacy
and all rules of professional conduct applicable to MediQual or by which any of
its properties are bound or subject. MediQual has heretofore made available to
Cardinal copies of all material correspondence from and to the Occupational
Safety and Health Administration and any other Governmental Authority and
inspectors.
4.11 Intellectual Property. Set forth in Section 4.11 to the MediQual
Disclosure Schedule is a true and complete list of (i) all of MediQual's foreign
and domestic patents, patent applications, invention disclosures filed in the
patent offices of any countries, trademarks, service marks or tradenames,
copyrights (and any
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registrations or applications for registration for any of the foregoing), and
(ii) all material agreements to which MediQual is a party which concern any of
the Intellectual Property ("Intellectual Property" shall mean proprietary rights
of every kind, including, without limitation, all domestic or foreign patents,
patent applications, intangible rights in inventions (whether or not
patentable), products, intangible rights in technologies, discoveries,
copyrightable and copyrighted works, apparatus, trade secrets, trademarks and
trademark registration applications and registrations, service marks and service
mark registration applications and registrations, trade names, trade dress,
copyrights and copyright registration applications and registrations, design
rights, customer lists, marketing and customer information, mask works rights,
know-how, licenses, technical information (whether confidential or otherwise),
copyright and trade secret rights in software, databases, methodologies and all
documentation thereof). The Intellectual Property set forth in Section 4.11 of
the MediQual Disclosure Schedule, together with any other intellectual property
which MediQual owns or otherwise has the right to use, collectively is
sufficient for the operation of the business of MediQual in substantially the
same manner as such business is at present conducted. Except as set forth in
Section 4.11 to the MediQual Disclosure Schedule, (i) MediQual owns, free and
clear of any liens, claims or encumbrances, the Intellectual Property and has
the exclusive right to bring actions for the infringement thereof; (ii) all of
the patents, trademark registrations, service mark registrations, tradename
registrations, design right registrations, and copyright registrations included
in the Intellectual Property are valid; (iii) the Intellectual Property does not
infringe and has not infringed any now existing or subsequently issued domestic
or foreign patent, trademark, service mark, tradename, copyright, design right
or other intellectual property or proprietary right; (iv) no person or entity
has asserted in writing that, with respect to the Intellectual Property,
MediQual or a licensee of MediQual is infringing or has infringed any domestic
or foreign patent, trademark, service mark, tradename, copyright or design
right, or has misappropriated or improperly used or disclosed any trade secret,
confidential information or know-how which assertion has not been subsequently
resolved; (v) the Intellectual Property, and its use or operation, do not
infringe, and have not infringed, any foreign or domestic patent, trademark,
service mark, tradename, copyright or contractual right of any entity, and have
not involved the misappropriation or improper use or disclosure of any trade
secrets, confidential information or know-how of any entity; (vi) all working
requirements and all fees, annuities, and other payments which are due from
MediQual on or before the effective date of this Agreement for any of the
Intellectual Property, including, without limitation, all foreign or domestic
patents, patent applications, trademark registrations, service mark
registrations, tradename registrations, copyright registrations and any
applications for any of the preceding, have been met or paid; (vii) the claims
made in the foreign or domestic patents and patent applications that are a part
of the Intellectual Property are not dominated by claims of patents owned by
other persons or entities; (viii) the making, using, selling, manufacturing,
marketing, licensing, reproduction, distribution, or publishing of any process,
service, machine, manufacture, composition of matter, or material pursuant to
any part of the Intellectual Property, does not and will not infringe any
domestic or foreign patent, trademark, service mark, tradename, copyright or
other intellectual property right; (ix) no unexpired foreign or domestic patents
or patent applications exist that are adverse to the material interests of
MediQual; (x) the Intellectual Property is not the subject of any pending
Action; (xi) no part of the Intellectual Property was obtained through
inequitable conduct or fraud in the United States Patent and Trademark Office or
any foreign governmental entity; (xii) MediQual is not aware of any (a) prior
act that would adversely affect, void or invalidate any of the Intellectual
Property or (b) conduct or use by MediQual or any third party that would
adversely affect, void or invalidate any of the Intellectual Property; (xiii)
the execution, delivery and performance of this Agreement by MediQual, and the
consummation of the transactions contemplated thereby, will not breach, violate
or conflict with any instrument or agreement governing or contained within any
of the Intellectual Property, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any of the Intellectual
Property or in any way impair the right of Cardinal or Subcorp to use, sell,
offer to sell, license or dispose of, or to bring any action for the
infringement of, any Intellectual Property; (xiv) there are no royalties,
honoraria, fees or other payments payable to any third party by reason of
MediQual's ownership, use, license, sale or disposition of the Intellectual
Property; (xv) no part of the source or object code, algorithms or structure
included in any of the Intellectual Property is copied from, based upon or
derived from any source or object code, algorithm or structure included in any
computer software product owned by any third party nor does any substantial
similarity of any of such source or object code, algorithms or structure to any
computer software product owned by any third party result from such source or
object code,
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algorithms or structure being copied from, based upon or derived from any
computer software product owned by any third party; and (xvi) no software
included in the Intellectual Property contains any "Self-Help Code," i.e., any
back door, time bomb, drop dead device, or other software routine designed to
disable a computer program automatically with the passage of time or under the
positive control of any unauthorized person, or, to MediQual's knowledge,
contains any "Unauthorized Code," i.e., any virus, Trojan horse, worm, or other
software routines or hardware components designed to permit unauthorized access,
disable, erase, or otherwise harm software, hardware, or data or to perform any
other such actions.
(b) MediQual has taken all steps that are reasonably necessary and
appropriate to safeguard and maintain the secrecy and confidentiality of all
trade secrets contained in the Intellectual Property (including, without
limitation, entering into appropriate confidentiality and nondisclosure
agreements with officers, directors, employees and third-party consultants of
MediQual).
(c) MediQual has taken all steps that are reasonably necessary and
appropriate to safeguard and maintain all material copyrights and patents
contained in the Intellectual Property, including, without limitation, entering
into appropriate assignments with current and former officers, directors,
employees and third party consultants of MediQual.
4.12 Title to and Condition of Properties. Except as set forth in Section
4.12 to the MediQual Disclosure Schedule, MediQual has good, valid and
indefeasible title to all of its material assets and properties of every kind,
nature and description, tangible or intangible, wherever located, which
constitute all of the property now used in and necessary for the conduct of its
business as presently conducted (including without limitation all material
property and assets shown or reflected on the Audited Statements or the Interim
Statements, when delivered, except inventory sold in the ordinary course of
business). Except as set forth in Section 4.12 to the MediQual Disclosure
Schedule, all such properties are owned free and clear of all mortgages,
pledges, liens, security interests, encumbrances and restrictions of any nature
whatsoever, including without limitation (a) rights or claims of parties in
possession; (b) easements or claims of easements; (c) encroachments, overlaps,
boundary line or water drainage disputes or any other matters; (d) any lien or
right to a lien for services, labor or material furnished; (e) special tax or
other assessments; (f) options to purchase, leases, tenancies, or land
contracts; (g) contracts, covenants, or reservations which restrict the use of
such properties and (h) violations of any Applicable Laws applicable to such
properties. All such properties are usable for their current uses without
violating any Applicable Laws, or any applicable private restriction, and such
uses are legal conforming uses. Except as set forth in Section 4.12 to the
MediQual Disclosure Schedule, no financing statement under the Uniform
Commercial Code or similar law naming MediQual or any of its predecessors is on
file in any jurisdiction in which MediQual owns property or does business, and
no Company is a party to or bound under any material agreement or legal
obligation authorizing any party to file any such financing statement. Section
4.12 to the MediQual Disclosure Schedule contains a complete and accurate list
of the location of all real property which is owned, leased or operated by
MediQual and describes the nature of MediQual's interest in that real property.
With respect to any real property leased by MediQual, MediQual has an insurable
leasehold interest in that real property.
Except as set forth in Section 4.12 to the MediQual Disclosure Schedule,
all real property, plants and structures and all machinery and equipment and
tangible personal property owned, leased or used by MediQual and material to the
operation of its business are reasonably suitable for the purpose or purposes
for which they are being used (including full compliance with all Applicable
Laws) and are in good condition and repair, ordinary wear and tear excepted.
Section 4.12 to the MediQual Disclosure Schedule lists, and MediQual has
furnished or made available to Cardinal, copies of all engineering, geologic and
environmental reports prepared by or for MediQual or with respect to the real
property owned, leased or used by MediQual.
Except as set forth in Section 4.12 to the MediQual Disclosure Schedule, no
real or personal property owned, leased, or used by MediQual has been used to
produce, process, store, handle, or transport any hazardous or toxic substance
or waste (as those terms are defined or described in any of the Applicable Laws
relating to the protection, preservation, conservation, restoration or quality
of the environment), except to the extent immaterial quantities of hazardous
substances are used as an incidental aspect of the operation of its business.
Except as set forth in Section 4.12 to the MediQual Disclosure Schedule, no
hazardous or toxic
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substance or waste has been disposed of, released or discharged on, leaked from,
or has otherwise contaminated any real property now or heretofore owned, leased
or used by MediQual. Except as set forth in Section 4.12 to the MediQual
Disclosure Schedule, no asbestos or substances containing material quantities of
asbestos have been installed in any such property.
4.13 Registration Statement; Prospectus/Proxy Statement. None of the
information provided by MediQual for inclusion in the Registration Statement at
the time it becomes effective or, in the case of the Prospectus/Proxy Statement,
at the date of mailing and at the date of the meeting of the MediQual
Stockholders to consider the Merger, will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
4.14 Litigation. Except as set forth in Section 4.14 to the MediQual
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation (an "Action") pending or, to the knowledge of MediQual (or its
officers or directors), threatened against MediQual or any officer or director
of MediQual which, individually or in the aggregate, if adversely determined,
would have a Material Adverse Effect on MediQual or a Material Adverse Effect on
the ability of MediQual to consummate the transactions contemplated hereby.
MediQual is not subject to any outstanding order, writ, injunction or decree
which, individually or in the aggregate, insofar as can be reasonably foreseen,
could have a Material Adverse Effect on MediQual or a Material Adverse Effect on
the ability of MediQual to consummate the transactions contemplated hereby.
Except as set forth in Section 4.14 to the MediQual Disclosure Schedule, since
March 31, 1994, (i) there has not been any Action asserted, or to the knowledge
of MediQual, threatened against MediQual relating to MediQual's method of doing
business or its relationship with past, existing or future users or purchasers
of any goods or services of MediQual and (ii) MediQual has not been subject to
any outstanding order, writ, injunction or decree relating to MediQual's method
of doing business or its relationship with past, existing or future customers,
lessees, users, purchasers or licensees of any Intellectual Property, goods or
services of MediQual.
4.15 Brokerage and Finder's Fees; Expenses. Except for MediQual's
obligations to Smith Barney Inc. ("Smith Barney") (copies of the written
agreements relating to such obligations having previously been provided to
Cardinal), neither MediQual nor, to the knowledge of MediQual, any stockholder,
director, officer or employee thereof, has incurred or will incur on behalf of
MediQual, any brokerage, finder's or similar fee in connection with the
transactions contemplated by this Agreement. Section 4.15 to the MediQual
Disclosure Schedule discloses the maximum aggregate amount of all fees and
expenses which will be paid or will be payable by MediQual to all attorneys,
accountants and investment bankers in connection with the Merger ("Merger
Fees").
4.16 Accounting Matters. Neither MediQual nor any of its affiliates has
taken or agreed to take any action that (without giving effect to any actions
taken or agreed to be taken by Cardinal or any of its affiliates) would (a)
prevent Cardinal from accounting for the business combination to be effected by
the Merger as a pooling-of-interests for financial reporting purposes or (b)
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code.
4.17 Employee Benefit Plans.
(a) For purposes of this Section 4.17, the following terms have the
definitions given below:
"Controlled Group Liability" means any and all liabilities under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971
of the Code, (iv) the continuation coverage requirements of section 601 et
seq. of ERISA and Section 4980B of the Code, and (v) corresponding or
similar provisions of foreign laws or regulations, in each case other than
pursuant to the Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means, with respect to any entity, trade or
business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or
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Section 4001(b)(1) of ERISA that includes the first entity, trade or
business, or that is a member of the same "controlled group" as the first
entity, trade or business pursuant to Section 4001(a)(14) of ERISA.
"Plans" means all employee benefit plans, programs, policies,
practices, and other arrangements providing benefits to any employee or
former employee or beneficiary or dependent thereof, whether or not
written, and whether covering one person or more than one person, sponsored
or maintained by MediQual or any of its subsidiaries or to which MediQual
or any of its subsidiaries contributes or is obligated to contribute.
Without limiting the generality of the foregoing, the term "Plans" includes
all employee welfare benefit plans within the meaning of Section 3(1) of
ERISA and all employee pension benefit plans within the meaning of Section
3(2) of ERISA.
"Withdrawal Liability" means liability to a Multi-employer Plan as a
result of a complete or partial withdrawal from such Multi-employer Plan,
as those terms are defined in Part I of Subtitle E of Title IV of ERISA.
(b) Section 4.17 to the MediQual Disclosure Schedule lists all Plans. With
respect to each Plan, MediQual has made available to Cardinal a true, correct
and complete copy of: (i) each writing constituting a part of such Plan,
including without limitation all plan documents, benefit schedules, trust
agreements, and insurance contracts and other funding vehicles; (ii) the most
recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii)
the current summary plan description, if any; (iv) the most recent annual
financial report, if any; and (v) the most recent determination letter from the
Internal Revenue Service, if any.
(c) The Internal Revenue Service has issued a favorable determination
letter with respect to each Plan that is intended to be a "qualified plan"
within the meaning of Section 401(a) of the Code (a "Qualified Plan"), and there
are no existing circumstances nor any events that have occurred that could
adversely affect the qualified status of any Qualified Plan or the related
trust.
(d) All contributions required to be made to any Plan by Applicable Laws or
by any plan document or other contractual undertaking, and all premiums due or
payable with respect to insurance policies funding any Plan, for any period
through the date hereof have been timely made or paid in full and through the
Closing Date will be timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof or the Closing Date, as
applicable, have been or will be fully reflected in the Audited Statements and
the Interim Statements.
(e) MediQual and its subsidiaries have complied, and are now in compliance
with all provisions of ERISA, the Code and all laws and regulations applicable
to the Plans. Each Plan has been operated in compliance with its terms. There is
not now, and there are no existing, circumstances that could give rise to, any
requirement for the posting of security with respect to a Plan or the imposition
of any lien on the assets of MediQual or any of its subsidiaries under ERISA or
the Code. Each Plan includes provisions which reserve the rights of the sponsor
of the Plan to amend or terminate the Plan.
(f) No Plan is subject to Title IV or Section 302 of ERISA or Section 412
or 4971 of the Code. No Plan is a "multi-employer plan" within the meaning of
Section 4001(a)(3) of ERISA (a "Multi-employer Plan") or a plan that has two or
more contributing sponsors at least two of whom are not under common control,
within the meaning of Section 4063 of ERISA (a "Multiple Employer Plan"), nor
has MediQual or any of its subsidiaries or any of their respective ERISA
Affiliates, at any time within five years before the date hereof, contributed to
or been obligated to contribute to any Multi-employer Plan or Multiple Employer
Plan.
(g) There does not now exist, and there are no existing, circumstances that
could result in, any Controlled Group Liability that would be a liability of
MediQual or any of its subsidiaries following the Closing. Without limiting the
generality of the foregoing, neither MediQual nor any of its subsidiaries nor
any of their respective ERISA Affiliates has engaged in any transaction
described in Section 4069 or Section 4204 of ERISA.
(h) Except for health continuation coverage as required by Section 4980B of
the Code or Part 6 of Title I of ERISA or as required by applicable state
insurance laws, neither MediQual nor any of its subsidiaries has
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any liability for life, health, medical or other welfare benefits to former
employees or beneficiaries or dependents thereof.
(i) Except as set forth in Section 4.17(i) to the MediQual Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in, cause the
accelerated vesting or delivery of, or increase the amount or value of, any
payment or benefit to any employee, officer, director or consultant of MediQual
or any of its subsidiaries and Section 4.17(i) to the MediQual Disclosure
Schedule specifies the amount of any such payment or benefit. Without limiting
the generality of the foregoing and except as set forth in Section 4.17(i) to
the MediQual Disclosure Schedule, no amount paid or payable by MediQual or any
of its subsidiaries in connection with the transactions contemplated hereby
either solely as a result thereof or as a result of such transactions in
conjunction with any other events will be an "excess parachute payment" within
the meaning of Section 280G of the Code.
(j) There are no pending or, to the knowledge of MediQual, threatened
claims (other than claims for benefits in the ordinary course), lawsuits or
arbitrations which have been instituted against the Plans, or, to the knowledge
of MediQual, any fiduciaries thereof with respect to their duties to the Plans
or the assets of any of the trusts under any of the Plans which could reasonably
be expected to result in any material liability of MediQual or any of its
subsidiaries.
4.18 Contracts. Section 4.18 to the MediQual Disclosure Schedule lists all
written or oral contracts, agreements, guarantees, leases and executory
commitments (each a "Contract") to which MediQual is a party and which fall
within any of the following categories: (a) Contracts not entered into in the
ordinary course of MediQual's business, (b) joint venture, partnership and
similar agreements, (c) Contracts which are service contracts or equipment
leases involving payments by MediQual of more than $50,000 per year, (d)
Contracts containing covenants purporting to limit the freedom of MediQual to
compete in any line of business in any geographic area or to hire any individual
or group of individuals, (e) Contracts which after the Effective Time would have
the effect of limiting the freedom of Cardinal or its subsidiaries (other than
MediQual and its subsidiaries) to compete in any line of business in any
geographic area or to hire any individual or group of individuals, including any
Contracts with distributors granting any exclusive rights, (f) Contracts which
contain minimum purchase conditions or requirements or other terms that restrict
or limit the purchasing relationships of MediQual or its affiliates, or any
customer, licensee or lessee thereof, (g) Contracts relating to any outstanding
commitment for capital expenditures in excess of $50,000, (h) Contracts relating
to the lease or sublease of or sale or purchase of real or personal property
involving any annual expense or price in excess of $50,000 and not cancelable by
MediQual (without premium or penalty) within one month, (i) Contracts with any
labor organization, (j) indentures, mortgages, promissory notes, loan
agreements, guarantees of amounts in excess of $50,000, letters of credit or
other agreements or instruments of MediQual or commitments for the borrowing or
the lending of amounts in excess of $50,000 by MediQual or providing for the
creation of any charge, security interest, encumbrance or lien upon any of the
assets of MediQual, (k) Contracts which are fixed price, capitation or other
risk sharing agreements with customers not cancelable by MediQual (without
premium or penalty) within one month; (l) Contracts involving annual revenues or
expenditures to the business of MediQual in excess of 3.0% of MediQual's annual
revenues, (m) Contracts providing for "earn-outs" or other contingent payments
involving more than $50,000 over the term of the Contract and (n) Contracts with
or for the benefit of any affiliate of MediQual or immediate family member
thereof (other than subsidiaries of MediQual). All such Contracts are valid and
binding obligations of MediQual and, to the knowledge of MediQual, the valid and
binding obligation of each other party thereto. Neither MediQual nor, to the
knowledge of MediQual, any other party thereto is in violation of or in default
in respect of, nor has there occurred an event or condition which with the
passage of time or giving of notice (or both) would constitute a default under
or permit the termination of, any Contract.
(d) Except as set forth in Section 4.18 of the MediQual Disclosure Schedule
or as contemplated by the transactions contemplated hereby, there are no
Contracts or other transactions between MediQual, on the one hand, and any (i)
officer or director of MediQual, (ii) record or beneficial owner of five percent
or more of the voting securities of MediQual or (iii) affiliate (as such term is
defined in Regulation 12b-2 promulgated under the Exchange Act) of any such
officer, director or beneficial owner, on the other hand.
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4.19 Accounts Receivable. All accounts and notes receivable (including
lease and finance notes receivable) and accrued interest receivable of MediQual
have arisen in the ordinary course of business and the accounts receivable
reserves reflected on the balance sheet included in the Interim Statements
(which reserves shall not exceed $200,000) will be as of the date thereof
established in accordance with generally accepted accounting principles
consistently applied and will be adequate.
4.20 Labor Matters. Except as set forth in Section 4.20 to the MediQual
Disclosure Schedule, neither MediQual nor any of its subsidiaries has any labor
contracts, collective bargaining agreements or employment or consulting
agreements with any persons employed by MediQual or any persons otherwise
performing services primarily for MediQual or any of its subsidiaries (the
"MediQual Business Personnel"). Neither MediQual nor any of its subsidiaries has
engaged in any unfair labor practice with respect to MediQual Business
Personnel, and there is no unfair labor practice complaint pending or, to the
knowledge of MediQual, threatened, against MediQual or any of its subsidiaries
with respect to MediQual Business Personnel. There is no labor strike, dispute,
slowdown or stoppage pending or, to the knowledge of MediQual, threatened
against MediQual or any of its subsidiaries, and neither MediQual nor any of its
subsidiaries has experienced any labor strike, dispute, slowdown or stoppage or
other labor difficulty involving its employees since March 31, 1994.
