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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
--------------------- ----------------------
Commission file number 333-23287
HEALTHCARE RECOVERIES, INC.,
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 61-1141758
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
1400 Watterson Tower, Louisville, Kentucky 40128
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(502) 454-1340
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Not Applicable
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check X whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
YES X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 11, 1997, was as follows: 11,470,000 shares of
Common Stock, $.001 par value.
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HEALTHCARE RECOVERIES, INC.
FORM 10-Q
June 30, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996 . . . . . . . . . 1
Condensed Statements of Operations for the three months and six months
ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Part II: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submissions of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
HEALTHCARE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,582 $ 53
Restricted cash 13,904 18,755
Accounts receivable, less allowance for doubtful accounts
of $104 - June 30, 1997 and $100 - December 31, 1996 2,003 1,926
Other current assets 1,302 275
-------- --------
Total current assets 37,791 21,009
-------- --------
Property and equipment, at cost:
Furniture and fixtures 1,734 1,713
Office equipment 989 975
Computer equipment 3,389 3,076
Leasehold improvements 625 598
-------- --------
6,737 6,362
Accumulated depreciation and amortization (4,347) (3,865)
-------- --------
2,390 2,497
-------- --------
Other assets 1,519 463
-------- --------
Total assets $ 41,700 $ 23,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 931 $ 586
Accrued expenses 4,736 3,740
Funds due clients 10,987 14,953
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Total current liabilities 16,654 19,279
Other liabilities 1,034 580
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Total liabilities 17,688 19,859
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Contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized
no shares issued or outstanding
Common stock, $.001 par, 20,000,000 shares authorized, 11,470,000 and
9,800,000 shares issued and outstanding, respectively 11 10
Contributed capital in excess of par value of common stock 22,042
Equity funding from Medaphis Corporation 182
Retained earnings 1,959 3,918
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Total stockholders' equity 24,012 4,110
------- -------
Total liabilities and stockholders' equity $41,700 $23,969
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
1
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE RESULTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Subrogation $ 9,324 $ 7,680 $18,240 $14,356
Other revenues 970 970
------- ------- ------- -------
Total revenues 9,324 8,650 18,240 15,326
Cost of services 4,359 3,703 8,685 7,058
------- ------- ------- -------
Gross profit 4,965 4,947 9,555 8,268
Support expenses 2,450 2,145 4,787 4,015
Non-recurring compensation charge 2,848 2,848
------- ------- ------- -------
Operating income (loss) (333) 2,802 1,920 4,253
Interest income 215 132 329 225
------- ------- ------- -------
Income (loss) before income taxes (118) 2,934 2,249 4,478
Provision for income taxes 1,146 1,231 2,137 1,878
------- ------- ------- -------
Net income (loss) $(1,264) $ 1,703 $ 112 $ 2,600
======= ======= ======= =======
Earnings (loss) per common and common
equivalent share $ (0.12) $ 0.17 $ 0.01 $ 0.27
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
2
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operations:
Net income $ 112 $ 2,600
Adjustment to reconcile net income to net cash provided by
(used in) operations:
Non-recurring compensation charge 2,848
Depreciation and amortization 482 405
Deferred income taxes (612) (495)
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash 4,851 (957)
Increase in accounts receivable (77) (545)
Increase in other current assets (627) (1,351)
(Increase) decrease in other assets (970) 14
Increase (decrease) in trade accounts payable 345 (134)
Increase in accrued expenses 1,123 477
Increase (decrease) in funds due clients (3,966) 860
Increase in other liabilities 454 107
-------- --------
Net cash provided by operations 3,963 981
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (375) (838)
-------- --------
Net cash used in investing activities (375) (838)
-------- --------
Cash flows from financing activities:
Issuance of common stock 19,194
Distributions to Medaphis Corporation (2,253) (76)
-------- --------
Net cash provided by (used in) financing activities 16,941 (76)
-------- --------
Net increase in cash and cash equivalents 20,529 67
Cash and cash equivalents, beginning of period 53 --
-------- --------
Cash and cash equivalents, end of period $ 20,582 $ 67
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENT, CONTINUED
(UNAUDITED)
1. BASIS OF PRESENTATION
Healthcare Recoveries, Inc. (the "Company") was incorporated on June
30, 1988 under the laws of the State of Delaware. The Company's services
comprise the complete outsourcing of the identification, investigation and
recovery of accident-related medical benefits incurred by its clients for which
other persons or entities have primary responsibility. The rights of the
Company's clients to recover the value of these medical benefits arise by law or
contract, are known generally as the right of subrogation, and are generally
paid from the proceeds of liability or workers' compensation insurance.
The Company operated as an independent entity until August 28, 1995
when it was merged with and into a subsidiary of Medaphis Corporation
("Medaphis") in a transaction accounted for as a pooling of interests. On May
16, 1997 the Company amended its Certificate of Incorporation to authorize
2,000,000 shares of $.001 par value preferred stock and 20,000,000 shares of
$.001 par value common stock of which 9,800,000 were issued and outstanding
after a 98,000-for-1 common stock split which the Company declared to be
effective immediately prior the public offering (the "Offering") of the
Company's Common Stock by Medaphis on May 21, 1997. In addition to the shares
sold by Medaphis, the Company issued 200,000 shares of common stock to certain
members of the Company's management as a divestiture bonus (the "Divestiture
Bonus") and sold 1,470,000 shares of common stock to the underwriters of the
Offering.
The accompanying financial statements are presented in a condensed
format and consequently do not include all of the disclosures normally required
by generally accepted accounting principles or those normally made in the
Company's financial statements. Accordingly, for further information, the reader
of this Form 10-Q may wish to refer to the Company's audited financial
statements as of and for the year ended December 31, 1996, contained in the
Company's Registration Statement on Form S-1.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.
4
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENT, CONTINUED
(UNAUDITED)
2. CONTINGENCIES
The Company is engaged in the business of identifying and recovering
subrogation and related claims of its clients, many of which arise in the
context of personal injury lawsuits. As such, the Company operates in a
litigation-intensive environment. The Company has, from time to time, been, and
in the future expects to be, named as a party in litigation incidental to its
business operations. To date, the Company has not been involved in any
litigation which has had a material adverse effect upon the Company, but there
can be no assurance that pending litigation or future litigation will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
3. NON-RECURRING COMPENSATION CHARGE
The accompanying condensed statements of operations for the three and
six months ended June 30, 1997, include a non-recurring, non-cash compensation
charge (not deductible for income tax purposes) of approximately $2.8 million
($.28 per share) related to the Divestiture Bonus.
4. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) per common and common equivalent share were computed
based on the weighted-average number of common and common equivalent shares
outstanding during the periods presented after giving retroactive effect to the
98,000-for-1 common stock split effective immediately prior to the Offering.
Shares used in computing earnings (loss) per common and common equivalent share
were 10,243,000, 9,800,000, 10,043,000, and 9,800,000, for the three months and
six months ended June 30, 1997 and 1996, respectively. Common equivalent shares
were not used in computing earnings per share for three months ended June 30,
1997 due to their anti-dilutive nature. Earnings (loss) per common and common
equivalent share do not give retroactive effect to the divestiture bonus granted
in connection with the Offering or stock options on 550,000 shares granted to
members of the Company's executive management and to non-employee directors at
the time of the Offering.
5
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENT
(UNAUDITED)
5. FUTURE CHANGES IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and will require presentation of both basic
and fully diluted earnings per share for both interim and annual periods ending
after December 31, 1997. Basic and fully diluted earnings per share amounts
computed under the provisions of SFAS 128 are the same as earnings (loss) per
common and common equivalent share as reported in the accompanying statements of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The provisions of SFAS No. 130 will be effective for
fiscal years beginning after December 15, 1997.
6
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Healthcare Recoveries, Inc. (hereinafter referred to as "HRI" or the
"Company") provides insurance subrogation and related recovery services to the
private healthcare payor industry. HRI services comprise the complete
outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by its clients for which other
persons or entities have primary responsibility. The rights of HRI's clients to
recover the value of these medical benefits, known generally as the right of
subrogation, arise by law or contract, and are generally paid from the proceeds
of liability or workers' compensation insurance.
For a typical new client, it takes three to six months from the
contract signing (when the lives are "sold") to complete the construction of
electronic data interfaces necessary for the Company to begin service; at this
point, the new client is considered "installed." During the installation period,
the Company must also hire and train qualified staff necessary to provide
contracted services. After installation, the client transmits data to HRI from
which it creates an inventory of backlog (i.e., gross recoveries in process.)
Backlog is the total dollar amount of potentially recoverable claims
that the Company is pursuing on behalf of its clients at any point in time.