4.21 Undisclosed Liabilities. Except (i) as and to the extent disclosed or
reserved against on the balance sheet of MediQual as of March 31, 1997 included
in the Interim Statements, (ii) as incurred after the date thereof in the
ordinary course of business consistent with prior practice and not prohibited by
this Agreement and which in any event are not material or (iii) as set forth in
Section 4.21 to the MediQual Disclosure Schedule, MediQual does not have any
liabilities or obligations of any nature, whether known or unknown, absolute,
accrued, contingent or otherwise and whether due or to become due, that,
individually or in the aggregate, could have a Material Adverse Effect on
MediQual.
4.22 Operation of MediQual's Business; Relationships.
(a) Since January 1, 1996 through the date of this Agreement, MediQual has
not engaged in any transaction which, if done after execution of this Agreement,
would violate Section 5.3(c) hereof except as set forth in Section 4.22 to the
MediQual Disclosure Schedule. Section 4.22 to the MediQual Disclosure Schedule
describes each termination or non-renewal that has occurred with respect to any
Contract with any customer or licensee of Intellectual Property from January 1,
1996 to the date of this Agreement.
(b) The relationships of MediQual with its customers and suppliers
(including, without limitation, data suppliers) are satisfactory and the
execution of this Agreement, the consummation of the Merger and the other
transactions contemplated hereby will not materially adversely affect the
relationships of MediQual with such customers or suppliers.
(c) No product produced by MediQual or produced for MediQual by a third
party and being an MediQual trademark or other Proprietary Right of MediQual has
been recalled voluntarily or involuntarily since January 1, 1994, no such recall
is being considered by MediQual, and, to the knowledge of MediQual, no such
recall is being considered by or has been requested or ordered by any MediQual
customer, Governmental Authority or consumer group.
(d) Section 4.22 to the MediQual Disclosure Schedule lists each mandate
(including its expiration date, if any, and the mandated provider) issued by any
Governmental Authority requiring any hospital or other health care provider to
use any of MediQual's products or services or, to the knowledge of MediQual, any
similar products or services.
(e) MediQual is and since January 1, 1994 has been engaged in the clinical
information management systems and services business and has engaged in no other
business whatsoever except as may be incidental to the foregoing.
(f) MediQual is in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "MediQual
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Permits"), and there is no Action pending or, to the knowledge of MediQual,
threatened regarding any of the MediQual Permits. MediQual is not in conflict
with, or in default or violation of any of the MediQual Permits, except for any
such conflicts, defaults or violations which, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect on MediQual.
During the period commencing on December 1, 1994 and ending on the date hereof,
MediQual has not received any notification with respect to possible conflicts,
defaults or violations of Applicable Laws, except for notices relating to
possible conflicts, defaults or violations, which conflicts, defaults or
violations could not have a Material Adverse Effect on MediQual.
4.23 Product Warranties and Liabilities. Section 4.23 to the MediQual
Disclosure Schedule lists all forms of warranties, guarantees or assurances of
its products and services that are in effect or proposed to be used by it
including any made to customers in connection with their conversion from
MediQual's Medis Groups to its Atlas System. Section 4.23 to the MediQual
Disclosure Schedule sets forth a description of each pending or, to the
knowledge of MediQual, threatened Action under any warranty or guaranty against
MediQual. MediQual has not incurred, nor does MediQual know or have any reason
to believe there is any basis for alleging, any liability, damage, loss, cost or
expense as a result of any defect or other deficiency (whether of design,
materials, workmanship, labeling instructions or otherwise) ("Product
Liability") with respect to any product sold or services rendered by or on
behalf of MediQual (including any licensee thereof) after December 1, 1994 and
prior to the Effective Time, whether such Product Liability is incurred by
reason of any express or implied warranty (including, without limitation, any
warranty of merchantability or fitness), any doctrine of common law (tort,
contract or other), any statutory provision or otherwise and irrespective of
whether such Product Liability is covered by insurance.
4.24 Environmental Matters.
(a) As used herein, the term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or industrial, toxic or hazardous
substances or wastes (collectively, "Hazardous Materials") into the environment,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as
well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(b) There are, with respect to MediQual, its subsidiaries or any
predecessor of the foregoing, no past or present violations of Environmental
Laws, releases of any material into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual obligations which
may give rise to any material common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and none
of MediQual and its subsidiaries has received any notice with respect to any of
the foregoing, nor is any Action pending or threatened in connection with any of
the foregoing.
(c) No Hazardous Materials are contained on or about any real property
currently or previously owned or leased by MediQual or any of its subsidiaries
or predecessors and no Hazardous Materials were released on or about any real
property previously owned or leased by MediQual or any of its subsidiaries or
predecessors during the period the property was owned or leased by MediQual or
any of its subsidiaries or predecessors, except in the normal course of
MediQual's business. To the extent MediQual or any of its subsidiaries or
predecessors currently uses or previously used real property which MediQual or
any of its subsidiaries or predecessors never owned or leased, to the knowledge
of MediQual no Hazardous Materials were or are contained on or about the portion
of such property currently or previously used by MediQual or any of its
subsidiaries or predecessors and no Hazardous Materials were released on or
about any such portion of property previously used by MediQual or any of its
subsidiaries or predecessors during the period the property was used by MediQual
or any of its subsidiaries or predecessors, except in the normal course of
MediQual's business.
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(d) There are no underground storage tanks on or under any real property
currently or previously owned or leased by MediQual or any of its subsidiaries.
4.25 [Intentionally Omitted]
4.26 Board Recommendation. The Board of Directors of MediQual, has by
unanimous written consent of its directors (who constituted 100% of the
directors then in office) (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are in the best
interests of the stockholders of MediQual, and (ii) resolved to recommend that
the holders of the shares of MediQual Conversion Stock approve this Agreement
and the transactions contemplated herein, including the Merger (the "MediQual
Board Recommendation").
4.27 DGCL and State Takeover Laws. Prior to the date hereof, the Board of
Directors of MediQual has taken all action, if any, necessary to exempt under or
make not subject to any state takeover law or other state law that purports to
limit or restrict business combinations or the ability to acquire or vote
shares: (i) the execution of this Agreement and the Support/Voting Agreements
dated on or about May 27, 1997 between Cardinal and certain MediQual
Stockholders (collectively, the "Support Agreements"), (ii) the Merger and (iii)
the transactions contemplated hereby and the Support Agreements.
4.28 Insurance. Except as set forth in Section 4.28 to the MediQual
Disclosure Schedule, MediQual is presently insured, and during each of the past
five calendar years has been insured against such risks as companies engaged in
a similar business would, in accordance with good business practice, customarily
be insured. Except as set forth in Section 4.28 to the MediQual Disclosure
Schedule, the policies of fire, theft, liability, professional practice and
other insurance maintained with respect to the assets or businesses of the
Company may be continued by MediQual without modification or premium increase
after the Effective Time and for the duration of their current terms which terms
expire as set forth in Section 4.28 to the MediQual Disclosure Schedule.
4.29 Lease Arrangements.
(a) Except as set forth in Section 4.29 to the MediQual Disclosure
Schedule, there are no lessees ("Master Lessees") who have been granted the
right to use, purchase, lease or license Intellectual Property, goods or
services from MediQual and to provide, resell, sublease or relicense same to
other authorized lessees or third parties. The identity of each Master Lessee
and a description of all lessees and third parties to whom such Master Lessee is
entitled to provide, resell, sublease or relicense Intellectual Property, goods
and services of MediQual are set forth in Section 4.29 to the MediQual
Disclosure Schedule. There are no agreements between MediQual and any Master
Lessee other than those in writing that are set forth in Section 4.29 to the
MediQual Disclosure Schedule.
(b) The relationships of MediQual with its lessees and licensees are
satisfactory, and the execution of this Agreement, the consummation of the
Merger, and, to the knowledge of MediQual, the consummation of the transactions
contemplated thereby will not materially adversely affect the relationships of
MediQual with such lessees and licensees.
(c) MediQual is not a party to any vendor financing arrangement which (i)
requires MediQual to use such financing for any particular transaction, or (ii)
cannot be terminated (without premium or penalty) upon less than one month's
notice.
4.30 Books of Account; Records. MediQual's general ledgers, stock record
books, minute books and other material records relating to the assets,
properties, contracts and outstanding legal obligations of MediQual are, in all
material respects, complete and correct, and have been maintained in accordance
with good business practices and the matters contained therein are appropriate
and accurately reflected in the Audited Statements and the Interim Statements.
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ARTICLE V
COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the period from and
after the execution of this Agreement.
5.1 Mutual Covenants.
(a) General. Each of the parties shall use its reasonable efforts to take
all action and to do all things necessary, proper or advisable to consummate the
Merger and the transactions contemplated by this Agreement (including, without
limitation, using its reasonable efforts to cause the conditions set forth in
Article VI for which they are responsible to be satisfied as soon as reasonably
practicable and to prepare, execute and deliver such further instruments and
take or cause to be taken such other and further action as any other party
hereto shall reasonably request).
(b) HSR Act. As soon as practicable, and in any event no later than ten
(10) business days after the date hereof, each of the parties hereto will file
any Notification and Report Forms and related material required to be filed by
it with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the HSR Act with respect to the Merger, will
use its reasonable efforts to obtain an early termination of the applicable
waiting period, and shall promptly make any further filings pursuant thereto
that may be necessary, proper or advisable.
(c) Other Governmental Matters. Each of the parties shall use its
reasonable efforts to take any additional action that may be necessary, proper
or advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any Governmental Authority that it may
be required to give, make or obtain.
(d) Pooling-of-Interests. Each of the parties shall use all reasonable
efforts to cause the Merger to qualify for pooling-of-interests accounting
treatment for financial reporting purposes, including without limitation,
appropriate representation letters to Cardinal's accountants.
(e) Tax-Free Treatment. Each of the parties shall use all reasonable
efforts to cause the Merger to constitute a tax-free "reorganization" under
Section 368(a) of the Code.
(f) Public Announcements. Unless otherwise required by Applicable Laws or
requirements of the NYSE (and in that event only if time does not permit), at
all times prior to the earlier of the Effective Time or termination of this
Agreement pursuant to Section 7.1, Cardinal and MediQual shall consult with each
other before issuing any press release with respect to the Merger and shall not
issue any such press release prior to such consultation.
5.2 Covenants of Cardinal.
(a) Preparation of Registration Statement. Cardinal shall prepare and file
the Registration Statement with the Commission as soon as is reasonably
practicable and shall use all reasonable efforts to have the Registration
Statement declared effective by the Commission and to maintain the effectiveness
of the Registration Statement through the Effective Time. If, at any time prior
to the Effective Time, Cardinal shall obtain knowledge of any information
pertaining to Cardinal contained in or omitted from the Registration Statement
that would require an amendment or supplement to the Registration Statement or
the Prospectus/ Proxy Statement, Cardinal will so advise MediQual in writing and
will promptly take such action as shall be required to amend or supplement the
Registration Statement. Cardinal shall promptly furnish to MediQual all
information concerning it as may be required for supplementing the
Prospectus/Proxy Statement. Cardinal also shall take such other reasonable
actions (other than qualifying to do business in any jurisdiction in which it is
not so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of Cardinal Common Shares in the Merger.
(b) Notification of Certain Matters. Cardinal shall give prompt notice to
MediQual of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any Cardinal or Subcorp representation or
warranty contained in this Agreement to be untrue or inaccurate at or
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prior to the Effective Time and (ii) any material failure of Cardinal to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.2(c) shall not limit or otherwise affect the remedies
available hereunder to MediQual.
(c) NYSE Listing. Cardinal shall use its reasonable efforts to cause the
Cardinal Common Shares issuable pursuant to the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
(d) Directors' and Officers' Indemnification and Insurance. From and after
the Effective Time, Cardinal shall (i) cause (including, providing adequate
funding), the Surviving Corporation to: (i) indemnify and hold harmless the
present and former officers and directors of MediQual in respect of acts or
omissions occurring prior to the Effective Time to the extent provided under the
MediQual Certificate and the MediQual By-laws in effect on the date hereof, and
(ii) use its reasonable efforts to cause the Surviving Corporation to maintain
in effect for not less than one year after the Effective Time MediQual's current
policy of director's and officer's insurance with respect to matters occurring
prior to the Effective Time; provided, however, that the Surviving Corporation
may substitute therefor policies containing terms and conditions which are no
less advantageous to covered officers and directors and that the Surviving
Corporation shall not be required to pay a premium for such insurance in excess
of $18,000, but in such case shall purchase as much insurance as possible for
such $18,000.
5.3 Covenants of MediQual.
(a) MediQual Stockholders Meeting. MediQual shall take all action in
accordance with state and federal securities laws, the DGCL and the MediQual
Certificate and the MediQual Bylaws reasonably necessary to obtain the consent
and approval of MediQual Stockholders with respect to the Merger, this Agreement
and the transactions contemplated hereby on the earliest practicable date.
(b) Information for the Registration Statement and Preparation of
Prospectus/Proxy Statement. MediQual shall promptly furnish Cardinal with all
information concerning it as may be required under the Securities Act for
inclusion in the Registration Statement. MediQual shall cooperate with Cardinal
in the preparation of the Registration Statement in a timely fashion and shall
use all reasonable efforts to assist Cardinal in having the Registration
Statement declared effective by the Commission as promptly as practicable. If at
any time prior to the Effective Time, any information pertaining to MediQual
contained in or omitted from the Registration Statement makes such statements
contained in the Registration Statement materially false or misleading, MediQual
shall promptly so inform Cardinal and provide Cardinal with the information
necessary to make statements contained therein not materially false and
misleading. MediQual shall use all reasonable efforts to cooperate with Cardinal
in the preparation and filing of the Registration Statement and the
Prospectus/Proxy Statement with the Commission (provided, that it is understood
that MediQual is not required to separately file the Prospectus/Proxy Statement
with the Commission under the Exchange Act). MediQual shall use all reasonable
efforts to mail at the earliest practicable date to MediQual Stockholders the
Prospectus/Proxy Statement, which shall include all information required under
Applicable Law to be furnished to MediQual Stockholders in connection with the
Merger and the transactions contemplated thereby and shall include the MediQual
Board Recommendation.
(c) Conduct of MediQual's Operations. During the period from the date of
this Agreement to the Effective Time, MediQual shall conduct its operations only
in the ordinary course, except as expressly contemplated by this Agreement and
the transactions contemplated hereby, and shall use all reasonable efforts to
maintain and preserve its business organization and its material rights and
franchises and to retain the services of its officers and key employees and
maintain relationships with customers, suppliers, lessees, licensees and other
third parties, and to maintain all of its operating assets in their current
condition (normal wear and tear excepted), to the end that their goodwill and
ongoing business shall not be impaired in any material respect. Without limiting
the generality of the foregoing, during the period from the date of this
Agreement to the Effective Time, MediQual shall not, except as otherwise
expressly contemplated by this Agreement and the transactions contemplated
hereby or as set forth in Section 5.3(c) to the MediQual Disclosure Schedule,
without the prior written consent of Cardinal:
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(i) do or effect any of the following actions with respect to its
securities: (A) adjust, split, combine or reclassify its capital stock, (B)
make, declare or pay any dividend or distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for
any shares of its capital stock, (C) grant any person any right or option
to acquire any shares of its capital stock, (D) issue, deliver or sell or
agree to issue, deliver or sell any additional shares of its capital stock
or any securities or obligations convertible into or exchangeable or
exercisable for any shares of its capital stock or such securities (except
pursuant to the exercise of MediQual Options which are outstanding as of
the date hereof), or (E) enter into any agreement, understanding or
arrangement with respect to the sale or voting of its capital stock;
(ii) directly or indirectly sell, transfer, lease, pledge, mortgage,
encumber or otherwise dispose of any of its material property or assets
other than licensing of Intellectual Property made in the ordinary course
of business;
(iii) make or propose any changes in the MediQual Certificate or the
MediQual Bylaws;
(iv) merge or consolidate with any other person or acquire a material
amount of assets or capital stock of any other person or, enter into any
confidentiality agreement with any person;
(v) incur, create, assume or otherwise become liable for any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise
as an accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity, other than in the ordinary
course of business consistent with past practice not in excess of $100,000
in the aggregate;
(vi) create any subsidiaries;
(vii) enter into or modify any employment, severance, termination or
similar agreements or arrangements with, or grant any bonuses, salary
increases, severance or termination pay to, any officer, director,
consultant or employee or otherwise increase the compensation or benefits
provided to any officer, director, consultant or employee other than salary
increases granted in the ordinary course of business consistent with past
practice to employees who are not officers or directors of MediQual, and
except as may be required by Applicable Law or a binding written contract
in effect on the date of this Agreement;
(viii) enter into, adopt or amend any employee benefit or similar
plan;
(ix) change its method of doing business or change any method or
principle of accounting in a manner that is inconsistent with past
practice;
(x) settle any Actions, whether now pending or hereafter made or
brought involving an amount in excess of $25,000;
(xi) write up, write down or write off the book value of any assets,
individually or in the aggregate, in excess of $100,000 except for
depreciation and amortization in accordance with generally accepted
accounting principles consistently applied;
(xii) modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to, any Contract set forth in
Section 4.17 to the MediQual Disclosure Schedule, any other material
Contract to which MediQual is a party or any confidentiality agreement to
which MediQual is a party;
(xiii) incur or commit to any capital expenditures, obligations or
liabilities in respect thereof which in the aggregate exceed or would
exceed $50,000;
(xiv) make any material changes or modifications to any pricing policy
or investment policy or enter into any new management agreements or leases
on terms different from those in effect in the ordinary and usual course of
business, consistent with past practice;
(xv) pay (or agree to become obligated to pay) any Merger Fees in
excess of the amount set forth in Section 4.15 to the MediQual Disclosure
Schedule;
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(xvi) take any action to exempt or make not subject to any other state
takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares, any person or entity
(other than Cardinal or its subsidiaries) or any action taken thereby,
which person, entity or action would have otherwise been subject to the
restrictive provisions thereof and not exempt therefrom;
(xvii) take any action that could result in the representations and
warranties set forth in Article IV becoming false or inaccurate;
(xviii) enter into or carry out any other transaction other than in
the ordinary and usual course of business;
(xix) permit or cause any subsidiary to do any of the foregoing or
agree or commit to do any of the foregoing; or
(xx) agree in writing or otherwise to take any of the foregoing
actions.
(d) Intellectual Property Matters. MediQual shall use all reasonable
efforts to preserve its ownership rights to the Intellectual Property owned by
MediQual free and clear of any liens, claims or encumbrances (other than those
that exist on the date hereof and are referenced in Section 4.12 to the MediQual
Disclosure Schedule) and shall use all reasonable efforts to assert, contest and
prosecute any infringement of any issued foreign or domestic patent, trademark,
service mark, or copyright owned by MediQual or any misappropriation or
disclosure of any material trade secret, confidential information or know-how
that forms a part of the Intellectual Property owned by MediQual.
(e) No Solicitation. MediQual agrees that, during the term of this
Agreement, it shall not, and shall not authorize or permit any of its
subsidiaries or any of its or its subsidiaries' directors, officers, employees,
agents or representatives to, directly or indirectly, solicit, initiate,
encourage or facilitate, or furnish or disclose non-public information in
furtherance of, any inquiries or the making of any proposal with respect to any
recapitalization, merger, consolidation or other business combination involving
MediQual, or acquisition of any capital stock (other than upon exercise of
MediQual Options which are outstanding as of the date hereof) or any material
portion of the assets of MediQual, or any combination of the foregoing (a
"Competing Transaction"), or negotiate, explore or otherwise engage in
discussions with any person (other than Cardinal, Subcorp or their respective
directors, officers, employees, agents and representatives) with respect to any
Competing Transaction or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or any other
transactions contemplated by this Agreement. Neither the Board of Directors of
MediQual nor any committee thereof shall (A) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Cardinal, the MediQual
Board Recommendation, (B) approve or recommend, or propose publicly to approve
or recommend, any Competing Transaction or (C) cause MediQual to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Competing
Transaction or proposal for a Competing Transaction. From and after the
execution of this Agreement, MediQual shall immediately advise Cardinal in
writing of the receipt, directly or indirectly, of any inquiries, discussions,
negotiations, or proposals relating to a Competing Transaction (including the
specific terms thereof and the identity of the other party or parties involved)
and promptly furnish to Cardinal a copy of any such proposal or inquiry in
addition to any information provided to or by any third party relating thereto.
(f) Affiliates of MediQual. MediQual shall use all reasonable efforts to
cause each such person who may be at the Effective Time or was on the date
hereof an "affiliate" of MediQual for purposes of Rule 145 under the Securities
Act, to execute and deliver to Cardinal no less than 45 days prior to the date
of the meeting of MediQual Stockholders to approve the Merger, the written
undertakings in the form attached hereto as Exhibit A. On or prior to such date,
MediQual shall (after consultation with outside counsel for MediQual) provide
Cardinal with a letter specifying all of the persons or entities who may be
deemed to be "affiliates" of MediQual under the preceding sentence.
(g) Access; Financial Statements. MediQual shall permit representatives of
Cardinal to have appropriate access at all reasonable times to MediQual's
premises, properties, books, records, contracts, tax records, documents,
customers and suppliers. Proprietary information obtained by Cardinal pursuant
to this Sec-
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tion 5.3(g) shall be subject to the provisions of the letter agreement dated
April 2, 1997 between Cardinal and Smith Barney Inc. on behalf of MediQual
relating to confidentiality (the "Confidentiality Agreement"), which agreement
remains in full force and effect. MediQual shall deliver to Cardinal Interim
Statements within 20 days following the end of each calendar month after the
date hereof.