These claims are gross figures, prior to estimates of claim settlement and
rejection. Backlog increases when the Company opens new files of potentially
recoverable claims and decreases when files of claims are recovered (or, after
further investigation, determined to be non-recoverable). Recoveries have
historically been produced from the backlog in a generally predictable cycle,
because any group of potential recoveries that was sufficiently large in
number to display statistically significant characteristics and that originated
from a defined time period, tended to produce recovery results comparable to
those of other groups having similar characteristics. Although some recoveries
will be made during the first year of service, the average time to make a
recovery is 18 to 24 months, with substantially all recoveries being made by
the sixth year. Backlog for a client will range in age from newly identified
potential recoveries to potential recoveries that are in the late stages of the
recovery
7
<PAGE> 10
process. As a result of this cycle, approximately six years from the date of
installation, a client's annual amounts of subrogation recoveries as a percent
of a client's backlog will be generally constant, except for variations due to
the number of installed lives for the client and changes in the costs of medical
services.
Because backlog is based on the judgment of Company personnel,
historical performance may not be indicative of future results and the actual
amount of future subrogation revenues to be derived from backlog could differ
significantly from historical experience. Further, the recovery characteristics
of backlog in future years may be different from historical experience for a
variety of reasons.
The Company is paid a contingency fee from the amount of recoveries
obtained from backlog on behalf of its clients. The Company's revenues are a
function of subrogation recoveries and effective fee rates. Effective fee rates
vary depending on the mix between recoveries and client fee schedules. The fee
schedules for each client are separately negotiated and reflect the Company's
standard fee rates, the services to be provided and anticipated volume of
services. The Company grants volume discounts and negotiates a lower fee when it
assumes backlog from a client because some of the recovery work will have
already been completed by the client.
HRI was incorporated on June 30, 1988 under the laws of Delaware and
operated as an independent entity until August 28, 1995, when the Company was
acquired by Medaphis Corporation ("Medaphis") in a transaction valued at
approximately $79.1 million. Medaphis sold HRI in May 1997, as part of its
restructuring plan to divest non-core businesses. In anticipation of the sale of
HRI by Medaphis, certain revisions were made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. The Company paid these previously
allocated costs directly during the six months ended June 30, 1997. The
allocation of these costs was based principally on specific identification, the
ratio of the number of Company employees to total Medaphis employees or the
ratio of total Company assets to total Medaphis assets, as appropriate. These
costs include executive salaries, employee benefits, insurance, payroll
processing and other general and administrative expenses. Management believes
that, in the aggregate, these costs reflect the fair value of services rendered
by Medaphis and that it would have incurred similar costs as an independent
company.
8
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Management does not expect a significant change in the costs incurred
by the Company as a result of operating on a stand-alone basis, except for the
non-recurring, non-cash compensation charge incurred as a result of the
divestiture bonus, consisting of 200,000 shares of the Company's common stock
granted to members of executive management and certain other employees of the
Company upon the sale of HRI by Medaphis.
9
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The following table present certain key operating indicators for the
Company for the periods indicated:
KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Cumulative Lives Sold, Beginning of Period (1) 30.9 26.2 29.5 24.2
Lives from Existing Client Growth 0.9 0.3 0.9 0.2
Lives Added From Contracts with Existing Clients 1.0 0.3 2.3 1.5
Lives Added From Contracts with New Clients 1.5 0.7 1.6 1.6
------ ------ ------ ------
Cumulative Lives Sold, End of Period 34.3 27.5 34.3 27.5
====== ====== ====== ======
Lives Installed (1).................................. 32.7 26.5 32.7 26.5
Backlog (2).......................................... $599.6 $498.6 $599.6 $498.6
Subrogation Recoveries (3)........................... $ 34.1 $ 27.8 $ 67.8 $ 52.1
Throughput (4)....................................... 5.8% 5.9% 12.0% 12.1%
Effective Fee Rate................................... 27.3% 27.6% 26.9% 27.5%
Subrogation Revenues (3)............................. $ 9.3 $ 7.7 $ 18.2 $ 14.4
Employees:...........................................
Direct Operations.............................. 326 308 326 308
Support........................................ 78 74 78 74
------ ------ ------ ------
Total Employees........................... 404 382 404 382
====== ====== ====== ======
</TABLE>
(1) Includes reductions to prior period information with respect to the number
of lives reported by a client to HRI, and with respect to certain lives as
to which HRI provides service, on a limited short-term basis, under a
non-standard fee arrangement.
(2) Backlog (i.e., gross recoveries in process) represents the total dollar
amount of potentially recoverable claims that the Company is pursuing on
behalf of clients at any point in time.
(3) Subrogation recoveries and subrogation revenues for the three and six
months ended June 30, 1996 exclude approximately $8.2 million of
recoveries in connection with the breast implant litigation settlement and
$970,000 of other revenue, derived from these recoveries, respectively.
(4) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period.
10
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Results of Operations
The following table presents, for the periods indicated, certain items
in the statements of operations as a percentage of subrogation revenue.