(h) Notification of Certain Matters. MediQual shall give prompt notice to
Cardinal of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any MediQual representation or warranty
contained in this Agreement to be materially untrue or inaccurate at or prior to
the Effective Time and (ii) any material failure of MediQual to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.3(h) shall not limit or otherwise affect the remedies available
hereunder to Cardinal.
(i) Employment Agreements. MediQual shall use all reasonable efforts to
cause each employee of MediQual set forth in Section 5.3(i) of the MediQual
Disclosure Schedule to enter into an employment agreement with MediQual
substantially in the form attached to Section 5.3(i) of the MediQual Disclosure
Schedule.
(j) Termination of Agreements. MediQual shall use all reasonable efforts to
cause as of or prior to Closing the termination of, and the waiver or
satisfaction of all remaining obligations or liabilities, contingent or
otherwise, of MediQual under, the agreements listed in Section 5.3(j) of the
MediQual Disclosure Schedule.
(k) Exercise of Warrants. MediQual shall use all reasonable efforts to
cause to be exercised, immediately prior to the Closing, and to satisfy in full
all of MediQual's obligations under, all warrants to purchase MediQual Common
Stock which may then remain issued and outstanding.
(l) Stock Option Committee. MediQual shall cause the "Committee" which is
currently administering MediQual's 1996 Stock Incentive Plan (i) not to cause
the voluntary Acceleration (as defined in such Plan) of any MediQual Option
which is outstanding immediately prior to the Closing and (ii) to make the
determination pursuant to Section 8(c) of such plan that the Cardinal Exchange
Options into which such outstanding MediQual Options are converted at the
Effective Time shall be deemed to be "comparable options" for purposes of such
Section 8(c).
(m) Injunctive Relief. MediQual acknowledges and agrees that Cardinal's and
Subcorp's remedies at law for any violation or attempted violation of any of
MediQual's obligations under this Article V would be inadequate, and agrees that
in the event of any such violation or attempted violation, Cardinal and Subcorp
(or either of them) shall be entitled to a temporary restraining order,
temporary and permanent injunctions, and other equitable relief, without the
necessity of posting any bond or proving any actual damage, in addition to all
other rights and remedies which may be available to Cardinal and Subcorp from
time to time.
ARTICLE VI
CONDITIONS
6.1 Mutual Conditions. The obligations of the parties hereto to consummate
the Merger shall be subject to fulfillment of the following conditions:
(a) No temporary restraining order, preliminary or permanent
injunction or other order or decree which prevents the consummation of the
Merger shall have been issued and remain in effect, and no statute, rule or
regulation shall have been enacted by any Governmental Authority which
prevents the consummation of the Merger.
(b) Any applicable waiting periods applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated.
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(c) The Merger and the transactions contemplated hereby shall have
been approved by the MediQual Stockholders in the manner required by any
Applicable Law, and by the MediQual Certificate, and the MediQual Bylaws.
(d) The Commission shall have declared the Registration Statement
effective. On the Closing Date and at the Effective Time, no stop order or
similar restraining order shall have been threatened by the Commission or
entered by the Commission or any state securities administrator prohibiting
the Merger.
(e) No Action shall be instituted by any Governmental Authority which
seeks to prevent consummation of the Merger or seeking material damages in
connection with the transactions contemplated hereby which continues to be
outstanding.
6.2 Conditions to Obligations of MediQual. The obligations of MediQual to
consummate the Merger and the transactions contemplated hereby shall be subject
to the fulfillment of the following conditions unless waived by MediQual:
(a) The representations and warranties of each of Cardinal and Subcorp
set forth in Article III shall be true and correct in all material respects
on the date hereof and on and as of the Closing Date as though made on and
as of the Closing Date (except for representations and warranties made as
of a specified date, which need be true and correct only as of the
specified date).
(b) Each of Cardinal and Subcorp shall have performed in all material
respects each obligation and agreement and shall have complied in all
material respects with each covenant to be performed and complied with by
it hereunder at or prior to the Effective Time.
(c) Each of Cardinal and Subcorp shall have furnished MediQual with a
certificate dated the Closing Date signed on behalf of it by the Chairman,
President or any Vice President to the effect that the conditions set forth
in Sections 6.2(a) and (b) have been satisfied.
(d) MediQual shall have received the legal opinion, dated the Closing
Date, of Baker & Hostetler LLP substantially in the form attached hereto as
Exhibit B.
(e) The Cardinal Common Shares to be issued in the Merger and the
transactions contemplated hereby shall have been authorized for inclusion
on the NYSE, subject to official notice of issuance.
6.3 Conditions to Obligations of Cardinal and Subcorp. The obligations of
Cardinal and Subcorp to consummate the Merger and the other transactions
contemplated hereby shall be subject to the fulfillment of the following
conditions unless waived by each of Cardinal and Subcorp:
(a) The representations and warranties of MediQual set forth in
Article IV shall be true and correct in all material respects on the date
hereof and on and as of the Closing Date as though made on and as of the
Closing Date (except for representations and warranties made as of a
specified date, which need be true and correct only as of the specified
date).
(b) MediQual shall have performed in all material respects each
obligation and agreement and shall have complied in all material respects
with each covenant to be performed and complied with by it hereunder at or
prior to the Effective Time.
(c) MediQual shall have furnished Cardinal with a certificate dated
the Closing Date signed on its behalf by its Chairman, President or any
Vice President to the effect that the conditions set forth in Sections
6.3(a) and (b) have been satisfied.
(d) Cardinal shall have received the legal opinion, dated the Closing
Date, of Bingham, Dana & Gould LLP, substantially in the form attached
hereto as Exhibit C.
(e) Cardinal shall have received letters, in form and substance
reasonably satisfactory to Cardinal, from Deloitte & Touche LLP and Arthur
Andersen LLP each dated the date of the Proxy Statement and confirmed in
writing at the Effective Time stating that the Merger will qualify as a
pooling of interests transaction under Opinion 16 of the Accounting
Principles Board.
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(f) Each person who may be at the Effective Time or was on the date of
this Agreement an "affiliate" of MediQual for purposes of Rule 145 under
the Securities Act shall have executed and delivered to Cardinal at least
45 days prior to the date of the meeting of MediQual Stockholders to
approve the Merger the written undertakings in the form attached hereto as
Exhibit A.
(g) There shall not have been a breach of any obligation by any
shareholder which has entered into a Support Agreement.
(h) MediQual shall have received all material customer, vendor,
lessee, licensee, licensor and other third party consents and approvals
required because of this Agreement or the transactions contemplated by this
Agreement.
(i) MediQual, Cardinal, the MediQual Stockholders Representative and
Bank One Trust Company, NA shall have executed and delivered the Escrow
Agreement.
(j) MediQual shall not have received notice from the holder or holders
of more than 5%, on a fully diluted common stock basis, of the MediQual
Dissenting Stock issued and outstanding on the record date for the
determination of MediQual Stockholders entitled to vote on the Merger that
such holders have exercised or intend to exercise their appraisal rights
under Section 262 of the DGCL.
(k) The book value of MediQual reflected in the most recent Interim
Statement shall not be less than the sum of (i) $3,087,658; and (ii)
$275,000 for each additional month reflected in the Interim Statements
since April 30, 1997 and a pro rata portion of $275,000 for any partial
month ending on the day prior to the Closing. For purposes of this Section
6.3(k) book value shall include the MediQual Common Stock and all classes
of MediQual Preferred Stock.
(l) The employment agreements referenced in Section 5.3(i) of the
Agreement shall have been entered into and shall remain in full force and
effect according to their terms as of the Closing.
(m) As of or prior to the Closing, the agreements listed in Section
5.3(j) of the MediQual Disclosure Schedule shall have been effectively
terminated and all of MediQual's obligations and liabilities, contingent or
otherwise, thereunder shall have been satisfied or irrevocably waived by
the other parties thereto.
(n) Warrants to purchase at least 95% of the MediQual Common Stock
which is issuable upon the exercise of all warrants to purchase MediQual
Common Stock outstanding on the date hereof shall have been (i) exercised
effective as of or prior to the Effective Time or (ii) duly surrendered in
exchange for warrants (in form and substance reasonably satisfactory to
Cardinal with an exercise price equal to the quotient obtained by dividing
the current exercise price of $.80 by the Common Equivalent Exchange Ratio)
to purchase a number of Cardinal Common Shares equal to the product of (a)
the number of shares of MediQual Common Stock issuable upon the exercise of
the warrants being surrendered and (b) the Common Equivalent Exchange
Ratio; provided, however, that this condition shall not have been satisfied
if any holder of warrants to purchase MediQual Common Stock who does not
exercise or surrender warrants pursuant to clause (i) or (ii) above, has
advised MediQual, in writing or otherwise, that such holder will not so
exercise or surrender all of such holder's warrants.
(o) The ongoing relationship and economic terms of the Letter
Agreement between MediQual and the American Society of Health-System
Pharmacists ("ASHSP") dated July 7, 1995 have been ratified by ASHSP on
terms and conditions satisfactory to Cardinal in its reasonable discretion;
provided, that Cardinal shall have rights under this Section 6.3(o) only if
Cardinal uses all reasonable efforts to obtain such ratification by the
required time.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval and adoption of this Agreement
by MediQual Stockholders:
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(a) by mutual consent of Cardinal and MediQual;
(b) by either Cardinal or MediQual if any permanent injunction or
other order of a court or other competent Governmental Authority preventing
the consummation of the Merger shall have become final and nonappealable;
(c) by either Cardinal or MediQual if the Merger shall not have been
consummated before November 30, 1997, unless extended by the Boards of
Directors of both Cardinal and MediQual (provided that the right to
terminate this Agreement under this Section 7.1(c) shall not be available
to any party whose failure or whose affiliate's failure to perform any
material covenant or obligation under this Agreement has been the cause of
or resulted in the failure of the Merger to occur on or before such date);
(d) by Cardinal if the Board of Directors of MediQual shall withdraw,
modify or change the MediQual Board Recommendation in a manner adverse to
Cardinal, or if the Board of Directors of MediQual shall have refused to
affirm the MediQual Board Recommendation within two business days of any
written request from Cardinal;
(e) by MediQual if the Board of Directors of Cardinal shall withdraw,
modify or change its approval of this Agreement and the transactions
contemplated hereby in a manner adverse to MediQual, or if the Board of
Directors of Cardinal shall have refused to affirm such approval within two
business days of any written request from MediQual;
(f) by Cardinal if any party breaches such party's obligations under
the applicable Support Agreement;
(g) by Cardinal or MediQual, no earlier than the fifth trading day or
later than the third full trading day immediately preceding the date of the
MediQual stockholders meeting at which the vote to approve the Merger will
be taken, if the Average Share Price is less than $46.75; provided,
however, that MediQual will have no right to terminate pursuant to this
paragraph (g) unless (x) MediQual shall have given, during the three
trading day period referred to above, one full trading day's prior written
notice of its intention to terminate pursuant to this Section 7.1(g) and
(y) Cardinal, during such one full trading day period, shall not have given
written notice (an "Adjustment Election") to MediQual that (A) the Common
Equivalent Exchange Ratio shall be calculated pursuant to clause (a)(y) of
Section 2.2 (a)(i) and (B) the Class A Preferred Exchange Ratio shall be
calculated pursuant to clause (a)(y) of Section 2.2(a)(ii);
(h) by MediQual or Cardinal, no earlier than the fifth trading day or
later than the second full trading day immediately preceding the date of
the MediQual stockholders meeting at which the vote to approve the Merger
will be taken, if the Average Share Price is less than $44.00; or
(i) by Cardinal if at any time the representations and warranties of
MediQual set forth in Section 4.16 shall not be true and correct or
Cardinal shall have been advised that the condition set forth in Section
6.3(e) cannot be satisfied.
7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement, except for the provisions of
the penultimate sentence of Section 5.3(g) and the provisions of Sections 7.2
and 9.10, shall become void and have no effect, without any liability on the
part of any party or its directors, officers or stockholders. Notwithstanding
the foregoing, nothing in this Section 7.2 shall relieve any party to this
Agreement of liability for a material breach of any provision of this Agreement
and provided, further, however, that if it shall be judicially determined that
termination of this Agreement resulted from an intentional breach of this
Agreement, then, in addition to other remedies at law or equity for breach of
this Agreement, the party so found to have intentionally breached this Agreement
shall indemnify and hold harmless the other parties for their respective
reasonable costs, fees and expenses of their counsel and accountants, as well as
fees and expenses incident to negotiation, preparation and execution of this
Agreement and related documentation ("Costs") and shall pay to the terminating
party or parties a termination fee equal
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to $1,250,000 which payments shall constitute the terminating party's sole and
exclusive remedy with respect to the breach giving rise to the termination.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after adoption of this Agreement by MediQual Stockholders, but after
any such approval, no amendment shall be made which by law requires further
approval or authorization by the MediQual Stockholders without such further
approval or authorization. Notwithstanding the foregoing, this Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, Cardinal
(with respect to MediQual) and MediQual (with respect to Cardinal and Subcorp)
by action taken or authorized by their respective Boards of Directors, may, to
the extent legally allowed, (a) extend the time for the performance of any of
the obligations or other acts of such party, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations, Warranties and Agreements.
(a) Subject to the limitations set forth in Section 8.3 and 8.8,
below, and notwithstanding any investigation conducted at any time with
regard thereto by or on behalf of Cardinal or MediQual, all
representations, warranties, covenants and agreements of MediQual or
Cardinal in this Agreement and in any other documents executed or delivered
by MediQual or Cardinal pursuant to this Agreement or in connection with
the transactions contemplated by this Agreement (the "Additional
Documents") shall survive the execution, delivery and performance of this
Agreement and the Additional Documents. All representations and warranties
of MediQual or Cardinal set forth in this Agreement and in the Additional
Documents shall be deemed to have been made again by MediQual or Cardinal,
as the case may be, at and as of the Effective Time (except for
representations and warranties made as of a specified date, which need be
true and correct only as of the specified date). This Section 8.1 shall not
limit any covenant or agreement of the parties hereto, which by its terms
contemplates performance after the Effective Time or after the termination
of this Agreement.
(b) As used in this Article VIII, any reference to a representation,
warranty or covenant contained in any section of this Agreement shall
include the Schedule relating to such section.
8.2 Indemnification.
(a) Subject to the limitations set forth in Sections 8.3 and 8.8
below, by virtue of the approval and adoption of this Agreement and the
Merger by the MediQual Stockholders, the MediQual Stockholders shall
indemnify and hold harmless Cardinal from and against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments or causes
of action, assessments, costs and expenses, including without limitation
interest, penalties, attorneys' fees, any and all expenses actually
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation (collectively, "Damages"),
asserted against, resulting to, imposed upon, or incurred or suffered by
Cardinal, directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of any of the representations and
warranties made by MediQual in this Agreement or the Additional Documents
(collectively, "Indemnifiable Claims").
(b) Subject to the limitations set forth in Section 8.3 and 8.8,
Cardinal hereby covenants and agrees to indemnify and hold harmless the
MediQual Stockholders, from and after the Effective Time, from and against
any and all Damages, asserted against, resulting to, imposed upon, or
incurred or suffered by
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MediQual or the MediQual Stockholders, directly or indirectly, as a result
of or arising from any inaccuracy in or breach or nonfulfillment of any of
the representations and warranties made by Cardinal in this Agreement
(collectively, "Indemnifiable Claims" when used in the context of MediQual
or the MediQual Stockholders as the Indemnified Party (as defined in
Section 8.3(f)).
(c) For purposes of this Article VIII, all Damages shall be computed
net of any insurance coverage or tax benefit which reduces the Damages that
would otherwise be sustained; provided that in all cases the timing of the
receipt or realization of insurance proceeds shall be taken into account in
determining the amount of reduction of Damages.
(d) Cardinal shall be deemed to have suffered Damages arising out of
or resulting from the matters referred to in Section 8.2(a) if the same
shall be suffered by any parent, subsidiary or affiliate of Cardinal,
including without limitation MediQual after the Effective Time.
8.3 Limitations on Indemnification. Rights to indemnification under this
Article VIII are subject to the following limitations:
(a) Neither Cardinal nor MediQual nor the MediQual Stockholders shall
be entitled to indemnification hereunder with respect to an Indemnifiable
Claim arising out of a breach of a representation or warranty (or, if more
than one such Indemnifiable Claim is asserted, with respect to all such
Indemnifiable Claims) unless the aggregate amount of Damages with respect
to such Indemnifiable Claim or Claims exceeds $100,000 (the "Threshold") in
which event Cardinal, MediQual or the MediQual Stockholders shall be
entitled to indemnification hereunder for Damages with respect to all
Indemnifiable Claims in excess of the Threshold up to the amount of (i)
with respect to Damages incurred by the MediQual Stockholders, $1,800,000,
and (ii) with respect to Damages incurred by Cardinal, the value of that
number of Retained Shares equal to 6% of the aggregate number of Cardinal
Common Shares which would be issuable to MediQual Stockholders on the
Closing Date (including all of the Retained Shares) (determined as set
forth in Section 8.7) (as applicable, the "Cap").
(b) The obligation of indemnity with respect to the representations
and warranties set forth in Article III and in Article IV shall terminate
on the earlier of (i) the date on which Cardinal's audited financial
statements for the first fiscal year ending after the Effective Time are
issued and (ii) the one-year anniversary of the Effective Time.
(c) The foregoing provisions of this Section 8.3 notwithstanding, if,
prior to the termination of any obligation to indemnify, written notice of
a claimed breach or other occurrence or matter giving rise to a claim of
indemnification is given by the Party seeking indemnification (the
"Indemnified Party") to the Party from whom indemnification is sought (the
"Indemnifying Party"), or a suit or action based upon a claimed breach is
commenced against the Indemnifying Party, the Indemnified Party shall not
be precluded from pursuing such claimed breach, occurrence, other matter,
or suit or action, or from recovering from the Indemnifying Party (whether
through the courts or otherwise) on the claim, suit or action, by reason of
the termination otherwise provided for above.
8.4 Procedure for Indemnification with Respect to Third Party Claims.
(a) If the Indemnified Party determines to seek indemnification under
this Article VIII with respect to Indemnifiable Claims resulting from the
assertion of liability by third parties, it shall give notice to the
Indemnifying Party within 60 days of the Indemnified Party's becoming aware
of any such Indemnifiable Claim, which notice shall set forth such material
information with respect to such Indemnifiable Claim as is then reasonably
available to the Indemnified Party. If any such liability is asserted
against the Indemnified Party and the Indemnified Party notifies the
Indemnifying Party of such liability, the Indemnifying Party shall be
entitled, if it so elects by written notice delivered to the Indemnified
Party within 10 days after receiving the Indemnified Party's notice, to
assume the defense of such asserted liability with counsel reasonably
satisfactory to the Indemnified Party. Notwithstanding the foregoing: (i)
the Indemnified Party shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be payable by
the Indemnified Party; (ii) the Indemnified Party shall not have any
obligation to give any notice of any assertion of liability by a third
party unless
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such assertion is in writing; and (iii) the rights of the Indemnified Party
to be indemnified in respect of Indemnifiable Claims resulting from the
assertion of liability by third parties shall not be adversely affected by
its failure to give notice pursuant to the foregoing provisions unless,
and, if so, only to the extent that, the Indemnifying Party is materially
prejudiced by such failure. With respect to any assertion of liability by a
third party that results in an Indemnifiable Claim, the Parties shall make
available to each other all relevant information in their possession which
is material to any such assertion.
(b) In the event that the Indemnifying Party fails to assume the
defense of the Indemnified Party against any such Indemnifiable Claim,
within 15 days after receipt of the Indemnified Party's notice of such
Indemnifiable Claim, the Indemnified Party shall have the right to defend,
compromise or settle such Indemnifiable Claim on behalf, for the account,
and at the risk of the Indemnifying Party.
(c) Notwithstanding anything in this Section 8.4 to the contrary, (i)
if there is a reasonable probability that an Indemnifiable Claim may
materially and adversely affect the Indemnified Party, its corporate
parent, if any, its subsidiaries or affiliates, including without
limitation MediQual after the Effective Time if Cardinal is the Indemnified
Party, other than as a result of money damages or other money payments,
then the Indemnified Party shall have the right, at the cost and expense of
the Indemnifying Party, to defend, compromise or settle such Indemnifiable
Claim; and (ii) the Indemnifying Party shall not, without the Indemnified
Party's prior written consent, settle or compromise any Indemnifiable Claim
or consent to entry of any judgment in respect of any Indemnifiable Claim
unless such settlement, compromise or consent includes as an unconditional
term the giving by the claimant or the plaintiff to the Indemnified Party
(and its corporate parent, if any, its subsidiaries and affiliates
including without limitation MediQual after the Effective Time if Cardinal
is the Indemnified Party) a release from all liability in respect of such
Indemnifiable Claim.
8.5 Procedure For Indemnification with Respect to Non-Third Party Claims.
In the event that the Indemnified Party asserts the existence of an
Indemnifiable Claim giving rise to Damages (but excluding Indemnifiable Claims
resulting from the assertion of liability by third parties), it shall give
written notice to the Indemnifying Party specifying the nature and amount of the
Indemnifiable Claim asserted. If the Indemnifying Party, within ten business
days after receipt of such notice by the Indemnified Party, has not given
written notice to the Indemnified Party announcing its intent to contest such
assertion by the Indemnified Party, such assertion shall be deemed accepted and
the amount of Indemnifiable Claim shall be deemed a valid Indemnifiable Claim.
In the event, however, that the Indemnifying Party contests the assertion of an
Indemnifiable Claim by giving such written notice to the Indemnified Party
within such ten business day period, then if the Parties, acting in good faith,
cannot reach agreement with respect to such Indemnifiable Claim within 20 days
after such notice, the contested assertion of the claim shall be referred to
arbitration in Wilmington, Delaware, in accordance with the then-current rules
of the American Arbitration Association. The determination made in accordance
with such rules shall be delivered in writing to the Parties and shall be final
and binding and conclusive on the Parties and the amount of the Indemnifiable
Claim, if any, determined to exist shall be a valid Indemnifiable Claim. Each
Party shall pay its own legal, accounting and other fees in connection with such
a contest; provided that if the contested claim is referred to and ultimately
determined by arbitration, the legal, auditing and other fees of the prevailing
Party and the fees and expenses of any arbitrator shall be borne by the
nonprevailing Party.
8.6 MediQual Stockholders Representative.
(a) By virtue of the approval and adoption of this Agreement at the
MediQual Stockholders Meeting, the MediQual Stockholders hereby irrevocably
appoint Eric A. Kriss (the "MediQual Stockholders Representative") to act
on behalf of the MediQual Stockholders with respect to all matters relating
to this Article VIII and the Escrow Agreement, including without limitation
in considering and certifying the amount of any indemnification hereunder,
in communicating with the MediQual Stockholders, in appointing a successor
Escrow Agent under the Escrow Agreement, in considering and acting with
respect to any amendment or termination of this Agreement, and generally in
performing all acts expressly required or permitted to be performed by the
MediQual Stockholders Representative pursuant hereto and pursuant to the
Escrow Agreement provided, however, that the MediQual Stockholders
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Representative shall have no obligation to act on behalf of the MediQual
Stockholders except as expressly provided herein. Cardinal and the Escrow
Agent shall have the right to deal exclusively with the MediQual
Stockholders Representative with respect to all matters under the Escrow
Agreement and neither Cardinal nor the Escrow Agent shall have any
liability to any MediQual Stockholders for any acts or omissions of the
MediQual Stockholders Representative, or any acts or omissions taken or not
taken by Cardinal or the Escrow Agent at the direction of the MediQual
Stockholders Representative, including, but not limited to (i) any acts or
omissions relating to the voting of any Retained Shares or (ii) the
transferring or the failure to transfer any shares or funds released from
escrow. Upon any distribution of Cardinal Common Shares or other funds to
the MediQual Stockholders Representative (or to one or more of the MediQual
Stockholders upon written instruction of the MediQual Stockholders
Representative) in accordance with the Agreement, the Escrow Agent and
Cardinal shall be deemed to have fully satisfied any and all obligations to
the MediQual Stockholders under this Agreement and the Escrow Agreement
with respect to the amount of such distribution.
(b) The MediQual Stockholders Representative will have no liability to
MediQual or the MediQual Stockholders with respect to actions taken or
omitted to be taken in its capacity as MediQual Stockholders
Representative, except with respect to any liability resulting primarily
from the MediQual Stockholders Representative's gross negligence or willful
misconduct. The MediQual Stockholders Representative shall be entitled to
rely upon any directions received from holders (the "Majority Holders") of
(i) prior to the Effective Time, holders of a majority of the MediQual
Class B Preferred Stock and MediQual Class C Preferred Stock, voting
together as a single class, and a majority of the MediQual Class B
Preferred Stock, MediQual Class C Preferred Stock and Mediqual Common Stock
voting together as a single class (with each share of MediQual Class B
Preferred Stock and MediQual Class C Preferred Stock entitling the holder
thereof to such number of votes as shall equal the number of shares of
MediQual Common Stock into which such shares of MediQual Class Preferred
Stock or MediQual Class C Preferred Stock are convertible on the date of
such direction), and (ii) after the Effective Time, holders of a majority
of the Cardinal Common Shares received in the Merger; provided, however,
that the MediQual Stockholders Representative shall not be required to
follow any such direction, and shall be under no obligation to take any
action in its capacity as the MediQual Stockholders Representative, unless
the MediQual Stockholders Representative has been provided with funds,
security or indemnities which, in the sole determination of the MediQual
Stockholders Representative, are sufficient to protect the MediQual
Stockholders Representative against the costs, expenses and liabilities
which may be incurred by the MediQual Stockholders Representative in
responding to such direction or taking such action. The MediQual
Stockholders Representative shall be entitled to engage such counsel,
experts and other agents and consultants as it shall deem necessary in
connection with exercising its powers and performing its function hereunder
and (in the absence of bad faith on the part of the MediQual Stockholders
Representative) shall be entitled to conclusively rely on the opinions and
advice of such Persons. The MediQual Stockholders Representative shall be
entitled to reimbursement by the MediQual Stockholders, from (i) the
Retained Shares (but only to the extent available for such reimbursement
under the terms of the Escrow Agreement), and (ii) any other funds or
security otherwise received by him in his capacity as the MediQual
Stockholders Representative pursuant to or in accordance with this
Agreement, for all reasonable expenses, disbursements and advances
(including fees and disbursements of its counsel, experts and other agents
and consultants) incurred by the MediQual Stockholders Representative in
such capacity, and for indemnification, by the MediQual Stockholders,
against any loss, liability or expenses arising out of actions taken or
omitted to be taken in its capacity as the MediQual Stockholders
Representative (except for those arising out of the MediQual Stockholders
Representative's gross negligence or willful misconduct), including the
costs and expenses of investigation and defense of claims.
(c) Notwithstanding the foregoing provisions of this Section 8.6,
nothing in this Section 8.6 shall in any way effect or derogate from any
obligation or liability of MediQual or the MediQual Stockholders to
Cardinal hereunder.
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8.7 Satisfaction of Obligations; Release from Escrow. Cardinal's sole
remedy for an Indemnification Claim against the MediQual Stockholders shall be a
claim against those of the Retained Shares held pursuant to the terms and
conditions of the Escrow Agreement which are available, subject to the Cap, to
satisfy such Indemnification Claims against the MediQual Stockholders. For
purposes of determining the number of Retained Shares which shall be necessary
to satisfy an Indemnifiable Claim against the MediQual Stockholders, each
Escrowed Share (as defined in the Escrow Agreement) shall be deemed to have a
value equal to the last reported sale price of Cardinal Common Shares on the
NYSE on the trading day immediately preceding the Closing Date (subject to
equitable adjustment for stock splits, reclassifications, combinations,
reorganizations or other similar changes).
8.8 Termination of MediQual's Warranties. Notwithstanding any provisions
of this Agreement to the contrary: (a) all representations, warranties and
covenants made by MediQual in this Agreement or the Additional Documents shall
terminate as to MediQual (but only as to MediQual, and not as to the MediQual
Stockholders) as of the Closing; and (b) after the Closing, MediQual shall not
have any obligation or liability to any MediQual Stockholder as a direct or
indirect result of any misrepresentation, breach of covenant or other occurrence
or circumstance for which the MediQual Stockholders have or may have liability
to Cardinal under this Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or dispatched by a nationally recognized overnight courier service to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Cardinal or Subcorp:
Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Attention: Robert D. Walter
Telecopy No.: (614) 717-8919
with a copy to
John M. Gherlein, Esq.
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3485
Telecopy No.: (216) 696-0740
(b) if to MediQual:
MediQual Systems, Inc.
1900 West Park Drive Suite 250
Westborough, MA 01581
Attention: Eric A. Kriss
Telecopy No.: (508) 366-6365
with a copy to
Victor J. Paci, Esq.
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
Telecopy No.: (617) 951-8736
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9.2 Interpretation. When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. The headings and the table of contents
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. For the purposes of
any provision of this Agreement, a "Material Adverse Effect" with respect to any
party shall mean a material adverse effect on the assets, liabilities, results
of operations or financial condition of such party and its subsidiaries taken as
a whole. For purposes of this Agreement, a "subsidiary" of any person means
another person, an amount of the voting securities or other voting ownership or
voting partnership interests of which is sufficient to elect at least a majority
of its Board of Directors or other governing body (or, if there are no such
voting securities or interests, 50% or more of the equity interests of which) is
owned directly or indirectly by such first person.
9.3 Counterparts. This Agreement may be executed in counterparts, which
together shall constitute one and the same Agreement. The parties may execute
more than one copy of the Agreement, each of which shall constitute an original.
9.4 Entire Agreement. This Agreement (including the documents and the
instruments referred to herein), the Support Agreements, and the Confidentiality
Agreement constitute the entire agreement among the parties and supersede all
prior agreements and understandings, agreements or representations by or among
the parties, written and oral, with respect to the subject matter hereof and
thereof.
9.5 Third Party Beneficiaries. Except for the agreements set forth in
Section 5.2(d), nothing in this Agreement, express or implied, is intended or
shall be construed to create any third party beneficiaries.
9.6 Governing Law. Except to the extent that the laws of the jurisdiction
of organization of any party hereto, or any other jurisdiction, are mandatorily
applicable to the Merger or to matters arising under or in connection with this
Agreement, this Agreement shall be governed by the laws of the State of
Delaware. All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in any Delaware state or federal court
sitting in the City of Wilmington.
9.7 Consent to Jurisdiction; Venue.
(a) Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the state courts of Delaware and to the jurisdiction of the
United States District Court for District of Delaware, for the purpose of any
action or proceeding arising out of or relating to this Agreement and each of
the parties hereto irrevocably agrees that all claims in respect to such action
or proceeding may be heard and determined exclusively in any Delaware state or
federal court sitting in the City of Wilmington. Each of the parties hereto
agrees that a final judgment in any action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.
(b) Each of the parties hereto irrevocably consents to the service of any
summons and complaint and any other process in any other action or proceeding
relating to the Merger, on behalf of itself or its property, by the personal
delivery of copies of such process to such party. Nothing in this Section 9.7
shall affect the right of any party hereto to serve legal process in any other
manner permitted by law.
9.8 Specific Performance. The transactions contemplated by this Agreement
are unique. Accordingly, each of the parties acknowledges and agrees that, in
addition to all other remedies to which it may be entitled, each of the parties
hereto is entitled to a decree of specific performance, provided such party is
not in material default hereunder.
9.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
9.10 Expenses. Subject to the provisions of Section 7.2, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
that those expenses incurred in connection with filing, printing and mailing the
Registration
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<PAGE> 129
Statement and the Prospectus/Proxy Statement (including filing fees relating
thereto) will be shared equally by Cardinal and MediQual.
IN WITNESS WHEREOF, Cardinal, Subcorp and MediQual have signed this
Agreement as of the date first written above.
CARDINAL HEALTH, INC.
By: /s/ BRENDAN FORD
------------------------------------
Name: Brendan Ford
Title: Senior Vice President
Corporate Development
HUB MERGER CORP.
By: /s/ GEORGE H. BENNETT, JR.
------------------------------------
Name: George H. Bennett, Jr.
Title: Vice President
MEDIQUAL SYSTEMS, INC.
By: /s/ ERIC KRISS
------------------------------------
Name: Eric Kriss
Title: Chief Executive Officer
A-37
<PAGE> 130
ANNEX B
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to ss. 228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.sec. 251, 252, 254, 257, 258, 263 or 264 of this
Chapter:
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of
this Chapter to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing clauses a. and b.; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares, or fractional depository receipts
described in the foregoing clauses a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its
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certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
[If such notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation notifying
each of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting corporation shall
send such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.]
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a
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determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest which the surviving or resulting corporation would have had to pay
to borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 134
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1701.13(E) of the Ohio Revised Code sets forth conditions and
limitations governing the indemnification of officers, directors, and other
persons.
Article 6 of Cardinal's Code of Regulations contains certain
indemnification provisions adopted pursuant to authority contained in Section
1701.13(E) of the Ohio Revised Code. Cardinal's Code of Regulations provides 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 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
Cardinal or the shareholders of Cardinal or otherwise as provided in Section
1701.13(E) of the Ohio Revised Code, that (a) they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interest of
Cardinal; (b) in any action, suit, or proceeding by or in the right of Cardinal,
they were not, and have not been adjudicated to have been, negligent or guilty
of misconduct in the performance of their duties to Cardinal; and (c) with
respect to any criminal action or proceeding, that they had no reasonable cause
to believe that their conduct was unlawful. Section 1701.13(E) provides 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 reasonably incurred in connection therewith. At
present there are no material claims, actions, suits, or proceedings pending
where indemnification would be required under these provisions, and Cardinal
does not know of any such threatened claims, actions, suits, or proceedings
which may result in a request for such indemnification.
Cardinal has entered into indemnification contracts with each of its
directors and executive officers. These contacts generally: (i) confirm the
existing indemnity provided to them under Cardinal's Code of Regulations and
assure that this indemnity will continue to be provided; (ii) provide that if
Cardinal does not maintain directors' and officers' liability insurance,
Cardinal will, in effect, become a self-insurer of the coverage; and (iii)
provide that, in addition, the directors and officers shall be indemnified to
the fullest extent permitted by law against all expenses (including legal fees),
judgments, fines, and settlement amounts paid or incurred by them in any action
or proceeding, including any action by or in the right of Cardinal, on account
of their service as a director, officer, employee, or agent of Cardinal or at
the request of Cardinal as a director, officer, employee, or agent of another
corporation or enterprise. Coverage under the contracts is excluded: (A) on
account of conduct which is finally adjudged to be knowingly fraudulent,
deliberately dishonest, or willful misconduct; or (B) if a final court of
adjudication shall determine that such indemnification is not lawful; or (C) in
respect of any suit in which judgment is rendered for violation of Section 16(b)
of the Securities and Exchange Act of 1934, as amended, or similar provisions of
any federal state, or local statutory law; or (D) on account of any remuneration
paid which is finally adjudged to have been in violation of law; or (E) as to
officers who are not directors, with respect to any act or omission which is
finally adjudged to have been a violation, other than in good faith, of
Cardinal's Standards of Business Conduct of which the officer then most recently
has received written notice.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<S> <C>
2.01 Amended and Restated Agreement and Plan of Merger dated as of July 7, 1997, among
the Registrant, Hub Merger Corp., and MediQual Systems, Inc.(1)
2.02 Form of Escrow Agreement, to be entered into among the Registrant, MediQual
Systems, Inc., Eric Kriss as the MediQual Stockholders Representative and Bank One
Trust Company, N.A.
</TABLE>
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<PAGE> 135
<TABLE>
<C> <S>
3.01 Amended and Restated Articles of Incorporation of the Registrant, as amended.(2)
3.02 Restated Code of Regulations of the Registrant, as amended.(3)
4.01 Specimen Certificate for the Registrant's Common Shares.(2)
4.02 Indenture between the Registrant and Bank One, Indianapolis, NA relating to the
Registrant's
6 1/2% Notes Due 2004.(3)
4.03 Indenture dated as of April 18, 1997 between the Registrant and Bank One Columbus,
NA. (4)
Other long-term debt agreements of the Registrant are not filed pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K and the Registrant agrees to furnish copies of
such agreements to the Securities and Exchange Commission upon its request.
4.04 Form of Warrant Certificate to purchase Cardinal Common Shares.
5.01 Opinion of Baker & Hostetler LLP as to the legality of the securities being issued.
8.01 Opinion of Baker & Hostetler LLP as to certain tax matters.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Arthur Andersen LLP.
23.03 Consent of Ernst & Young LLP.
23.04 Consent of Price Waterhouse LLP.
23.05 Consent of Baker & Hostetler LLP (included in Exhibits 5.01 and 8.01).
99.01 Form of Support/Voting Agreement dated on or about May 23, 1997 between the
Registrant and certain holders of MediQual Systems, Inc. capital stock and certain
of their affiliates.
99.02 Form of Proxy Card.
99.03 Form of Letter to holders of MediQual Warrants.
</TABLE>
- ---------------
(1) Included as Annex A in the Proxy Statement/Prospectus included as part of
this Registration Statement.
(2) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 (Commission File No. 0-12591) and
incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 (Commission File No. 0-12591) and
incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Current Report on Form 8-K dated
April 21, 1997 (Commission file No. 0-12591) and incorporated herein by
reference.
(b) Financial Statement Schedule.
Schedule II--Valuation and Qualifying Accounts (incorporated by
reference from the Registrant's Current Report on Form 8-K filed on June
10, 1997).
(c) Report, Opinion or Appraisal. Not Applicable.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 indemnifica-
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<PAGE> 136
tion by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement 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.
(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph(c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offering
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(g) The undersigned Registrant hereby undertakes:
1. To file during any period in which offers and sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
2. That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dublin, State of Ohio, on
the 8th day of July, 1997.
CARDINAL HEALTH, INC.
/s/ ROBERT D. WALTER
------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 8, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ ROBERT D. WALTER Chairman and Chief Executive Officer
- --------------------------------------------- (principal executive officer)
Robert D. Walter
/s/ DAVID BEARMAN Executive Vice President and Chief Financial
- --------------------------------------------- Officer (principal financial officer)
David Bearman
/s/ RICHARD J. MILLER Vice President, Controller and Principal
- --------------------------------------------- Accounting Officer
Richard J. Miller
/s/ JOHN F. FINN Director
- ---------------------------------------------
John F. Finn
/s/ ROBERT L. GERBIG Director
- ---------------------------------------------
Robert L. Gerbig
/s/ JOHN F. HAVENS Director
- ---------------------------------------------
John F. Havens
/s/ REGINA E. HERZLINGER Director
- ---------------------------------------------
Regina E. Herzlinger
/s/ JOHN C. KANE Director
- ---------------------------------------------
John C. Kane
/s/ J. MICHAEL LOSH Director
- ---------------------------------------------
J. Michael Losh
/s/ GEORGE R. MANSER Director
- ---------------------------------------------
George R. Manser
/s/ JOHN B. MCCOY Director
- ---------------------------------------------
John B. McCoy
/s/ JERRY E. ROBERTSON Director
- ---------------------------------------------
Jerry E. Robertson
/s/ L. JACK VAN FOSSEN Director
- ---------------------------------------------
L. Jack Van Fossen
/s/ MELBURN G. WHITMIRE Director
- ---------------------------------------------
Melburn G. Whitmire
</TABLE>
II-4
<PAGE> 1
Exhibit 2.02
ESCROW AGREEMENT
AGREEMENT, dated as of ________ __, 1997, among Cardinal
Health, Inc., an Ohio corporation ("Cardinal"), MediQual Systems, Inc., a
Delaware corporation ("MediQual"), Eric A. Kriss (the "MediQual Stockholders
Representative"), and Bank One Trust Company, NA, a national banking
association, as escrow agent (the "Escrow Agent").
Preliminary Statements:
A. Cardinal, MediQual and Hub Merger Corp., a Delaware
corporation ("Subcorp"), have entered into an Amended and Restated Agreement and
Plan of Merger dated as of July 7, 1997 (the "Merger Agreement"), pursuant to
which, among other things, Cardinal will acquire the businesses operated by
MediQual through the merger of Subcorp with and into MediQual, with MediQual as
the surviving corporation, in accordance with the terms and conditions of the
Merger Agreement.
B. Capitalized terms used but not otherwise defined herein
shall have the respective meanings given them in the Merger Agreement.
C. The Merger Agreement provides that Cardinal shall be
indemnified, subject to the limitations set forth in the Merger Agreement, by
the MediQual Stockholders for certain possible losses.
D. To facilitate such indemnification, the Merger Agreement
provides for the deposit into escrow of a portion of the Cardinal Common Shares
otherwise to be distributed to the MediQual Stockholders to secure certain
indemnification obligations of the MediQual Stockholders and to provide for the
payment of the expenses of the MediQual Stockholders Representative incurred in
such capacity.
E. Cardinal and the Stockholders Representative desire to
secure the services of the Escrow Agent, and the Escrow Agent is willing to
provide such services, pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION I
APPOINTMENT OF ESCROW AGENT; RESIGNATION AND SUCCESSOR
1.1 APPOINTMENT OF ESCROW AGENT. The Escrow Agent is hereby
appointed, and accepts its appointment and designation as, Escrow Agent pursuant
to the terms and conditions of this Agreement.
<PAGE> 2
1.2 RESIGNATION OF ESCROW AGENT; APPOINTMENT OF SUCCESSOR. The
Escrow Agent acting at any time hereunder may resign at any time by giving at
least 30 days' prior written notice of resignation to Cardinal and the MediQual
Stockholders Representative, such resignation to be effective on the date
specified in such notice. Upon receipt of such notice, Cardinal shall, unless
otherwise agreed between Cardinal and the MediQual Stockholders Representative,
appoint a bank or trust company with a combined capital and surplus of at least
$100 million as successor Escrow Agent, by a written instrument delivered to
such Escrow Agent and the MediQual Stockholders Representative, whereupon such
successor Escrow Agent shall succeed to all the rights and obligations of the
retiring Escrow Agent as of the effective date of resignation as if originally
named herein. Upon such assignment of this Escrow Agreement, the retiring Escrow
Agent shall duly transfer and deliver the Escrow Deposit at the time held by the
retiring Escrow Agent, provided that, if no successor Escrow Agent shall have
been appointed on the effective date of resignation of the resigning Escrow
Agent hereunder, the resigning Escrow Agent may pay the Escrow Deposit into a
court of competent jurisdiction.