STATEMENTS OF OPERATIONS AS A PERCENTAGE OF SUBROGATION REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997(1) 1996(2) 1997(1) 1996(2)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Subrogation Revenues................. 100.0% 100.0% 100.0% 100.0%
Cost of Services .................... 46.8 48.2 47.6 49.2
Support Expenses .................... 26.3 27.9 26.2 28.0
Operating Income .................... 27.0 23.9 26.1 22.9
Income Before Income Taxes........... 29.3 25.6 27.9 24.4
Net Income .......................... 17.0 14.9 16.2 14.2
</TABLE>
(1) Statements of Operations for the three and six months ended June 30,
1997 exclude the $2.8 million non-cash, non-recurring compensation
charge (not deductible for income tax purposes) related to Medaphis
Corporation's divestiture of HRI.
(2) Statements of Operations for the three and six months ended June 30,
1996 exclude $970,000 ($563,000 after tax) of non-recurring
revenue from the silicone breast implant settlement.
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1996
Revenues. Total revenues increased 8% to $9.3 million in the second
quarter of 1997 as compared with $8.7 million in the second quarter of 1996,
and increased 19% to $18.2 million in the six-month period ended June 30, 1997
as compared with $15.3 million in the same period in 1996. In the three and
six-month periods ended June 30, 1996, total revenues include $970,000 of
non-recurring revenue derived from recoveries in the silicone breast implant
settlement. Growth in subrogation revenues occurred primarily because of
increased subrogation recoveries from $27.8 million for the three months ended
June 30, 1996 to $34.1 million for the three months ended June 30, 1997, a 23%
increase, and from $52.1 million for the six months ended June 30, 1996 to $67.8
million for the same period in 1997, a 30% increase.
The increase in total subrogation recoveries was due primarily to growth
in backlog (i.e., gross recoveries in process), which in turn grew primarily
because of an increase in the number of lives installed. Backlog increased 20%
to $599.6 million at June 30, 1997 from $498.6 million at June 30, 1996. The
Company was able to obtain subrogation recoveries at a throughput rate of 5.8%
of backlog for the three months ended June 30, 1997 and 5.9% for the same period
in 1996.
11
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Cost of Services. Cost of services for the second quarter of 1997 was
$4.4 million, an increase of 17.7% from $3.7 million in the second quarter of
1996, and was $8.7 million for the six months ended June 30, 1997, an increase
of 23.1% from $7.1 million in the same period a year ago. The increase in cost
of services for the three, and six-month periods ended June 30, 1997 was a
result of installing additional lives which require increased processing
activities and correspondingly led to increased staffing and investigation cost.
As a percentage of subrogation revenues (recurring revenue), cost of services
for the second quarter of 1997 was 46.8%, a decrease from 48.2% in the second
quarter of 1996, and for the six-month period ended June 30, 1997 was 47.6%, a
decrease from 49.2% for the same period a year ago. The decline in cost of
services as a percentage of subrogation revenues for the three, and six-month
periods ended June 30, 1997 was a result of productivity improvements.
Support Expenses. Support expenses increased 14%, to $2.4 million, for
the three months ended June 30, 1997, from $2.1 million for the same period in
1996, and 19%, to $4.8 million, for the six-months ended June 30, 1997, from
$4.0 million in 1996. Support expenses decreased as a percent of subrogation
revenue from 28% for the three, and six months ended June 30, 1996 to 26% for
the same periods in 1997. The decline in support expenses as a percentage of
subrogation revenues resulted from improved economies of scale in the support
functions.
Compensation Charge. In connection with the divestiture of the Company by
Medaphis in May 1997, the Company incurred a one-time $2.8 million non-cash,
compensation charge (not deductible for income tax purposes) from the issuance
by the Company of 200,000 shares of common stock to the Company's management as
a bonus for the successful completion of the sale of the Company by Medaphis.
These shares represent 2% of the 10,000,000 shares of common stock outstanding
after the initial public offering that closed on May 28, 1997 and 1.7% of the
11,470,000 shares of common stock outstanding after the sale of 1,470,000 newly
issued shares upon exercise of the underwriters' over-allotment option.
Interest Income. Interest income totaled $215,000 and $132,000 for the
three months ended June 30, 1997 and 1996, respectively, and $329,000 and
$225,000 for the six months ended June
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30, 1997 and 1996, respectively. The increase in interest income was a result of
interest income earned on $19.2 million of proceeds from the issuance by the
Company of 1,470,000 shares of common stock upon the exercise of the
underwriters' over-allotment option.
Tax. Income taxes were 41.9% of pre-tax income excluding the non-cash,
non-recurring compensation charge for the three and six months ended June 30,
1997 and 1996. The effective tax rates exceeded the U.S. statutory tax rate
primarily due to the impact of state and local taxes and non-deductible
expenses.