SECTION II
ESCROW ARRANGEMENTS
2.1 LIABILITY SECURED BY THE ESCROW DEPOSIT. This Escrow
Agreement has been executed and delivered, and the Escrow Account (as defined
in Section 2.2(d)) is hereby established, subject to the limitations set forth
in the Merger Agreement, to (i) facilitate any indemnification which may be owed
to Cardinal pursuant to the Merger Agreement, and (ii) to provide for the
payment of the expenses incurred by the MediQual Stockholders Representative in
serving in such capacity. That portion of the Escrow Deposit (as defined below)
attributable to ______ of the Escrowed Shares [6% of the aggregate number of
Cardinal Common Shares which would be issuable to MediQual Stockholders on the
Closing Date (including all of the Retained Shares)] including any Additional
Property (as defined below) deposited into the Escrow Account in respect of such
shares (hereinafter referred to collectively as the "First Escrowed Amount"),
will be available to satisfy claims of Cardinal in accordance with Section 3.1
hereof, and that portion of the Escrow Deposit attributable to ____________ of
the Escrowed Shares [0.5% of the aggregate number of Cardinal Common Shares
which would be issuable to MediQual Stockholders on the Closing Date (including
all of the Retained Shares)] including any Additional Property (as defined
below) deposited into the Escrow Account in respect of such shares (hereinafter
referred to collectively as the "Second Escrowed Amount"), will be available to
satisfy the reimbursement of the expenses incurred by the MediQual Stockholders
Representative
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incurred in such capacity in accordance with Section 3.2 hereof. In addition, in
the event that any of the First Escrowed Amount is still available upon the
satisfaction of all Indemnification Obligations (as defined below), but prior to
the distribution of any such amount to the MediQual Stockholders in accordance
with Section 3.3, such remaining First Escrowed Amount shall also constitute
part of the Second Escrowed Amount in accordance with the terms of such Section
3.3 hereof.
2.2 DELIVERY OF THE ESCROWED SHARES; ETC. (a) On the Closing
Date, Cardinal shall deliver to the Escrow Agent certificates bearing
appropriate legends registered in the name of the "Escrow Agent under Escrow
Agreement, dated _______ ___, 1997, by and among Cardinal Health, Inc., an Ohio
corporation, MediQual Systems, Inc., a Delaware corporation, Eric A. Kriss and
Bank One Trust Company, NA", for the applicable number of Cardinal Common Shares
determined in accordance with Section 2.1(h) of the Merger Agreement (such
Shares, together with any additional Cardinal Common Shares distributed in
respect thereof pursuant to any stock split (or deposited with respect to any
such stock split shares), and any cash deposited into the Escrow Account
pursuant to Section 2.2(b), collectively the "Escrowed Shares"). Cardinal shall
also deliver to the Escrow Agent for deposit into the Escrow Account all cash
dividends or Cardinal Common Shares distributed pursuant to any stock dividend,
reclassification of shares or other transaction to which such shares may be
subject, and any other securities, cash or other property distributed in respect
of the Escrowed Shares (whether by way of liquidation, merger, exchange,
spin-off or otherwise), any investments or securities permitted by this
Agreement and any interest received thereon (collectively, the "Additional
Property"). (The Escrowed Shares, together with the Additional Property, shall
constitute the "Escrow Deposit".) Notwithstanding any other provision of this
Agreement to the contrary, whenever Escrowed Shares are to be distributed
pursuant to this Agreement, except for distributions made pursuant to Section
2.2(b), there shall be distributed to the party entitled to such Escrow Shares,
concurrently with the delivery of such Escrowed Shares, the Additional Property
relating thereto. The parties agree that all such distributions of Additional
Property made to the MediQual Stockholders in respect of such Escrowed Shares,
including, without limitation, all such interest and all other income earned on
such shares, shall be interest and income of the MediQual Stockholders and shall
be reported for federal, state and local tax purposes as for the accounts of the
MediQual Stockholders, pro rata in accordance with their respective ownership as
reflected on the then current Ownership Certificate (as hereinafter defined).
(b) In order to facilitate the transfer (subject to applicable
restrictions, if any) by the MediQual Stockholders of their respective Escrowed
Shares (but no Additional Property in
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respect thereof), at any time and from time to time during the term of this
Agreement, the MediQual Stockholders Representative, on behalf of any MediQual
Stockholder, shall have the right to substitute cash for any Escrowed Shares
included in the Escrow Deposit by depositing with the Escrow Agent an amount of
cash equal to the product of (i) the number of Escrowed Shares such MediQual
Stockholder wishes to substitute cash for (the "Substituted Shares"), times (ii)
the value of such Substituted Shares (as determined in accordance with Section
8.7 of the Merger Agreement). Upon any such substitution, the Escrow Agent shall
open a separate subaccount for such MediQual Stockholder. Upon receipt of such
amount of cash in respect of such Substituted Shares, together with a certified
form W-9 and such other information as the Escrow Agent may reasonably require,
the Escrow Agent shall release such Substituted Shares to the MediQual
Stockholders Representative on behalf of such MediQual Stockholder.
(c) On the Closing Date, the MediQual Stockholders
Representative shall deliver to the Escrow Agent a written certificate setting
forth the respective ownership interests of each MediQual Stockholder with
respect to the Escrowed Shares (as the same may be amended from time to time in
accordance with the next sentence, the "Ownership Certificate"). The Ownership
Certificate may be amended from time to time by written certificate executed by
the MediQual Stockholders Representative and delivered to the Escrow Agent.
(d) The Escrow Agent shall hold the Escrow Deposit in an
escrow account (the "Escrow Account") for the benefit of the MediQual
Stockholders and Cardinal. The Escrow Deposit shall not be subject to any lien
or attachment of any creditor or any party thereto, and shall be used solely for
the purposes and subject to the conditions set forth in this Agreement and the
Merger Agreement.
2.3 INVESTMENT OF THE ESCROW DEPOSIT. Except for the release
of the Escrow Shares pursuant to Section 2.2(b) and the release of the Escrow
Deposit pursuant to Section 3 hereof, the Escrow Agent shall not sell or
transfer any of the Escrowed Shares. The Escrow Agent is hereby authorized and
directed to invest any cash contained in the Escrow Deposit in the following
obligations (collectively, the "Permitted Investments"):
(a) obligations of, or fully guaranteed as to timely payment
of principal and interest by, the United States of America;
(b) such money market funds as are agreed to from time to time
by Cardinal and the MediQual Stockholders Representative; and
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(c) certificates of deposit with any bank or trust company
organized under the laws of the United States of America or any agency or
instrumentality thereof or under the laws of any state thereof which has a
combined capital and surplus of at least $100,000,000.
Subject to the foregoing limitations, the Escrow Agent shall
invest any such cash in accordance with written instructions delivered to it by
the MediQual Stockholders Representative from time to time. Except as provided
above, the Escrow Agent shall have no power or duty to invest the Escrow Deposit
or to make substitutions therefor or to sell, transfer or otherwise dispose of
investments acquired hereunder.
2.4 RIGHT TO VOTE THE ESCROWED SHARES. The MediQual
Stockholders Representative, on behalf of the MediQual Stockholders, shall have
the right to direct the Escrow Agent in a writing signed by the MediQual
Stockholders Representative to exercise the voting rights pertaining to all or a
portion of the Escrowed Shares that remain in the Escrow Account. The Escrow
Agent shall comply with any such directions. In the absence of such directions,
the Escrow Agent shall vote all of the Escrowed Shares in accordance with the
recommendations of management of Cardinal.
SECTION III
RELEASE OF THE ESCROW DEPOSIT
3.1 DISTRIBUTIONS FOR INDEMNIFICATION. (a) At any time prior
to the earlier of (i) the date on which Cardinal's audited financial statements
for the first fiscal year ending after the Effective Time are issued and (ii)
the first anniversary of the Effective Time (the "Escrow Date"), Cardinal may
deliver to the Escrow Agent (with a copy to the MediQual Stockholders
Representative) a certificate (a "Notice of Claim") (i) stating that Cardinal is
of the opinion that it may be entitled to indemnification pursuant to Article
VIII of the Merger Agreement (an "Indemnification Obligation"), (ii) stating the
aggregate amount (the "Claim Amount") of such Indemnification Obligation (or, in
the case of an unliquidated Indemnification Obligation, a good faith and
reasonable estimate thereof), and (iii) specifying in reasonable detail the
nature of such Indemnification Obligation. Any Notice of Claim delivered
pursuant to this Section 3.1 with respect to any unliquidated Indemnification
Obligation may be supplemented by a later Notice of Claim specifying in greater
detail the applicable Claim Amount or any other items set forth therein. Upon
delivery of any such Notice of Claim, the Escrow Agent shall, within three
business days of receipt thereof, deliver a written notice together with a copy
of such Notice of Claim to the MediQual Stockholders Representative.
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(b) If the MediQual Stockholders Representative shall object
on behalf of the MediQual Stockholders to the Indemnification Obligation or the
Claim Amount specified in such Notice of Claim, the MediQual Stockholders
Representative shall, within ten business days after delivery of the written
notice containing a copy of any such Notice of Claim, deliver to the Escrow
Agent a certificate (a "Reply Certificate") (x) specifying each such objection,
and (y) specifying in reasonable detail the nature and basis for such objection.
Within three business days after delivery to the Escrow Agent of a Reply
Certificate, the Escrow Agent shall deliver a copy of such Reply Certificate to
Cardinal. Cardinal and the MediQual Stockholders Representative shall negotiate
in good faith for a period of 20 days after delivery of such Reply Certificate
to Cardinal to reach a written resolution of any objections raised in a Reply
Certificate.
(c) If no Reply Certificate is delivered with respect to any
Notice of Claim, then the MediQual Stockholders Representative shall be deemed
to have delivered a Payment Authorization (as defined below) acknowledging
Cardinal's right to receive the Claim Amount specified in such Notice of Claim
with respect to the applicable Indemnification Obligation and the Escrow Agent
shall transfer to Cardinal a portion of the First Escrowed Amount in an amount
equal to such Claim Amount, all in accordance with the procedures set forth in
Section 3.1(e).
(d) If the Escrow Agent receives a Reply Certificate in a
timely manner with respect to any Notice of Claim, the Claim Amount referred to
in such Notice of Claim shall be held by the Escrow Agent and shall not be
released to Cardinal except upon Cardinal's delivery to the Escrow Agent of
either (i) joint written instructions signed by an authorized officer of
Cardinal and by the MediQual Stockholders Representative directing the Escrow
Agent to release the Claim Amount (or any other amount mutually agreed upon by
such parties) or (ii) a final, non-appealable judgment of the arbitrators in the
arbitration proceeding referred to in Section 8.5 of the Merger Agreement
relating to the Indemnification Obligation referred to in such Notice of Claim
demonstrating that Cardinal is entitled to indemnification for such Claim Amount
from the MediQual Stockholders pursuant to the Merger Agreement (either of (i)
or (ii), a "Payment Authorization"), at which date the portion of the amount due
to Cardinal determined pursuant to (i) or (ii) above shall promptly be paid to
Cardinal in accordance with the procedures set forth herein.
(e) As soon as practicable following receipt by the Escrow
Agent of a Payment Authorization, the Escrow Agent shall pay from the First
Escrowed Amount to Cardinal as follows, in the following order of priority, to
the extent required to make such payment:
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FIRST, the Escrow Agent shall transfer, deliver and assign to
Cardinal such number of Escrowed Shares (rounded up or down to the
nearest whole share in the case of the Escrow Shares that are not cash)
included in the First Escrowed Amount held in the Escrow Account as
shall have a value equal to the amount required to make or complete
such payment, it being understood and agreed that such non-cash
Escrowed Shares shall be valued for such purpose as set forth in
Section 8.7 of the Merger Agreement, together with the Additional
Property related thereto;
SECOND, to the extent of any insufficiency, the Escrow Agent
shall utilize any cash not part of the Escrowed Shares included in the
First Escrowed Amount then held in the Escrow Deposit; and
THIRD, to the extent of any insufficiency, the Escrow Agent
shall sell securities or investments included in the First Escrowed
Amount, other than the Escrowed Shares, then held in the Escrow Deposit
for cash and utilize such cash to make up such insufficiency.
To the extent the Escrow Agent is required to transfer, deliver and assign to
Cardinal any Escrowed Shares included in the First Escrowed Amount, Cardinal
shall assist and cooperate in a reasonable manner with the Escrow Agent to
facilitate such transfer, delivery and assignment. In the event the First
Escrowed Amount shall be insufficient to pay the amount expressly set forth in
such Payment Authorization, the Escrow Agent shall deliver to Cardinal the
entire remaining First Escrowed Amount and then deliver to Cardinal and to the
MediQual Stockholders Representative a written notification setting forth the
amount by which such Payment Authorization exceeds the amount of the First
Escrowed Amount so paid.
(f) To the extent that any payment pursuant to Section 3.1(e)
hereof shall be made in cash, the Escrow Agent shall pay all such amount to
Cardinal by wire transfer to the bank account or accounts designated by Cardinal
to the Escrow Agent in writing not less than one business day prior to the date
of such payment.
(g) Notwithstanding anything to the contrary in this
Agreement, in no event shall Cardinal be entitled to receive any amounts from
the Escrow Deposit in excess of the amount of the First Escrowed Amount.
3.2 DISTRIBUTION FOR EXPENSES OF THE MEDIQUAL STOCKHOLDERS
REPRESENTATIVE. (a) At any time during which there are Second Escrow Amounts
retained in the Escrow Deposit, the MediQual Stockholders Representative may
deliver to the Escrow Agent (with a copy to Cardinal) a certificate (a "Notice
of Expenses") stating that (i) the MediQual Stockholders
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Representative has incurred, or expects to incur, expenses, disbursements or
advances (including fees and disbursements of its counsel, experts and other
agents and consultants) in such capacity ("Representative Expenses"), (ii)
stating the aggregate amount of such Representative Expenses, and (iii)
specifying in reasonable detail the nature of such Representative Expenses.
Within five days of receipt of a Notice of Expenses, the Escrow Agent shall
transfer to the MediQual Stockholders Representative a portion of the Second
Escrowed Amount equal to the amount of such Representative Expenses as follows:
FIRST, the Escrow Agent shall transfer, deliver and assign to
the MediQual Stockholders Representative such number of
Escrowed Shares (rounded up or down to the nearest whole share
in the case of the Escrow Shares that are not cash) together
with the Additional Property related thereto included in the
Second Escrowed Amount held in the Escrow Account as shall
have a value equal to the amount required to make or complete
such payment, it being understood and agreed that such
non-cash Escrowed Shares shall be valued for such purpose as
set forth in Section 3.2(d) hereof, together with the
Additional Property related thereto;
SECOND, to the extent of any insufficiency, the Escrow Agent
shall utilize any cash not part of the Escrowed Shares
included in the Second Escrowed Amount held in the Escrow
Deposit; and
THIRD, to the extent of any insufficiency, the Escrow Agent
shall sell securities or investments included in the Second
Escrowed Amount, other than the Escrowed Shares, then held in
the Escrow Deposit for cash and utilize such cash to make up
such insufficiency.
To the extent the Escrow Agent is required to transfer, deliver and assign to
the MediQual Stockholders Representative any Escrowed Shares included in the
Second Escrowed Amount, the MediQual Stockholders Representative shall assist
and cooperate in a reasonable manner with the Escrow Agent to facilitate such
transfer, delivery and assignment. In the event that the Second Escrowed Amount
shall be insufficient to pay the amount of any Representative Expenses
specifically set forth in such Notice of Expenses, the Escrow Agent shall
deliver to the MediQual Stockholders Representative the entire remaining Second
Escrowed Amount and then deliver to the MediQual Stockholders Representative a
written notification setting forth the amount by which the Representative
Expenses set forth in such Notice of Expenses exceeds the amount of the Second
Escrowed Amount so paid. Nothing in this Agreement shall be deemed to restrict
or prohibit the MediQual Stockholders Representative from exercising any rights
or remedies it may have with respect to the MediQual
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Stockholders, whether by way of indemnification or contribution, or otherwise,
for reimbursement of expenses incurred by the MediQual Stockholders
Representative in such capacity.
(b) To the extent that any payment pursuant to Section 3.2(a)
hereof shall be made in cash, the Escrow Agent shall pay all such amount to the
MediQual Stockholders Representative by wire transfer to the bank account or
accounts designated by the MediQual Stockholders Representative in writing not
less than one business day prior to the date of such payment.
(c) Notwithstanding anything to the contrary in this
Agreement, in no event shall the MediQual Stockholders Representative be
entitled to receive any amounts from the Escrow Deposit in excess of the sum of
(i) the amount of the Second Escrowed Amount, plus (ii) any of the First
Escrowed Amount which is not the subject of an Unresolved Claim on the Escrow
Date.
(d) For purposes of this Section 3.2, any non-cash Escrowed
Shares distributed to the MediQual Stockholders Representative shall be valued
for such purpose as the closing price of Cardinal Common Shares as reported on
the New York Stock Exchange Composite Tape on the last trading date immediately
preceding the date on which such shares are distributed to the MediQual
Stockholders Representative.
3.3 RELEASE UPON THE ESCROW DATE. (a) On the Escrow Date, the
Escrow Agent shall distribute the Escrow Deposit to the MediQual Stockholders
and shall terminate the Escrow Account, unless (i) the Escrow Agent shall have
received a Notice of Claim from Cardinal prior to the Escrow Date with respect
to an indemnification claim (an "Unresolved Claim") for which the Escrow Agent
has not received a subsequent Payment Authorization or written notification
signed by Cardinal and the MediQual Stockholder's Representative, informing the
Escrow Agent of the termination or other resolution of such claim or claims
(each, a "Claim Termination Notice"), or (ii) the Escrow Agent shall have
received a Notice of Expenses from the MediQual Stockholders Representative
informing the Escrow Agent that the MediQual Stockholders Representative expects
to incur additional Representative Expenses in connection with Unresolved Claims
or otherwise (an "Expense Claim"). If on the Escrow Date there shall exist any
Unresolved Claim or Expense Claim, then (i) the Escrow Agent shall retain the
Escrow Deposit in the Escrow Account in an amount sufficient for the payment of
all Claim Amounts with respect to all such Unresolved Claims (but not in excess
of the remainder of the First Escrowed Amount), and shall retain in the Escrow
Account in an amount sufficient to cover such Expense Claims (but not in excess
of the remainder of the Escrow Deposit), and (ii) the Escrow Agent shall release
to the MediQual Stockholders the portion of the Escrow Deposit in the Escrow
Account not otherwise retained in accordance with clause
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(i). For all purposes of this Section 3.3(a), the Escrowed Shares (other than
the cash which may be a part thereof) shall be valued as set forth in Section
3.1, in the case of the First Escrowed Amount, or Section 3.2, in the case of
the Second Escrowed Amount.
(b) Upon the resolution of any Unresolved Claim, the Escrow
Agent shall (A) release any portion of the Escrow Deposit retained in respect of
such Unresolved Claim (x) to Cardinal in accordance with any Payment
Authorization received by the Escrow Agent in respect of such Unresolved Claim
or (y) to the MediQual Stockholders in accordance with any Claim Termination
Notice received by the Escrow Agent in respect of such Unresolved Claim and, if
no other Unresolved Claims or Expense Claims remain outstanding, (B) release the
remainder of the Escrow Deposit to the MediQual Stockholders. For purposes of
this Section 3.3(b), the Escrowed Shares shall be valued as set forth in Section
8.7 of the Merger Agreement.
(c) Any distribution to the MediQual Stockholders
Representative pursuant to this Section 3.3 shall be made by the Escrow Agent to
the MediQual Stockholders based on their respective interests in the Escrowed
Shares (as reflected in the then most recent version of the Ownership
Certificate) and the cash and other investments constituting the Escrow Deposit,
subject to any written instructions of the MediQual Stockholders Representative
(including, without limitation, any instructions as to the liquidation of the
Escrow Account and/or the transfer of the Escrowed Shares to the transfer agent
of Cardinal). The Escrow Agent shall sign such stock powers or other documents
of transfer as are necessary to transfer any remaining Escrowed Shares included
within the Escrow Deposit in accordance with such instructions (the "Released
Shares").
SECTION IV
ESCROW AGENT
4.1 FEES. For its services hereunder, the Escrow Agent shall
receive (i) $2,500 upon its receipt of the Escrow Deposit at the Closing (which
shall constitute the fee for initiating the transaction and the fee for the
first year of the Agreement), (ii) commencing on the first anniversary of the
date hereof and then annually thereafter, $1,500 for each calendar year until it
has delivered all of the Escrow Deposit pursuant to Section 3 (prorated for
partial years), and (iii) the transaction fees set forth on Schedule 1 attached
hereto. The Escrow Agent shall be reimbursed for all reasonable out-of-pocket
expenses incurred by the Escrow Agent necessary to perform such services (other
than taxes imposed in respect of the receipt of the fees referred to in the
preceding sentence). The fees, expenses and
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reimbursements referred to in the foregoing two sentences shall be paid by
Cardinal.