Net Income. Recurring net income excludes a $2.8 million ($.28 per share)
non-recurring compensation charge in the second quarter of 1997 and $563,000
($.06 per share, net of tax) of net income from the implant settlement in the
second quarter of 1996. Recurring net income for the three months ended June 30,
1997 increased $0.4 million, or 39%, to $1.6 million, or $0.15 per share, from
$1.1 million, or $0.12 per share, in the comparable period of 1996 and for the
six months ended June 30, 1997 increased $0.9 million, or 45%, to $3.0 million,
or $0.29 per share, from $2.0 million, or $0.21 per share, in the same period in
1996. Net loss as reported for the three months ended June 30, 1997 was $1.3
million, or $0.12 per share, compared to net income of $1.7 million, or $0.17
per share, for the same period in 1996. Net income as reported for the six
months ended June 30, 1997 was $112,000, or $0.01 per share, compared to $2.6
million, or $0.27 per share, for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the six months ended June
30,1997 and 1996, are summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operations ........................... $ 3,963 $ 981
Net cash used in investing activities ..................... (375) (838)
Net cash provided by (used in) financing activities ....... 16,941 (76)
Net increase in cash and cash equivalents ................. $20,529 $ 67
</TABLE>
13
<PAGE> 16
The Company had working capital of $21.1 million at June 30, 1997,
including cash and cash equivalents of $20.6 million, compared with working
capital of $1.7 million at December 31, 1996. The increase is primarily
attributable to the $19.2 million of proceeds received in connection with the
exercise of the underwriters' over-allotment option.
Net cash provided by operations increased $3.0 million for the six
months ended June 30, 1997, primarily as a result of increased net income
excluding the non-cash non-recurring compensation charge, timing of recurring
cash receipts, disbursements related to accrued expenses and subrogation
recoveries.
Net cash used in investing activities primarily reflects the Company's
capital expenditures for ongoing facility expansion and system enhancements,
including computer hardware, to meet the requirements of the Company's growing
revenue base.
The Company anticipates that capital expenditures for the year ending
December 31, 1997, will be approximately $2.9 million for facility expansion,
computer hardware and the planned upgrade of the subrogation system. Over the
next 24 to 36 months, the Company anticipates total expenditures for the
upgrade of approximately $3.2 million, of which $2.6 million to be spent on
hardware and third-party software will be capitalized.
Net cash provided by financing activities for the six months ended June
30, 1997 reflects $19.2 million in proceeds received in connection with the
exercise of the underwriters' over-allotment option. Net cash used in
financing activities for the six months ended June 30, 1996 reflected the
Company's ongoing distributions to Medaphis prior to the sale of the Company by
Medaphis.
In May 1997, the Company executed a $10.0 million unsecured revolving
Line of Credit ("Line of Credit") for working capital purposes with National
City Bank of Kentucky (the "Bank"). The interest rate on outstanding
indebtedness, at the Company's option will be either (i) the greater of the
Bank's prime rate or the effective Federal Funds rate plus 0.5% or (ii) the
LIBOR plus 2.25%. The maturity date for all outstanding indebtedness under the
Line of Credit will be two years from May 22, 1997. The agreement contains
customary covenants, including covenants to maintain certain minimum interest
coverage and leverage ratios and a minimum level of net worth. As of June 30,
14
<PAGE> 17
1997, the Company was in compliance with the covenants and there were no
outstanding draws on the Line of Credit.
By contract, with respect to its standard recovery services, the
Company disburses recoveries to its clients on or before the 15th day of the
month following the month in which recoveries are made. At June 30, 1997 and
December 31, 1996, the Company reported on its balance sheet, as a current
asset, restricted cash of $13.9 million and $18.8 million respectively,
representing subrogation recoveries effected by HRI for its clients, except that
restricted cash at December 31, 1996 also included $6.4 million in recoveries
from the silicone breast implant settlement received in November and December
1996. At June 30, 1997 and December 31, 1996, HRI reported on its balance sheet,
as a current liability, funds due clients of $11.0 million and $15.0 million,
respectively, representing recoveries to be distributed to clients, net of the
fee earned on such recoveries.
The Company believes that its available cash resources, together with
the borrowings available under the Line of Credit, will be sufficient to meet
its current operating requirements and internal development initiatives.
NEW ACCOUNTING STANDARD
The Company has determined that earnings per share computed under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", is the same as the Company's reported per share
results of operations. This pronouncement specifies the computation,
presentation, and disclosure requirements for earnings per share and will
require presentation of both basic and fully diluted earnings per share for both
interim and annual periods ending after December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The provisions of SFAS No. 130 will be effective for
fiscal years beginning after December 15, 1997.