4.2 RESPONSIBILITIES OF ESCROW AGENT. The Escrow Agent's
acceptance of its duties under this Agreement is subject to the following terms
and conditions, which the parties hereto agree shall govern and control with
respect to its rights, duties, liabilities and immunities:
(a) Except as to its due execution and delivery of the
Agreement, it makes no representation and has no responsibility as to the
validity of this Agreement or of any other instrument referred to herein, or as
to the correctness of any statement contained herein, and it shall not be
required to inquire as to the performance of any obligation under the Merger
Agreement.
(b) The Escrow Agent shall be protected in acting upon any
written notice, request, waiver, consent, receipt or other paper or document,
not only as to its due execution and the validity and effectiveness of its
provisions, but also as to the truth of any information therein contained, which
it in good faith believes to be genuine and what it purports to be.
(c) The Escrow Agent shall not be liable for any error of
judgment, or for any act done or step taken or omitted by it in good faith, or
for any mistake of fact or law, or for anything which it may do or refrain from
doing in connection therewith, except its own gross negligence or misconduct.
(d) The Escrow Agent may consult with competent and
responsible legal counsel selected by it, and it shall not be liable for any
action taken or omitted by it in good faith in accordance with the advice of
such counsel.
(e) Cardinal and the MediQual Stockholders agree to jointly
and severally indemnify and hold the Escrow Agent and its directors, employees,
officers, agents, successors and assigns (collectively, the "Indemnified
Parties") harmless from and against any and all losses, claims, damages,
liabilities and expenses (collectively, "Damages"), including, without
limitation, reasonable costs of investigation and counsel fees and expenses
which may be imposed on the Escrow Agent or incurred by it in connection with
its acceptance of this appointment as the Escrow Agent hereunder or the
performance of its duties hereunder. Such indemnity includes, without
limitation, Damages incurred in connection with any litigation (whether at the
trial or appellate levels) arising from this Escrow Agreement or involving the
subject matter hereof. The indemnification provisions contained in this
paragraph are in addition to any other rights any of the Indemnified Parties may
have by law or otherwise and shall survive the termination of this Agreement or
the resignation or removal of the Escrow Agent. Notwithstanding
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any provision to the contrary in this Escrow Agreement, Cardinal and the
MediQual Stockholders shall have no liability to the Indemnified Parties with
respect to any Damages that result, directly or indirectly, from the gross
negligence or misconduct of the Escrow Agent. Any obligation of the MediQual
Stockholders pursuant to this Section shall be satisfied only by the deduction
from the Escrow Deposit by the MediQual Stockholders Representative of the
amount of such obligations.
(f) The Escrow Agent shall have no duties or responsibilities
except those expressly set forth herein, and it shall not be bound by any
modification of this Agreement unless in writing and signed by all parties
hereto or their respective successors in interest.
(g) The Escrow Agent shall have no responsibility in respect
of the validity or sufficiency of this Escrow Agreement or of the terms hereof.
The recitals of facts in this Escrow Agreement shall be taken as the statements
of Cardinal and the MediQual Stockholders, and the Escrow Agent assumes no
responsibility for the correctness of the same.
(h) The Escrow Agent shall be protected in acting upon any
notice, resolution, request, consent, order, certificate, report, opinion, bond
or other paper or document reasonably believed by it to be genuine and to have
been signed and presented by the proper party or parties. Whenever the Escrow
Agent shall deem it necessary or desirable that a matter be proved or
established prior to taking or suffering any action under this Escrow Agreement,
such matter may be deemed inclusively proved and established by a certificate
signed by Cardinal and the MediQual Stockholders Representative (on behalf of
the MediQual Stockholders), and such certificate shall be full warranty for any
action taken or suffered in good faith under the provisions of this Escrow
Agreement.
(i) Except as specifically set forth above, the Escrow Agent
does not have any interest in the Escrow Deposit but is serving as escrow agent
only and having only possession thereof. This Section 4.2(i) shall survive
notwithstanding any termination of this Agreement or the resignation of the
Escrow Agent.
SECTION V
CERTAIN TRANSACTIONS
5.1 MERGER AND OTHER EXCHANGE TRANSACTIONS. In the event of
any consolidation or merger of Cardinal with or into any other corporation or in
the event of any other transaction upon which the holders of Cardinal Common
Shares are entitled to receive cash, shares of stock, securities or other
property in
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exchange for their Cardinal Common Shares, the Escrow Agent, if and to the
extent directed to do so by Cardinal, shall present such Escrow Shares which are
Cardinal Common Shares for such exchange, conversion or otherwise. Any such
cash, shares of stock, securities or other property received from such exchange,
conversion or otherwise shall be deposited in the Escrow Account and shall be
disbursed in accordance with the terms of this Escrow Agreement to Cardinal
and/or the MediQual Stockholders entitled thereto.
5.2 MERGER, ETC. OF CARDINAL. Nothing contained in this Escrow
Agreement shall prevent any merger, liquidation or consolidation of Cardinal
with or into another corporation or corporations, or successive consolidations
or mergers in which Cardinal or its successor or successors shall be a party or
parties, or any sale or other conveyance of all or substantially all of the
property of Cardinal to another corporation.
SECTION VI
MISCELLANEOUS
6.1 MEDIQUAL STOCKHOLDERS REPRESENTATIVE. By virtue of the
approval and adoption of the Merger Agreement at the MediQual Stockholders
Meeting, the MediQual Stockholders have irrevocably appointed the MediQual
Stockholders Representative to act on behalf of the MediQual Stockholders with
respect to all matters relating to this Agreement and Article VIII of the Merger
Agreement, including without limitation in considering and certifying the amount
of any indemnification hereunder, in communicating with the MediQual
Stockholders, in appointing a successor Escrow Agent hereunder, in considering
and acting with respect to any amendment or termination of this Agreement, and
generally in performing all acts expressly required or permitted to be performed
by the MediQual Stockholders Representative pursuant hereto and pursuant to the
Merger Agreement. Cardinal and the Escrow Agent shall have the right to deal
exclusively with the MediQual Stockholders Representative with respect to all
matters under this Agreement and neither Cardinal nor the Escrow Agent shall
have any liability to any MediQual Stockholders for any acts or omissions of the
MediQual Stockholders Representative, or any acts or omissions taken or not
taken by Cardinal or the Escrow Agent at the direction of the MediQual
Stockholders Representative, including, but not limited to (i) any acts or
omissions relating to the voting of any Escrowed Shares or (ii) the transferring
of or the failure to transfer any shares or funds released from escrow. Upon any
distribution of Escrowed Shares or other funds to the MediQual Stockholders
Representative (or to one or more of the MediQual Stockholders upon written
instruction of the MediQual Stockholders Representative) in accordance with this
Agreement, the Escrow
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Agent and Cardinal shall be deemed to have fully satisfied any and all
obligations to the MediQual Stockholders under this Agreement and the Merger
Agreement with respect to the amount of such distribution. The MediQual
Stockholders Representative shall be entitled to reimbursement from the Second
Escrowed Amount, in accordance with the terms of this Agreement, for all
reasonable expenses, disbursements and advances (including fees and
disbursements of its counsel, experts and other agents and consultants) incurred
by the MediQual Stockholders Representative in such capacity.
6.2 AMENDMENT AND TERMINATION This Agreement may be amended or
terminated by the written agreement of the parties hereto, or shall terminate
automatically at such time as all securities and funds from the Escrow Deposit
have been paid or distributed in accordance with the terms of this Agreement and
the Escrow Agent has received all fees as described in Section 6.1 hereto.
Notwithstanding the foregoing, all provisions concerning the indemnification of
the Escrow Agent shall survive any termination of this Agreement.
6.3 NOTICES. All notices, requests, demands, letters, waivers
and other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed, certified or registered mail with postage prepaid, (c)
sent by next-day or overnight mail or delivery or (d) sent by fax, as follows:
To MediQual:
MediQual Systems, Inc.
1900 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Eric A. Kriss
Telecopy No.: (508) 366-6365
With a copy to:
Victor J. Paci, Esq.
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
Telecopy No.: (617) 951-8736
-14-
<PAGE> 15
To Cardinal:
Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Attention: Robert D. Walter
Telecopy No.: (614) 717-8919
With a copy to:
John M. Gherlein, Esq.
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3485
Telecopy No.: (216) 696-0740
To the Escrow Agent:
Bank One Trust Company, NA
Corporate Trust Department
100 East Broad Street - 8th Floor
Columbus, Ohio 43215
Attention: Michael Dockman
Telecopy No.: (614) 285-5195
To the MediQual Stockholders Representative:
Eric A. Kriss
1900 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Telecopy No.: (508) 366-6365
or to such other Person or address as any party shall specify by notice in
writing to the party entitled to notice. All such notices, requests, demands,
letters, waivers and other communications shall be deemed to have been received
(w) if by personal delivery on the day after such delivery, (x) if by certified
or registered mail, on the fifth Business Day after the mailing thereof, (y) if
by next-day or overnight mail or delivery, on the day delivered or (z) if by
fax, on the next day following the day on which such fax was sent, provided that
a copy is also sent by certified, registered or overnight mail.
6.4 GOVERNING LAW. This Agreement shall be construed,
performed and enforced in accordance with the laws of the State of Delaware.
6.5 MISCELLANEOUS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. The
headings in this Agreement are for convenience of reference only and shall not
define or limit the provisions
-15-
<PAGE> 16
hereof. This Agreement may be executed in several counterparts, each of which is
an original but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
CARDINAL HEALTH, INC.
By:
------------------------------------
Name:
Title:
MEDIQUAL SYSTEMS, INC.
By:
------------------------------------
Name:
Title:
---------------------------------------
ERIC A. KRISS
BANK ONE TRUST COMPANY, NA
By:
------------------------------------
Name:
Title:
-16-
<PAGE> 1
EXHIBIT 4.04
------------
WARRANT
-------
WARRANT NO. W-__ _____ WARRANTS
SHARES ARE NOT REQUIRED TO BE ISSUED UPON EXERCISE OF
THIS WARRANT AND ANY SHARES SO ISSUED MAY NOT BE
TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(THE "ACT") OR (ii) UPON FIRST FURNISHING TO THE
COMPANY AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH ISSUANCE OR TRANSFER IS NOT IN
VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT
OR ANY APPLICABLE STATE SECURITIES LAW.
CARDINAL HEALTH, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, __________________________ or registered assigns under
Section 8 hereof (the "Holder") is the owner of _____ warrants specified above
(the "Warrants") each of which entitles the Holder thereof to purchase one (1)
fully paid and nonassessable share of the Common Shares, without par value
("Common Shares"), of Cardinal Health, Inc., a corporation organized under the
laws of Ohio (the "Company"), or such other number of shares as may be
determined pursuant to an adjustment in accordance with Section 4 hereof, at the
price per share set forth in Section 4 hereof, subject to adjustment from time
to time pursuant to Section 4 hereof (the "Warrant Price") and subject to the
provisions and upon the terms and conditions set forth herein.
1. Term of Warrant.
----------------
Subject to Section 7 hereof, each Warrant is exercisable, at the option
of the Holder, at any time during the period commencing on the date hereof and
ending at 5:00 p.m. Eastern time on April 27, 2003, or if such date shall, in
the State of Ohio, be a holiday or a day on which banks are authorized to close,
then 5:00 p.m. Eastern time the next following day which in the State of Ohio is
not a holiday or a day on which banks are authorized to close.
2. Method of Exercise and Payment; Issuance of New Warrant
-------------------------------------------------------
Certificate; Contingent Exercise.
---------------------------------
(a) Subject to Sections 1 and 7 hereof, each Warrant may be
exercised by the Holder hereof by the surrender of this Warrant Certificate
(with the notice of exercise form attached hereto as EXHIBIT 1 duly executed) at
the principal office of the Company and by the payment to the Company of (i)
cash or a certified check or a wire transfer in an amount equal to the then
applicable Warrant Price multiplied by the number of Common Shares then being
<PAGE> 2
purchased or (ii) that number of Common Shares of the Company having a fair
market value (as defined below) equal to the then applicable Warrant Price
multiplied by the number of Common Shares then being purchased. In the
alternative, the Holder hereof may exercise its right to purchase some or all of
the Common Shares pursuant to this Warrant Certificate, on a net basis, such
that, without the exchange of any funds, the Holder hereof receives that number
of Common Shares subscribed to pursuant to this Warrant Certificate less that
number of Common Shares having an aggregate fair market value (as defined below)
at the time of exercise equal to the aggregate Warrant Price that would
otherwise have been paid by the Holder for the number of Common Shares
subscribed to under this Warrant Certificate. Fair market value shall be the
daily closing price per share on the last business day prior to the day of
exercise. The closing price for each day shall be the last sale price or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Common Shares are listed or admitted
to trading; or, if not listed or admitted to trading on any national securities
exchange, the last quoted price (or, if not so quoted, the average of the last
quoted high bid and low asked prices) in the over-the-counter market, as
reported by NASDAQ or such other system then in use; or, if on any such date no
bids are quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in such
security selected by the Board of Directors of the Company. If on any such date,
no market maker is making a market in the Common Shares, the fair market value
of such security on such date shall be determined reasonably and in good faith
by the Board of Directors of the Company. If the Common Shares are not publicly
held or not so listed or traded, "fair market value" shall mean the fair value
per share determined reasonably and in good faith by the Board of Directors of
the Company.
(b) The Company agrees that the Common Shares so purchased
shall be deemed to be issued to the Holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant Certificate
shall have been surrendered and payment made for such shares as aforesaid. In
the event of any exercise of the rights represented by this Warrant Certificate,
certificates for the Common Shares so purchased shall be delivered to the Holder
hereof within 15 days thereafter and, unless all of the Warrants represented by
this Warrant Certificate have been fully exercised or have expired pursuant to
Section 1 hereof, a new Warrant Certificate representing the Common Shares, if
any, with respect to which the Warrants represented by this Warrant Certificate
shall not then have been exercised, shall also be issued to the Holder hereof
within such 15 day period.
3. Shares Fully Paid; Reservation of Shares.
-----------------------------------------
All Common Shares which may be issued upon the exercise of the Warrants
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of Common Shares to provide for the exercise of
the Warrants.
-2-
<PAGE> 3
4. Warrant Price; Adjustment of Warrant Price and Number of
--------------------------------------------------------
Shares.
-------
The Warrant Price shall be $_____ per Common Share, and the Warrant
Price and the number of Common Shares purchasable upon exercise of the Warrants
shall be subject to adjustment from time to time, as follows:
(a) RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any
reclassification or change of outstanding securities of the class issuable upon
exercise of the Warrants, or in case of any consolidation or merger of the
Company with or into another corporation or entity, other than a consolidation
or merger with another corporation or entity in which the Company is the
continuing corporation and which does not result in any reclassification,
conversion or change of outstanding securities issuable upon exercise of the
Warrants, or in case of any sale of all or substantially all of the assets of
the Company, the holder of the Warrants shall thereafter be entitled to receive
upon the exercise of the Warrants, in lieu of each Common Share theretofore
issuable upon exercise of the Warrants, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification,
conversion, change, consolidation, or merger by a holder of one Common Share.
The provisions of this Section 4(a) shall similarly apply to successive
reclassifications, changes, consolidations, mergers and transfers.
(b) SUBDIVISIONS, COMBINATIONS AND STOCK DIVIDENDS. If the
Company at any time while this Warrant Certificate is outstanding and unexpired
shall subdivide or combine its Common Shares, or shall pay a dividend with
respect to Common Shares payable in, or make any other distribution with respect
to its Common Shares consisting of, Common Shares, then the Warrant Price shall
be adjusted, from and after the date of determination of shareholders entitled
to receive such dividend or distribution, to that price determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of Common Shares outstanding immediately prior to such dividend or distribution
and (ii) the denominator of which shall be the total number of Common Shares
outstanding immediately after such dividend or distribution.
(c) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in
the Warrant Price pursuant to Section 4(b) hereof, the number of Common Shares
purchasable hereunder shall be adjusted, to the next larger whole share, to the
product obtained by multiplying the number of shares purchasable immediately
prior to such adjustment in the Warrant Price by a fraction (i) the numerator of
which shall be the Warrant Price immediately prior to such adjustment and (ii)
the denominator of which shall be the Warrant Price immediately thereafter.
5. Notice of Adjustments.
----------------------
Whenever any Warrant Price shall be adjusted pursuant to Section 4
hereof, the Company shall prepare a certificate signed by its chief financial
officer or treasurer setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, the Warrant Price after giving effect to such
adjustment and the number of Common Shares then purchasable upon exercise of the
Warrants, and shall cause copies of such certificate to be mailed to the Holder
hereof at the address specified in Section 9(c) hereof, or at such other address
as may be provided to the Company in writing by the Holder hereof.
-3-
<PAGE> 4
6. Fractional Shares.
-----------------
No fractional Common Shares will be issued in connection with any
exercise hereunder, but in lieu of such fractional shares the Company shall make
a cash payment therefor upon the basis of the Warrant Price then in effect.
7. Compliance with Securities Act.
-------------------------------
The Holder of this Warrant Certificate, by acceptance hereof, agrees
that Common Shares are not required to be issued upon exercise hereby and any
shares so issued may not be transferred except (i) pursuant to an effective
registration statement under the Securities Act of 1933 (the "Act") or (ii) upon
first furnishing to the Company an opinion satisfactory to the Company that such
issuance is not in violation of the registration requirements of the Act or
applicable state securities laws. This Warrant Certificate and all Common Shares
issued upon exercise of the Warrants (unless registered under the Act) shall be
stamped or imprinted with a legend substantially in the following form:
SHARES ARE NOT REQUIRED TO BE ISSUED UPON EXERCISE
OF THIS WARRANT AND ANY SHARES SO ISSUED MAY NOT BE
TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 (THE "ACT") OR (ii) UPON FIRST FURNISHING TO THE
COMPANY AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH ISSUANCE OR TRANSFER IS NOT IN
VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE
ACT OR ANY APPLICABLE STATE SECURITIES LAW.
8. Transfer.
---------
The Warrants and all rights under this Warrant Certificate are
transferable, in whole or in part, at the principal office of the Company by the
Holder hereof, in person or by its duly authorized attorney, upon surrender of
this Warrant Certificate properly endorsed (with the instrument of transfer form
attached hereto as EXHIBIT 2 duly executed). Each Holder of this Warrant
Certificate, by taking or holding the same, consents and agrees that this
Warrant Certificate, when endorsed in blank, shall be deemed negotiable as
against the Holder; provided, however, that the last Holder of this Warrant
Certificate as registered on the books of the Company may be treated by the
Company and all other persons dealing with this Warrant Certificate as the
absolute owner of the Warrants for any purposes and as the person entitled to
exercise the rights represented by this Warrant Certificate or to transfer the
Warrants on the books of the Company, any notice to the contrary
notwithstanding, unless and until such Holder seeks to transfer registered
ownership of the Warrants on the books of the Company and such transfer is
effected.
-4-
<PAGE> 5
9. Miscellaneous.
--------------
(a) REPLACEMENT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement or bond reasonably satisfactory in form and
amount to the Company or, in the case of mutilation, on surrender and
cancellation of this Warrant Certificate, the Company, at its expense, will
execute and deliver, in lieu of this Warrant Certificate, a new warrant
certificate of like tenor.
(b) NOTICE OF CAPITAL CHANGES. In case:
(i) the Company shall declare any dividend or distribution
payable to the holders of Common Shares and payable in, or consisting
of, Common Shares;
(ii) there shall be any capital reorganization or
reclassification of the capital of the Company, or consolidation or
merger of the Company with or into another corporation or entity, other
than a consolidation or merger with another corporation or entity in
which the Company is the continuing corporation, or sale of all or
substantially all of its assets to, another corporation or business
organization; or
(iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company
then, in any one or more of said cases, the Company shall give the Holder hereof
written notice of such event, in the manner set forth in Section 9(c), below at
the same time notice thereof is provided to the Company's shareholders.
(c) NOTICE. All notices, requests, payments, instructions or
other documents to be given hereunder shall be in writing or by written
telecommunication, and shall be deemed to have been duly given if (i) delivered
personally (effective upon delivery), (ii) mailed by certified mail, return
receipt requested, postage prepaid (effective five business days after
dispatch), (iii) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day), or (iv)
sent by telecopier followed within 24 hours by confirmation by one of the
foregoing methods (effective upon receipt of the telecopy in complete, readable
form), addressed, if to the Company, at its principal office to the attention of
its General Counsel, and, if to the Holder hereof, at its address as set forth
in the Company's books and records or at such other address as the Holder hereof
may have provided to the Company pursuant to this Section 9(c).
(d) NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, 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 Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant Certificate.
-5-
<PAGE> 6
(e) GOVERNING LAW. This Warrant Certificate shall be governed
by and construed in accordance with the laws of the State of Ohio.
This Warrant Certificate has been executed as of this _____ day of
_____________, 1997.
CARDINAL HEALTH, INC.
By:
---------------------------
Name:
-----------------------
Title:
----------------------
-6-
<PAGE> 7
EXHIBIT 1
---------
NOTICE OF EXERCISE
------------------
TO: CARDINAL HEALTH, INC.
1. The undersigned hereby elects to purchase ___________________ Common
Shares of Cardinal Health, Inc. pursuant to the terms of the attached Warrant.