15
<PAGE> 18
EXTERNAL FACTORS
The business of recovering subrogation and related claims for
healthcare payors is subject to a wide variety of external factors. Prominent
among these are factors that would materially change the healthcare payment,
fault-based liability, or workers' compensation systems. Because the Company's
profitability depends in large measure upon obtaining and using client claims
data, and the availability of property and casualty and workers' compensation
coverage as sources of recovery, changes in laws that would limit or bar either
the access to or use of claims data or the ability of healthcare payors to
recover subrogation and related claims represent an ongoing risk to the Company.
Moreover, because the Company's revenues derive from the recovery of
the costs of medical treatment of accidents, material changes in such costs will
tend to affect the Company's revenue or its rate of revenue growth. The
healthcare industry, and particularly the business of healthcare payors, is
subject to various external factors that may have the effect of significantly
altering the costs of healthcare. The Company is unable to predict which of
these factors, if any, could have a potentially material impact on healthcare
payors and through them, the healthcare subrogation recovery industry.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. Statements in this document
that look forward in time involve risks and uncertainties including the ability
of HRI to successfully implement its operating strategy and acquisition
strategy, HRI's ability to manage growth, changes in laws and government
regulations applicable to HRI, and changes in the historical relationships among
such key operating indicators as lives sold, lives installed, backlog and
throughput and in the predictive value of these indicators with respect to
certain aspects of HRI's financial results.
16
<PAGE> 19
SUPPLEMENTAL QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues:
Subrogation................ $6,676 $7,680 $7,718 $8,174 $30,248
Other revenues............. 0 970 72 129 1,171
------ ------ ------ ------ -------
Total revenues.... 6,676 8,650 7,790 8,303 31,419
Cost of services......................... 3,354 3,703 3,869 4,100 15,026
------ ------ ------ ------ -------
Gross profit............... 3,322 4,947 3,921 4,203 16,393
Support expenses......................... 1,871 2,145 2,044 2,033 8,093
------ ------ ------ ------ -------
Operating income........... 1,451 2,802 1,877 2,170 8,300
Interest income.......................... 92 132 123 139 486
------ ------ ------ ------ -------
Income before income taxes $1,543 2,934 2,000 2,309 8,786
Provision for income taxes............... 647 1,231 838 969 3,685
------ ------ ------ ------ -------
Net income............ $ $896 $1,703 $1,162 $1,340 $ 5,101
====== ====== ====== ====== =======
Weighted average shares.................. $9,800 9,800 9,800 9,800 9,800
Earnings per common share................ $ 0.09 $ 0.17 $ 0.12 $ 0.14 $ 0.52
====== ====== ====== ====== =======
</TABLE>
KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)
<TABLE>
<CAPTION>
1996
---------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Cumulative Lives Sold, Beginning of Period (1)........................ 24.2 26.2 27.5 28.6
Lives From Existing Client Growth.................................... 0.0 0.3 0.5 0.0
Lives Added From Contracts With Existing Clients..................... 1.1 0.3 0.5 0.6
Lives Added From Contracts With New Clients.......................... 0.9 0.7 0.1 0.3
------ ------ ------ ------
Cumulative Lives Sold, End of Period.................................. 26.2 27.5 28.6 29.5
====== ====== ====== ======
Lives Installed (1)................................................... 24.1 26.5 27.1 28.9
Backlog (2)........................................................... $448.1 $498.6 $526.5 $535.0
Subrogation Recoveries (3)............................................ $ 24.3 $ 27.8 $ 29.4 $ 31.0
Throughput (4)........................................................ 6.0% 5.9% 5.7% 5.8%
Effective Fee Rate.................................................... 27.4% 27.6% 26.3% 26.4%
Subrogation Revenues (3).............................................. $ 6.7 $ 7.7 $ 7.7 $ 8.2
Employees:
Direct Operations................................................... 278 308 298 312
Support............................................................. 64 74 67 71
------ ------ ------ ------
Total Employees.................................................. 342 382 365 383
------ ------ ------ ------
</TABLE>
17
<PAGE> 20
(1) Includes reductions to prior period information with respect to the number
of lives reported by a client to HRI, and with respect to certain lives as
to which HRI provides service, on a limited short-term basis, under a
non-standard fee arrangement.
(2) Backlog (i.e., gross recoveries in process) represents the total dollar
amount of potentially recoverable claims that the Company is pursuing on
behalf of clients at any point in time.
(3) Subrogation recoveries and subrogation revenues for the three and six
months ended June 30, 1996 exclude approximately $8.2 million of
recoveries in connection with the breast implant litigation settlement and
$970,000 of other revenue, derived from these recoveries, respectively.
(4) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period.
18
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal proceedings
There have been no material developments to the legal proceedings to
which the Company is a party and the description of litigation proceedings under
the caption "Business - Legal Proceedings" contained in the Company's
Registration Statement on Form S-1 (Registration No. 333-23287), declared
effective on May 28, 1997, remains accurate in all material respects. Such
description, as updated, is provided below for your information:
In March 1994 a class action complaint was filed against HRI in the
United States District Court for the Northern District of West Virginia, Michael
L. DeGarmo, et al. v. Healthcare Recoveries, Inc. The plaintiffs assert that
HRI's subrogation recovery efforts on behalf of its clients violate a number of
state and federal laws, including the Fair Debt Collection Practices Act and the
Racketeer Influenced and Corrupt Organization Act (RICO). The complaint also
seeks judgment, under the federal Declaratory Judgment Act, that HRI as the
subrogation agent for various healthcare payors be limited, in recovering from
persons who caused accidents or from the healthcare payors' injured insureds, to
the actual costs of the medical treatment provided to such injured insureds by
such healthcare payors, notwithstanding provisions in the applicable healthcare
policies or agreements, which generally allow recovery by the healthcare payors
of the "reasonable value" of such treatments. The complaint alleges that HRI
made fraudulent representations to recover sums in excess of those actually
expended by the applicable healthcare payor to pay for medical treatment.
Plaintiffs, and the putative class, demand compensatory damages, treble damages
under RICO, costs and reasonable attorneys' fees. HRI believes that the class
alleged by the plaintiffs does not satisfy requirements for a class action
because the plaintiffs are not adequate representatives of the putative class
and potential claims by class members lack the commonality required for class
actions due to the number of states whose laws apply to the subrogation
provisions of applicable healthcare policies and agreements and the varying
language of such subrogation provisions. The DeGarmo case is in non-merits
discovery, and no class of plaintiffs has been certified.
This lawsuit, if successful, could prevent the Company from recovering
the "reasonable value" of medical treatment under discounted fee-for-service
("DFS"), capitation and other payment arrangements. By the end of 1993, at the
direction of certain clients, HRI had ceased the practice of recovering on their
behalf the "reasonable value" of medical treatment provided by medical providers
under DFS arrangements with those clients. It is the Company's current policy
not to recover the "reasonable value" of medical treatment in DFS arrangements.
However, HRI historically and currently recovers the "reasonable value" of
medical treatment provided under capitation arrangements and other payment
arrangements with medical providers on behalf of those clients that compensate
medical providers under these payment mechanisms, to the extent that these
benefits are related to treatment of the injuries as to which clients have
recovery rights. The Company believes that its clients' contracts, including the
contracts that provide for recovery under DFS, capitation and other payment
arrangements are enforceable under the laws of the states potentially applicable
in this case and that, as a result, this litigation will not have a material
adverse effect upon its business, results of operations and financial condition.
Nevertheless, if this lawsuit or another lawsuit seeking relief under similar
theories were to be successful, it could have a material adverse effect on the
Company's business, results of operations and financial condition.
In March 1996 a class action complaint was filed against HRI in the
261st Judicial District Court. Travis County, Texas, Evelyn Dickey v. Healthcare
Recoveries, Inc. The complaint alleges that HRI violated Texas law by not filing
a $10,000 bond with the Secretary of State as required for all debt collectors.
The plaintiffs sought damages of $100 for each class member. In August 1996, the
plaintiffs filed an amended petition alleging, additionally, that HRI violated
Texas law in attempting to collect consumer debts without disclosing in any
communication to the debtors that it was collecting consumer debts. The putative
class consists of all persons contacted in Texas by HRI with respect to a
recovery. HRI believes that it is not a "debt collector" under Texas law and,
accordingly, is not subject to the Texas laws listed in the complaint. The
Company filed a motion for summary judgment in the case and on May 5, 1997 the
court issued an order granting summary judgment in favor of the Company. The
plaintiffs have filed an appeal. The Company does not believe that this
litigation will have a material adverse effect upon its financial condition or
upon results of its operations.
Item 2. Changes in Securities
In connection with the closing of the Company's initial public offering
on May 28, 1997, the Company issued 200,000 shares of unregistered Common Stock
to executive officers and certain other employees of the Company. These shares
were granted in a transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, based upon all of the facts and
circumstances, including but not limited to the following: (i) no general
solicitation or general advertising was made by the Company to the grantees,
(ii) 93% of the shares were issued to six executive officers of the Company and
the remainder were issued to five other employees of the Company, (iii) the
grantees had available the prospectus used in the Company's initial public
offering, access to management and all material information with respect to the
Company, and (iv) the shares were subject to restrictions on resale.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 1997, in preparation for the Company's initial public
offering, the sole stockholder of the Company acted by written consent pursuant
to which such stockholder approved (i) the Healthcare Recoveries, Inc.
Non-Qualified Stock Option Plan for Eligible Employees (and the reservation of
700,000 shares of Common Stock under such plan), (ii) the Healthcare Recoveries,
Inc. Directors' Stock Option Plan) and the reservation of 150,000 shares of
Common Stock under such plan), (iii) the Healthcare Recoveries, Inc. Employee
Stock Purchase Plan, (iv) the Amended and Restated Certificate of Incorporation
of the Company, (v) the Amended and Restated Bylaws of the Company, and (vi) the
Divestiture Bonus Agreement.
19
<PAGE> 22
Item 6. Exhibits and Reports on From 8-K
(a) Exhibits
3.1 -Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
3.2 -Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-2387), declared
effective on May 28, 1997).
4.1 -Specimen Stock Certificate (incorporate by reference to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
4.2 -Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
of Eligible Employees (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-2387), declared effective on
May 28, 1997).
4.3 -Healthcare Recoveries, Inc. Directors' Stock Option Plan
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-2387), declared effective on May 28, 1997).
10.1 -Employment Agreement, as amended, between the Company and
Patrick B. McGinnis.
10.2 -Form of Employment Agreement, as amended, between the
Company and Douglas R. Sharps, Dennis K. Burge, Bobby
T. Tokuuke and Debra M. Murphy.
10.3 -Supplemental Retirement Savings Plan (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-2387), declared
effective on May 28, 1997).
10.4 -Lease between W&M Kentucky, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
10.5 -Annual Bonus Plan (incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1
(Registration No. 333-2387), declared effective on May 28,
1997).
10.6 -Credit Agreement between Healthcare Recoveries, Inc. and
National City Bank of Kentucky dated May 28, 1997.
10.7 -Separation Agreement between Healthcare Recoveries, Inc. and
Medaphis Corporation dated May 28, 1997.
27.1 -Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter
ended June 30, 1997.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Healthcare Recoveries, Inc.
Date: August 14, 1997 /s/ Patrick B. McGinnis
----------------------------
Patrick B. McGinnis
Chairman, and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1997 /s/ Douglas R. Sharps
----------------------------
Douglas R. Sharps
Executive Vice President - Finance
and Administration, and
(Principal Financial and Chief Accounting
Officer)
21
<PAGE> 24
Exhibit Index
Exhibit
No.
-------
3.1 -Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
3.2 -Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-2387), declared
effective on May 28, 1997).
4.1 -Specimen Stock Certificate (incorporate by reference to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
4.2 -Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
of Eligible Employees (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-2387), declared effective on
May 28, 1997).
4.3 -Healthcare Recoveries, Inc. Directors' Stock Option Plan
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-2387), declared effective on May 28, 1997).
10.1 -Employment Agreement, as amended, between the Company and
Patrick B. McGinnis.
10.2 -Form of Employment Agreement, as amended, between the
Company and Douglas R. Sharps, Dennis K. Burge, Bobby
T. Tokuuke and Debra M. Murphy.
10.3 -Supplemental Retirement Savings Plan (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-2387), declared
effective on May 28, 1997).
10.4 -Lease between W&M Kentucky, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-2387), declared effective on May 28, 1997).
10.5 -Annual Bonus Plan (incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1
(Registration No. 333-2387), declared effective on May 28,
1997).
10.6 -Credit Agreement between Healthcare Recoveries, Inc. and
National City Bank of Kentucky dated May 28, 1997.
10.7 -Separation Agreement between Healthcare Recoveries, Inc. and
Medaphis Corporation dated May 28, 1997.
27.1 -Financial Data Schedule (for SEC use only).
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
as of the 28th day of May, 1997, by and between HEALTHCARE RECOVERIES, INC., a
Delaware corporation (the "Company"), and PATRICK B. MCGINNIS (the "Employee").
STATEMENT OF BACKGROUND INFORMATION
The Company provides subrogation and related recovery services for
healthcare payors (the "Business"), including health maintenance organizations,
indemnity insurers, Blue Cross and Blue Shield organizations, third-party
administrators, self-funded employee health welfare benefit plans, and provider
hospital organizations. The Company's services consist of assisting healthcare
payors to recover the cost or