2. Please issue a certificate or certificates representing said Common
Shares in the name of the undersigned or in such other name as is specified
below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
Dated:
-------------------------
Signature
<PAGE> 8
EXHIBIT 2
---------
FORM OF ASSIGNMENT
------------------
For value received, the undersigned hereby sells, assigns and transfers
unto _____________ the rights represented by the within Warrant Certificate to
purchase __________ Common Shares of Cardinal Health, Inc. to which the within
Warrant Certificate relates and appoints _________ to transfer such rights on
the books of Cardinal Health, Inc. with full power of substitution in the
premises.
Dated:
------------------- -------------------------
Signature
<PAGE> 1
Exhibit 5.01
July 8, 1997
Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43106
Subject: Registration Statement on Form S-4 with
-------- respect to the registration of Common Shares,
without par value ("Common Shares"), and
Warrants to purchase Common Shares
("Warrants")
----------------------------------------------
Gentlemen:
We have acted as counsel to Cardinal Health, Inc., an Ohio
corporation (the "Company"), in connection with its Registration Statement on
Form S-4 (the "Registration Statement") being filed this date under the
Securities Act of 1933, as amended (the "Act"), for the purpose of registering
under the Act up to 704,416 Common Shares and up to 14,806 Warrants issuable
in connection with the transaction contemplated by the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997 (the "Merger Agreement"),
by and among the Company, Hub Merger Corp., a Delaware corporation and wholly
owned subsidiary of the Company, and MediQual Systems, Inc., a Delaware
corporation.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents as we have deemed necessary
for the purposes of this opinion including, without limitation, the Articles of
Incorporation, as amended and restated of the Company (the "Cardinal Articles"),
and the Restated Code of Regulations, as amended, of the Company and the Merger
Agreement.
Based upon the foregoing, we are of the opinion that the
Common Shares and the Warrants have been duly and validly authorized and, when
issued in accordance with the terms and conditions of the Merger Agreement and
in the manner contemplated by the Registration Statement will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to our firm under "Legal
Matters" in the Proxy Statement/Prospectus
<PAGE> 2
included in the Registration Statement. In giving such consent, we do not
thereby admit that we are in the category of persons where consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ Baker & Hostetler LLP
Baker & Hostetler LLP
<PAGE> 1
Exhibit 8.01
July 8, 1997
Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43106
Gentlemen:
With reference to the Registration Statement on Form S-4 (the
"Registration Statement") being filed this date by Cardinal Health, Inc., an
Ohio corporation ("Cardinal"), with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of its common shares, without par value ("Cardinal Common Shares"), and warrants
to purchase Cardinal Common Shares to be issued in connection with the
transactions contemplated by the Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") dated as of July 7, 1997, among Cardinal, Hub
Merger Corp., a Delaware corporation and a wholly owned subsidiary of Cardinal,
and MediQual Systems, Inc., a Delaware corporation, we hereby confirm that the
discussion set forth under the captions "Summary -- Certain Federal Income Tax
Consequences" and "Certain Federal Income Tax Consequences" in the Registration
Statement provides a summary of the material federal income tax considerations
relevant to the MediQual stockholders receiving Cardinal Common Shares pursuant
to the Merger Agreement, including (i) that there can be no assurance that the
tax treatment of the merger by Cardinal, MediQual or MediQual stockholders will
not be challenged by the Internal Revenue Service, or that any such challenge
would not be sustained; and (ii) that no ruling has been requested from the
Internal Revenue Service and no legal opinion concerning the tax treatment of
the merger will be rendered.
We hereby consent to the filing of this opinion as Exhibit
8.01 to the Registration Statement and to the use of our name in Proxy
Statement/Prospectus included in the Registration Statement. In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under
<PAGE> 2
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange commission promulgated thereunder.
Very truly yours,
/s/ Baker & Hostetler LLP
Baker & Hostetler LLP
<PAGE> 1
Exhibit 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Cardinal Health, Inc. on Form S-4 of our report dated June 5, 1997, appearing in
the Form 8-K of Cardinal Health, Inc. dated June 10, 1997, for the year ended
June 30, 1996, and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
July 3, 1997
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
July 3, 1997
<PAGE> 1
Exhibit 23.03
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Cardinal Health,
Inc. and to the incorporation by reference therein of our report dated August
2, 1996, with respect to the consolidated financial statements of Pyxis
Corporation, included in the Form 8-K of Cardinal Health, Inc., dated June 10,
1997, filed with the Securities and Exchange Commission.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
July 3, 1997
<PAGE> 1
Exhibit 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Cardinal Health,
Inc. of our report dated January 30, 1997 related to the financial statements of
Owen Healthcare, Inc. which appears on page 6 in the Current Report on Form 8-K
of Cardinal Health, Inc. dated June 10, 1997. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
July 3, 1997
<PAGE> 1
EXHIBIT 99.01
May 23, 1997
Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Re: Support/Voting Agreement
------------------------
Dear Sirs:
The undersigned understands that Cardinal Health, Inc. ("Cardinal"),
Hub Merger Corp., a wholly owned subsidiary of Cardinal ("Subcorp"), and
MediQual Systems, Inc. ("MediQual") are entering into an Agreement and Plan of
Merger, to be dated on or about the date hereof (the "Agreement"), providing
for, among other things, a merger between Subcorp and MediQual (the "Merger"),
in which outstanding shares of capital stock of MediQual will be exchanged for
common shares, without par value, of Cardinal.
The undersigned is a shareholder of MediQual (the "Shareholder") and is
entering into this letter agreement to induce you to enter into the Agreement
and to consummate the transactions contemplated thereby.
The Shareholder confirms its agreement with you as follows:
1. The Shareholder represents, warrants and agrees that Schedule I
annexed hereto sets forth the shares of the capital stock of MediQual of which
the Shareholder or its affiliates (as defined under the Securities Exchange Act
of 1934, as amended) is the beneficial owner (the "Shares") and that the
Shareholder and its affiliates are on the date hereof the lawful owners of the
number of Shares set forth in Schedule I, free and clear of all liens, charges,
encumbrances, voting agreements and commitments of every kind, except as
disclosed in Schedule I. Except for the Shares set forth in Schedule I, neither
the Shareholder nor any of its affiliates own or hold any rights to acquire any
additional shares of the capital stock of MediQual (other than pursuant to stock
options or conversion rights with regard to any of the Shares in each case as
disclosed on Schedule I) or any interest therein or any voting rights with
respect to any additional shares. In addition, if the Shares include Class B
Preferred Stock or Class C Preferred Stock of MediQual, the Shareholder
represents and warrants that it has delivered to MediQual its written consent
under Section 6 of the Amended and Restated Certificate of Incorporation of
MediQual (the "Certificate") to the authorization of the Merger by the Board of
Directors of MediQual.
<PAGE> 2
Cardinal Health, Inc.
May 23, 1997
Page 2
2. The Shareholder agrees that it will not, will not permit any
company, trust or other entity controlled by the Shareholder to, and will not
permit any of its affiliates to, contract to sell, sell or otherwise transfer or
dispose of any of the Shares or any interest therein or securities convertible
thereinto or any voting rights with respect thereto, other than (i) pursuant to
the Merger or (ii) with your prior written consent.
3. The Shareholder agrees that it will cause any company, trust or
other entity controlled by the Shareholder to, and will cause its affiliates to,
cooperate fully with you in connection with the Agreement and the transactions
contemplated thereby. The Shareholder agrees that, during the term of this
letter agreement, it will not, and will not permit any such company, trust or
other entity to, and will not permit any of its affiliates to, directly or
indirectly (including through its directors, officers, employees or other
representatives) (i) solicit, initiate, encourage or facilitate, or furnish or
disclose non-public information in furtherance of, any inquiries or the making
of any proposal with respect to any recapitalization, merger, consolidation or
other business combination involving MediQual, or acquisition of any capital
stock (other than upon exercise of MediQual Options which are outstanding as of
the date hereof) or any material portion of the assets (except for acquisition
of assets in the ordinary course of business consistent with past practice) of
MediQual, or any combination of the foregoing (a "Competing Transaction"), or
negotiate, explore or otherwise engage in discussions with any person (other
than Cardinal, Subcorp or their respective directors, officers, employees,
agents and representatives) with respect to any Competing Transaction or enter
into any agreement, arrangement or understanding with respect to any Competing
Transaction or agree to or otherwise assist in the effectuation of any Competing
Transaction or (ii) if the Shares include Class A Preferred Stock, Class B
Preferred Stock or Class C Preferred Stock of MediQual, provide, participate in
the giving of, or consent to or acquiesce in the giving of a written request
with respect to the redemption of any shares of capital stock of MediQual
pursuant to Section 5(b) of the Certificate. Anything herein to the contrary
notwithstanding, the Shareholder agrees that its agreement in clause (ii) of the
preceding sentence shall remain in effect until January 2, 1998, and shall
survive termination of this agreement prior to such date.
4. The Shareholder agrees that all of the Shares beneficially owned by
the Shareholder or its affiliates (except shares subject to unexercised stock
options), or over which the Shareholder or any of its affiliates has voting
power or control, directly or indirectly (including any shares of capital stock
of MediQual acquired after the date hereof), at the record date for any meeting
of shareholders of MediQual called to consider and vote to approve the Merger
and the Agreement and/or the transactions contemplated thereby and/or any
Competing Transaction will be voted by the Shareholder or its affiliates in
favor of the approval of the Merger and the Agreement and the transactions
contemplated thereby and that neither the Shareholder nor any of its affiliates
will vote such Shares in favor of any Competing Transaction during the term of
this letter agreement.
<PAGE> 3
Cardinal Health, Inc.
May 23, 1997
Page 3
5. The Shareholder has all necessary power and authority to enter into
this letter agreement. This letter agreement is the legal, valid and binding
agreement of the Shareholder, and is enforceable against the Shareholder in
accordance with its terms.
6. The Shareholder agrees that damages are an inadequate remedy for the
breach by Shareholder of any term or condition of this letter agreement and that
you shall be entitled to a temporary restraining order and preliminary and
permanent injunctive relief in order to enforce our agreements herein.
7. Except to the extent that the laws of the jurisdiction of
organization of any party hereto, or any other jurisdiction, are mandatorily
applicable to matters arising under or in connection with this letter agreement,
this letter agreement shall be governed by the laws of the State of Ohio. All
actions and proceedings arising out of or relating to this letter agreement
shall be heard and determined in any Ohio state or federal court sitting in the
City of Columbus.
8. Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the state courts of Ohio and to the jurisdiction of the United
States District Court for the Southern District of Ohio, for the purpose of any
action or proceeding arising out of or relating to this letter agreement and
each of the parties hereto irrevocably agrees that all claims in respect to such
action or proceeding may be heard and determined exclusively in any Ohio state
or federal court sitting in the City of Columbus. Each of the parties hereto
agrees that a final judgment in any action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Each of the parties hereto irrevocably consents to the
service of any summons and complaint and any other process in any other action
or proceeding relating hereto, on behalf of itself or its property, by the
personal delivery of copies of such process to such party. Nothing in this
Section 8 shall affect the right of any party hereto to serve legal process in
any other manner permitted by law.
This letter agreement constitutes the entire agreement among the
parties hereto with respect to the matters covered hereby and supersedes all
prior agreements, understandings or representations among the parties written or
oral, with respect to the subject matter hereof.
This letter agreement may be terminated at the option of any party at
any time upon the earlier of (i) the date on which the Agreement is terminated
and (ii) the Effective Time (as defined in the Agreement). Please confirm that
the foregoing correctly states the understanding between us by signing and
returning to me a counterpart hereof.
Very truly yours,
-------------------------------
<PAGE> 4
Cardinal Health, Inc.
May 23, 1997
Page 4
Confirmed on the date
first above written.
Cardinal Health, Inc.
By:
------------------------------
<PAGE> 1
Exhibit 99.02
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 18, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Eric A. Kriss and William C. Price, and either of them,
as Proxies, with full powers of substitution, and hereby authorizes them to
represent and vote, as designated below, all shares of MediQual Systems, Inc.
("MediQual") Common Stock, Class B Preferred Stock and Class C Preferred Stock
that the undersigned is entitled to vote at the Special Meeting of Shareholders
of MediQual to be held at MediQual's principal offices at 1900 West Park Drive,
Westborough, Massachusetts, on August 18, 1997 at 10:00 a.m. and at any
postponements or adjournments thereof, with all powers the undersigned would
possess if personally present:
The Board of Directors recommends a vote "FOR":
1. The approval and adoption of the execution of the Amended and Restated
Agreement and Plan of Merger, dated as of July 7, 1997 (the "Merger
Agreement"), among Cardinal Health, Inc., Hub Merger Corp. ("Subcorp")
and MediQual and to approve the merger of Subcorp. with and into
MediQual upon the terms and subject to the conditions of the Merger
Agreement and as more fully described in the Proxy Statement/Prospectus
dated July 7, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. The consideration of such other matters incidental to the Merger as may
properly come before the Meeting. The Board of Directors at present
knows of no other matters to be brought before the Meeting.
This Proxy will be voted in accordance with the instructions given. Unless
revoked or otherwise instructed, the shares represented by this Proxy will be
voted for proposal 1 and will be voted in accordance with the discretion of the
proxies upon all other matters which may come before the meeting or any
adjournment or postponement thereof.
Signature Date: 1997
----------------------------------------- -----------------
Signature if held jointly Date: 1997
-------------------------- -----------------
IMPORTANT: When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by
authorized officer. If a partnership, please sign in name by an authorized
person.
PLEASE DATE AND MAIL IN ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE> 1
Exhibit 99.03
[MEDIQUAL LETTERHEAD]
__________, 1997
TO: The Holders of Warrants To Purchase MediQual Common Stock
("MediQual Warrants")
As you know, MediQual Systems, Inc. ("MediQual") has entered
into an Agreement and Plan of Merger dated as of May 27, 1997, which has been
amended and restated as of July 7, 1997 (the "Merger Agreement"), with Cardinal
Health, Inc. ("Cardinal") and Hub Merger Corp., a wholly owned subsidiary of
Cardinal ("Subcorp"), pursuant to which Subcorp will be merged (the "Merger")
with and into MediQual and each outstanding share of MediQual capital stock will
be converted into the right to receive a number of Common Shares of Cardinal
("Cardinal Common Shares") as determined pursuant to the share exchange formulas
set forth in the Merger Agreement and described in the accompanying Proxy
Statement/Prospectus. Capitalized terms used in this letter and not defined
herein have the meanings ascribed to such terms in the Merger Agreement.
It is a condition to the obligations of Cardinal and
Subcorp to complete the Merger that MediQual Warrants to purchase at
least 95% of the MediQual Common Stock issuable upon the exercise of all
MediQual Warrants outstanding on May 27, 1997, shall have been (a) exercised
effective as of or prior to the Effective Time of the Merger, or (b) duly
surrendered in exchange for Cardinal Warrants ("Cardinal Warrants") to purchase
a number of Cardinal Common Shares equal to the product of (x) the number of
shares of MediQual Common Stock issuable upon the exercise of the MediQual
Warrants being surrendered and (y) the Common Equivalent Exchange Ratio (as
defined in the Merger Agreement and described in the accompanying Proxy
Statement/Prospectus under the caption "The Merger Agreement--Merger
Consideration"). The Cardinal Warrants will have an exercise price equal to the
quotient obtained by dividing the current exercise price of the MediQual
Warrants of $0.80 by the Common Equivalent Exchange Ratio. In the event that
you would like to exercise your MediQual Warrant prior to the closing of the
Merger, you may do so either (i) for cash by using the form of exercise notice
attached to the back of the MediQual Warrant, or (ii) on a "net exercise"
basis, contingent upon the closing of the Merger. If you would like to choose
the contingent net exercise alternative for your Warrant, you should use the
Notice of Contingent Net Issue Exercise and Waiver attached as Exhibit A
hereto. If you execute and return this form with your MediQual Warrant, your
warrant will only be exercised in the event that the Merger is completed, and
then contemporaneous with such completion. Cardinal Warrants issued in exchange
for
<PAGE> 2
The Holders of Warrants to Purchase MediQual Common Stock
_________, 1997
Page 2
MediQual Warrants will be in the form of the Cardinal Warrant included as
Exhibit B to this letter, and a form of Contingent Agreement to Exchange Warrant
and Waiver is included as Exhibit C to this letter. Completed forms should be
returned promptly to:
William C. Price
Chief Financial Officer
MediQual Systems, Inc.
Suite 250
1100 West Park Drive
Westborough, MA 01581
The condition described above will not be staisfied if any
holder of a MediQual Warrant who does not exercise or surrender Mediqual
Warrants has advised Mediqual, in writing or otherwise, that such holder will
not surrender or exercise all of such holder's MediQual Warrants.
In addition, MediQual is required under the terms of the
Merger Agreement to use all reasonable efforts to cause all holders of MediQual
Warrants to exercise all of their MediQual Warrants effective as of or prior to
the Effective Time of the Merger. Holders who so exercise their Warrants will
receive Cardinal Common Shares in the Merger pursuant to the terms of the Merger
Agreement, which provides, among other things, that 6.5% of the Cardinal Common
Shares otherwise issuable to MediQual Stockholders in the Merger will be
deposited into escrow to secure certain indemnification obligations of the
MediQual Stockholders and to provide for the payment of the expenses of Eric A.
Kriss as the representative of the MediQual Stockholders. Subject to this
escrow requirement, holders of MediQual Warrants who exercise their warrants
will receive Cardinal Common Shares in the Merger that will be generally freely
tradeable. See "The Merger--Federal Securities Law Consequences" in the Proxy
Statement/Prospectus.
If you elect to exercise your warrant on a contigent "net
exercise" basis, after completion of the Merger, a certificate for Cardinal
Common Shares and a check for cash in lieu of any fractional shares will be
sent to you at the address you provide in the Notice of Contingent Net
Issue Exercise and Waiver. You will also be notified of the number of Cardinal
Common Shares deposited into escrow on your behalf.
If you do not exercise your MediQual Warrant prior to the
Merger, Cardinal will issue a new Cardinal Warrant in the form of Exhibit B to
this letter in exchange for your MediQual Warrant as described above. However,
the liquidity of your Cardinal Warrant may be limited. Because there is no
public trading market for the Cardinal Warrants, the Cardinal Warrant
<PAGE> 3
The Holders of Warrants to Purchase MediQual Common Stock
_________, 1997
Page 3
issued in exchange for the MediQual Warrants will not be freely tradeable for
the first year following the Merger. See "The Merger--Federal Securities Law
Consequences" in the accompanying Proxy Statement/Prospectus. In addition,
certain of the terms of the Cardinal Warrant you will receive upon exchange
will be different from those of your existing MediQual Warrant. Unlike your
MediQual Warrant, the form of Cardinal Warrant included as Exhibit B to this
letter provides that Cardinal Common Shares are not required to be issued upon
exercise of the Cardinal Warrant except (1) pursuant to an effective
registration statement under the Securities Act of 1933 (the "Securities Act")
or (2) upon the holder first furnishing to Cardinal an opinion of counsel
satisfactory to Cardinal that such issuance is not in violation of the
registration requirements of the Securities Act or any applicable state
securities law. (Your MediQual Warrant requires such an opinion only in
connection with the sale of MediQual Common Stock acquired upon the exercise of
your MediQual Warrant.) Since Cardinal is not under any obligation to file, and
does not intend to file, a registration statement under the Securities Act
covering the issuance of any Cardinal Common Shares upon exercise of the
Cardinal Warrants, the Cardinal Warrants will only be exercisable pursuant to
an exemption from the registration requirements of the Securities Act, and then
only upon the holder of the Cardinal Warrant furnishing to Cardinal an opinion
of counsel satisfactory to Cardinal that an exemption from registration is
available. Cardinal may waive the requirement for an opinion of counsel at the
time of exercise if the availability of an exemption from registration is
readily apparent. Generally, Cardinal Common Shares issued upon the exercise of
a Cardinal Warrant by the surrender of Cardinal Common Shares having a fair
market value equal to the applicable exercise price of the Cardinal Warrant, or
by a so-called cashless or net exercise, which is permitted in the form of
Cardinal Warrant, may be an exempt security within the meaning of Section
3(a)(9) of the Securities Act and therefore, exempt from the registration
requirements of the Securities Act. By virtue of the initial registration of
the issuance of the Cardinal Warrants under the Securities Act, Cardinal
believes that Cardinal Common Shares issued upon the exercise of a Cardinal
Warrant pursuant to the exemption in Section 3(a)(9) of the Securities Act will
be freely tradeable, except that Cardinal Common Shares received by persons who
are "affiliates" (as such term is defined under the Securities Act) of Cardinal
or MediQual prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act
described in the Proxy Statement/Prospectus under the caption "The
Merger-Federal Securities Law Consequences."
The exercise of a Cardinal Warrant by the payment of the cash
exercise price will generally only be exempt if it meets the requirements for
the exemption provided in Section 4(2) of
<PAGE> 4
The Holders of Warrants to Purchase MediQual Common Stock
_________, 1997
Page 4
the Securities Act which involves the issuance of Cardinal Common Shares in a
transaction not involving a public offering. The availability of this exemption
or any other exemption will depend on the facts and circumstances existing at
the time of the proposed exercise and there can be no assurance that this
exemption will be available at the time a holder of a Cardinal Warrant wishes to
exercise, or at all. Any Cardinal Common Shares issued upon the exercise of
Cardinal Warrants pursuant to Section 4(2) of the Securities Act will be
"restricted securities" within the meaning of Rule 144 under the Act and may not
be publicly resold by the holder for a period of one year following the time of
exercise of the Cardinal Warrant. Beginning one year after the time of exercise
of the Cardinal Warrant, the Cardinal Common Shares acquired upon the exercise
of the warrant pursuant to such exemption may be sold subject to the manner of
sale and volume limitations of Rule 144 described in "The Merger--Federal
Securities Law Consequences" in the Proxy Statement/Prospectus. Holders of
MediQual Warrants who exercise all of their MediQual Warrants prior to the
Effective Time and, therefore, receive Cardinal Common Shares in the Merger,
will not be subject to the foregoing limitations on the exercise of Cardinal
Warrants, although 6.5% of these shares will be placed into escrow at the
Effective Time.
You may elect to exercise your MediQual Warrant for cash,
exercise your Warrant on a "net exercise" basis, contingent upon the completion
of the Merger, or agree to exchange your Warrant for a Cardinal Warrant,
regardless of whether or not you elect to vote or have your vote as a MediQual
Stockholder represented at the special meeting of the stockholders of MediQual
at which the Merger will be considered, and regardless of whether or not such
vote is cast in favor of or against the proposed Merger.
To exchange your MediQual Warrant for a Cardinal Warrant,
complete the Contingent Agreement to Exchange Warrant included as Exhibit C to
this letter and return it, together with your Warrant Certificates to William C.
Price at the address set forth above.
Holders of MediQual Warrants should consult with their own
tax advisors with respect to the tax consequences of exercising their MediQual
Warrants or exchanging their MediQual Warrants for Cardinal Warrants. The
exercise of MediQual Warrants prior to the Merger, and the issuance of Cardinal
Common Shares in the Merger, are expected to be tax-free events to the MediQual
Warrant holders. See "Certain Federal Income Tax Consequences" in the
accompanying Proxy Statement/ Prospectus. However, holders of MediQual Warrants
are cautioned that under current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and current regulations thereunder, the
issuance of Cardinal Warrants in exchange for MediQual Warrants may be a
taxable transaction, even if the Merger constitutes a tax-free reorganization
within the meaning of Section 368 of the Code.
If you have any questions relating to your MediQual Warrants,
please call Mr. Price at Mediqual at (508) 366-6365, extension 2338. Questions
relating to the Cardinal Warrants should be directed to Paul S. Williams,
Cardinal's Assistant General Counsel, at (614) 717-7768.
MEDIQUAL SYSTEMS, INC.
By:
--------------------------------
CARDINAL HEALTH, INC.
By:
-------------------------------
<PAGE> 5
The Holders of Warrants to Purchase MediQual Common Stock
_________, 1997
Page 5
<PAGE> 6
Exhibit A
---------
NOTICE OF CONTINGENT NET ISSUE EXERCISE AND WAIVER
MEDIQUAL SYSTEMS, INC.
The undersigned (the "Warrant Holder") hereby irrevocably (i) elects to
exercise in full, by means of net exercise as provided in Section 2(a) of the
warrant (the "Warrant") accompanying this Notice of Contingent Net Issue
Exercise and Waiver (the "Notice"), the right represented by the Warrant to
purchase thereunder shares (the "Issued Shares") of common stock of MediQual
Systems, Inc. ("MediQual"), such exercise to be effective immediately prior to
and contingent upon the closing of the proposed merger (the "Merger") of
MediQual and a wholly-owned subsidiary of Cardinal Health, Inc. ("Cardinal") as
contemplated by the Amended and Restated Agreement and Plan of Merger, dated as
of July 7, 1997, by and among MediQual, Cardinal and a wholly-owned subsidiary
of Cardinal (the "Merger Agreement"), and (ii) waives the undersigned's rights
under Section 9(b) of the Warrant to receive notice of the record date of the
meeting of the shareholders of MediQual at which the Merger will be considered.
In the event that the Merger does not close prior to November 30, 1997, this
Notice shall be deemed null and void and the Warrant shall be promptly returned
to the Warrant Holder.
The Warrant Holder understands that, upon the closing of the Merger, it
will receive in lieu of shares of common stock of MediQual that number of
Cardinal common shares (determined pursuant to the provisions of the
Merger Agreement) otherwise issuable in the Merger in exchange for the MediQual
common stock for which the warrant is exercisable MINUS that number of Cardinal
common shares equal in value (determined in the same fashion) to the
aggregate exercise price of the Warrant.
The Warrant Holder further understands that, by exercising the Warrant
in this manner, approximately six and one half percent (6.5%) of the Cardinal
common shares issuable to the undersigned in exchange for the Issued Shares
as a result of the Merger (the "Escrowed Shares") will be required pursuant to
the Merger Agreement to be deposited into an escrow fund to be held for a
period of time not to exceed one year after the completion of the Merger
(except to the extent such escrow fund is subject to claims by Cardinal or the
MediQual Stockholders Representative appointed pursuant to the Merger
Agreement). The Warrant Holder acknowledges that this escrow fund will be used
to satisfy certain indemnification obligations of all of the stockholders with
respect to representations and warranties regarding MediQual's business made in
the Merger Agreement and pay the expenses of Eric A. Kriss as the MediQual
Stockholders Representative and that THERE CAN BE NO ASSURANCE THAT ANY OR ALL
OF THE ESCROWED SHARES WILL EVER BE RETURNED TO THE WARRANT HOLDER.
Simultaneously with, or promptly after, the closing of the Merger,
please (i) issue a certificate or certificates issued in the name of the
Warrant Holder listed below for that number of Cardinal common shares issuable
in exchange for the Issued Shares in the Merger (less the Escrowed Shares) as
described above, (ii) provide the Warrant Holder with written confirmation of
the number of Cardinal common shares held as Escrowed Shares pursuant to the
Merger Agreement, and (iii) pay any cash for any fractional share to the
Warrant Holder, with all of the foregoing to be sent to the Warrant Holder
at the address listed below:
Name:
---------------------------------------------
Address:
---------------------------------------------
Signature*:
---------------------------------------------
Social Security No.:
---------------------------------------------
Date:
---------------------------------------------
*Note: The above signature should correspond exactly with the name(s) on the
first page of the Warrant.
<PAGE> 7
EXHIBIT B
---------
WARRANT
-------
WARRANT NO. W-__ _____ WARRANTS
SHARES ARE NOT REQUIRED TO BE ISSUED UPON EXERCISE
OF THIS WARRANT AND ANY SHARES SO ISSUED MAY NOT BE
TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 (THE "ACT") OR (ii) UPON FIRST FURNISHING TO THE
COMPANY AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH ISSUANCE OR TRANSFER IS NOT IN
VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE
ACT OR ANY APPLICABLE STATE SECURITIES LAW.
CARDINAL HEALTH, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, __________________________ or registered assigns under
Section 8 hereof (the "Holder") is the owner of _____ warrants specified above
(the "Warrants") each of which entitles the Holder thereof to purchase one (1)
fully paid and nonassessable share of the Common Shares, without par value
("Common Shares"), of Cardinal Health, Inc., a corporation organized under the
laws of Ohio (the "Company"), or such other number of shares as may be
determined pursuant to an adjustment in accordance with Section 4 hereof, at the
price per share set forth in Section 4 hereof, subject to adjustment from time
to time pursuant to Section 4 hereof (the "Warrant Price") and subject to the
provisions and upon the terms and conditions set forth herein.
1. Term of Warrant.
----------------
Subject to Section 7 hereof, each Warrant is exercisable, at the option
of the Holder, at any time during the period commencing on the date hereof and
ending at 5:00 p.m. Eastern time on April 27, 2003, or if such date shall, in
the State of Ohio, be a holiday or a day on which banks are authorized to close,
then 5:00 p.m. Eastern time the next following day which in the State of Ohio is
not a holiday or a day on which banks are authorized to close.
2. Method of Exercise and Payment; Issuance of New Warrant
-------------------------------------------------------
Certificate; Contingent Exercise.
---------------------------------
(a) Subject to Sections 1 and 7 hereof, each Warrant may be
exercised by the Holder hereof by the surrender of this Warrant Certificate
(with the notice of exercise form attached hereto as EXHIBIT 1 duly executed) at
the principal office of the Company and by the payment to the Company of (i)
cash or a certified check or a wire transfer in an amount equal to the then
applicable Warrant Price multiplied by the number of Common Shares then being
<PAGE> 8
purchased or (ii) that number of Common Shares of the Company having a fair
market value (as defined below) equal to the then applicable Warrant Price
multiplied by the number of Common Shares then being purchased. In the
alternative, the Holder hereof may exercise its right to purchase some or all of
the Common Shares pursuant to this Warrant Certificate, on a net basis, such
that, without the exchange of any funds, the Holder hereof receives that number
of Common Shares subscribed to pursuant to this Warrant Certificate less that
number of Common Shares having an aggregate fair market value (as defined below)
at the time of exercise equal to the aggregate Warrant Price that would
otherwise have been paid by the Holder for the number of Common Shares
subscribed to under this Warrant Certificate. Fair market value shall be the
daily closing price per share on the last business day prior to the day of
exercise. The closing price for each day shall be the last sale price or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Common Shares are listed or admitted
to trading; or, if not listed or admitted to trading on any national securities
exchange, the last quoted price (or, if not so quoted, the average of the last
quoted high bid and low asked prices) in the over-the-counter market, as
reported by NASDAQ or such other system then in use; or, if on any such date no
bids are quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in such
security selected by the Board of Directors of the Company. If on any such date,
no market maker is making a market in the Common Shares, the fair market value
of such security on such date shall be determined reasonably and in good faith
by the Board of Directors of the Company. If the Common Shares are not publicly
held or not so listed or traded, "fair market value" shall mean the fair value
per share determined reasonably and in good faith by the Board of Directors of
the Company.
(b) The Company agrees that the Common Shares so purchased
shall be deemed to be issued to the Holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant Certificate
shall have been surrendered and payment made for such shares as aforesaid. In
the event of any exercise of the rights represented by this Warrant Certificate,
certificates for the Common Shares so purchased shall be delivered to the Holder
hereof within 15 days thereafter and, unless all of the Warrants represented by
this Warrant Certificate have been fully exercised or have expired pursuant to
Section 1 hereof, a new Warrant Certificate representing the Common Shares, if
any, with respect to which the Warrants represented by this Warrant Certificate
shall not then have been exercised, shall also be issued to the Holder hereof
within such 15 day period.
3. Shares Fully Paid; Reservation of Shares.
-----------------------------------------
All Common Shares which may be issued upon the exercise of the Warrants
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of Common Shares to provide for the exercise of
the Warrants.
-2-
<PAGE> 9
4. Warrant Price; Adjustment of Warrant Price and Number of
--------------------------------------------------------
Shares.
-------
The Warrant Price shall be $_____ per Common Share, and the Warrant
Price and the number of Common Shares purchasable upon exercise of the Warrants
shall be subject to adjustment from time to time, as follows:
(a) RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any
reclassification or change of outstanding securities of the class issuable upon
exercise of the Warrants, or in case of any consolidation or merger of the
Company with or into another corporation or entity, other than a consolidation
or merger with another corporation or entity in which the Company is the
continuing corporation and which does not result in any reclassification,
conversion or change of outstanding securities issuable upon exercise of the
Warrants, or in case of any sale of all or substantially all of the assets of
the Company, the holder of the Warrants shall thereafter be entitled to receive
upon the exercise of the Warrants, in lieu of each Common Share theretofore
issuable upon exercise of the Warrants, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification,
conversion, change, consolidation, or merger by a holder of one Common Share.
The provisions of this Section 4(a) shall similarly apply to successive
reclassifications, changes, consolidations, mergers and transfers.
(b) SUBDIVISIONS, COMBINATIONS AND STOCK DIVIDENDS. If the
Company at any time while this Warrant Certificate is outstanding and unexpired
shall subdivide or combine its Common Shares, or shall pay a dividend with
respect to Common Shares payable in, or make any other distribution with respect
to its Common Shares consisting of, Common Shares, then the Warrant Price shall
be adjusted, from and after the date of determination of shareholders entitled
to receive such dividend or distribution, to that price determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of Common Shares outstanding immediately prior to such dividend or distribution
and (ii) the denominator of which shall be the total number of Common Shares
outstanding immediately after such dividend or distribution.
(c) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in
the Warrant Price pursuant to Section 4(b) hereof, the number of Common Shares
purchasable hereunder shall be adjusted, to the next larger whole share, to the
product obtained by multiplying the number of shares purchasable immediately
prior to such adjustment in the Warrant Price by a fraction (i) the numerator of
which shall be the Warrant Price immediately prior to such adjustment and (ii)
the denominator of which shall be the Warrant Price immediately thereafter.
5. Notice of Adjustments.
---------------------
Whenever any Warrant Price shall be adjusted pursuant to Section 4
hereof, the Company shall prepare a certificate signed by its chief financial
officer or treasurer setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, the Warrant Price after giving effect to such
adjustment and the number of Common Shares then purchasable upon exercise of the
Warrants, and shall cause copies of such certificate to be mailed to the Holder
hereof at the address specified in Section 9(c) hereof, or at such other address
as may be provided to the Company in writing by the Holder hereof.
-3-
<PAGE> 10
6. Fractional Shares.
------------------
No fractional Common Shares will be issued in connection with any
exercise hereunder, but in lieu of such fractional shares the Company shall make
a cash payment therefor upon the basis of the Warrant Price then in effect.
7. Compliance with Securities Act.
-------------------------------
The Holder of this Warrant Certificate, by acceptance hereof, agrees
that Common Shares are not required to be issued upon exercise hereby and any
shares so issued may not be transferred except (i) pursuant to an effective
registration statement under the Securities Act of 1933 (the "Act") or (ii) upon
first furnishing to the Company an opinion satisfactory to the Company that such
issuance is not in violation of the registration requirements of the Act or
applicable state securities laws. This Warrant Certificate and all Common Shares
issued upon exercise of the Warrants (unless registered under the Act) shall be
stamped or imprinted with a legend substantially in the following form:
SHARES ARE NOT REQUIRED TO BE ISSUED UPON EXERCISE
OF THIS WARRANT AND ANY SHARES SO ISSUED MAY NOT BE
TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 (THE "ACT") OR (ii) UPON FIRST FURNISHING TO
THE COMPANY AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH ISSUANCE OR TRANSFER IS NOT IN
VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT
OR ANY APPLICABLE STATE SECURITIES LAW.
8. Transfer.
---------
The Warrants and all rights under this Warrant Certificate are
transferable, in whole or in part, at the principal office of the Company by the
Holder hereof, in person or by its duly authorized attorney, upon surrender of
this Warrant Certificate properly endorsed (with the instrument of transfer form
attached hereto as EXHIBIT 2 duly executed). Each Holder of this Warrant
Certificate, by taking or holding the same, consents and agrees that this
Warrant Certificate, when endorsed in blank, shall be deemed negotiable as
against the Holder; provided, however, that the last Holder of this Warrant
Certificate as registered on the books of the Company may be treated by the
Company and all other persons dealing with this Warrant Certificate as the
absolute owner of the Warrants for any purposes and as the person entitled to
exercise the rights represented by this Warrant Certificate or to transfer the
Warrants on the books of the Company, any notice to the contrary
notwithstanding, unless and until such Holder seeks to transfer registered
ownership of the Warrants on the books of the Company and such transfer is
effected.
-4-
<PAGE> 11
9. Miscellaneous.
--------------
(a) REPLACEMENT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement or bond reasonably satisfactory in form and
amount to the Company or, in the case of mutilation, on surrender and
cancellation of this Warrant Certificate, the Company, at its expense, will
execute and deliver, in lieu of this Warrant Certificate, a new warrant
certificate of like tenor.
(b) Notice of Capital Changes. In case:
(i) the Company shall declare any dividend or
distribution payable to the holders of Common Shares and payable in, or
consisting of, Common Shares;
(ii) there shall be any capital reorganization or
reclassification of the capital of the Company, or consolidation or
merger of the Company with or into another corporation or entity, other
than a consolidation or merger with another corporation or entity in
which the Company is the continuing corporation, or sale of all or
substantially all of its assets to, another corporation or business
organization; or
(iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company
then, in any one or more of said cases, the Company shall give the Holder hereof
written notice of such event, in the manner set forth in Section 9(c), below at
the same time notice thereof is provided to the Company's shareholders.
(c) NOTICE. All notices, requests, payments, instructions or
other documents to be given hereunder shall be in writing or by written
telecommunication, and shall be deemed to have been duly given if (i) delivered
personally (effective upon delivery), (ii) mailed by certified mail, return
receipt requested, postage prepaid (effective five business days after
dispatch), (iii) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day), or (iv)
sent by telecopier followed within 24 hours by confirmation by one of the
foregoing methods (effective upon receipt of the telecopy in complete, readable
form), addressed, if to the Company, at its principal office to the attention of
its General Counsel, and, if to the Holder hereof, at its address as set forth
in the Company's books and records or at such other address as the Holder hereof
may have provided to the Company pursuant to this Section 9(c).
(d) NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, 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 Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant Certificate.
<PAGE> 12
(e) GOVERNING LAW. This Warrant Certificate shall be governed
by and construed in accordance with the laws of the State of Ohio.
This Warrant Certificate has been executed as of this _____ day of
_____________, 1997.
CARDINAL HEALTH, INC.
By:
----------------------------
Name:
-----------------------
Title:
----------------------
-6-
<PAGE> 13
EXHIBIT 1
---------
NOTICE OF EXERCISE
------------------
TO: CARDINAL HEALTH, INC.
1. The undersigned hereby elects to purchase ___________________ Common
Shares of Cardinal Health, Inc. pursuant to the terms of the attached Warrant.
2. Please issue a certificate or certificates representing said Common
Shares in the name of the undersigned or in such other name as is specified
below:
-------------------------
(Name)
-------------------------
-------------------------
(Address)
Dated:
------------------------------
Signature
<PAGE> 14
EXHIBIT 2
---------
FORM OF ASSIGNMENT
------------------
For value received, the undersigned hereby sells, assigns and transfers
unto _____________ the rights represented by the within Warrant Certificate to
purchase __________ Common Shares of Cardinal Health, Inc. to which the within
Warrant Certificate relates and appoints _________ to transfer such rights on
the books of Cardinal Health, Inc. with full power of substitution in the
premises.
Dated:
----------------------- --------------------------------
Signature
<PAGE> 15
Exhibit C
---------
CONTINGENT AGREEMENT TO EXCHANGE WARRANT AND WAIVER
MEDIQUAL SYSTEMS, INC.
The undersigned (the "Warrant Holder"), hereby irrevocably (i) agrees
with MediQual Systems, Inc. ("MediQual") and Cardinal Health, Inc. ("Cardinal"),
that it is hereby surrendering the warrant (the "Warrant") to purchase common
stock, $.01 par value, of MediQual ("MediQual Stock") attached to this
Contingent Agreement to Exchange Warrant and Waiver to MediQual and Cardinal to
be exchanged, simultaneously with and contingent upon, the closing of the
proposed merger (the "Merger") of MediQual and a wholly-owned subsidiary of
Cardinal ("Subcorp") as contemplated by the Amended and Restated Agreement and
Plan of Merger, dated as of July 7, 1997, by and among MediQual, Cardinal and
Subcorp (the "Merger Agreement"), for a warrant (the "Exchange Warrant") to
purchase that number of common shares, without par value, of Cardinal ("Cardinal
Common Shares") which would be issuable in the Merger in exchange for the shares
of MediQual Stock otherwise issuable upon exercise of the Warrant, and (ii)
waives the undersigned's rights under Section 9(b) of the Warrant to receive
notice of the record date of the meeting of the stockholders of MediQual at
which the Merger will be considered. The undersigned acknowledges that the form
of the Exchange Warrant will not be identical to the form of the Warrant in
that, among other things, the Exchange Warrant will only be exercisable after
the effective time of the Merger to the extent that the shares issuable upon
exercise of the Exchange Warrant have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), or Cardinal is delivered an opinion
of counsel satisfactory to Cardinal that the issuance of Cardinal Common Shares
upon the exercise of the Exchange Warrant is not in violation of the
registration requirements of the Securities Act or any applicable state
securities law. The aggregate exercise price for all Cardinal Common
Shares issuable upon exercise of the Exchange Warrant shall be the same as the
aggregate exercise price for all shares of MediQual Stock issuable upon exercise
of the Warrant, and the per share exercise price shall be adjusted accordingly.
MediQual shall hold the Warrant and this Agreement pending the closing of the
Merger. In the event that the Merger does not close on or prior to November 30,
1997, this Contingent Agreement to Exchange Warrant and Waiver shall be deemed
null and void and the Warrant shall be promptly returned to the Warrant Holder.
Simultaneously with, or promptly after, the closing of the Merger,
Cardinal shall issue in the name of the Warrant Holder listed below a warrant
certificate or certificates, and shall send such Exchange Warrant to the
Warrant Holder at the address listed below:
Name:
-------------------------------
Address:
-------------------------------
Signature*:
-------------------------------
Social Security No.:
-------------------------------
Date:
-------------------------------
*Note: The above signature should correspond exactly with the name(s) on the
first page of the Warrant.
<PAGE> 16
-2-
Agreed and accepted:
CARDINAL HEALTH, INC. MEDIQUAL SYSTEMS, INC.
By: By:
--------------------- ----------------------
Title: Title:
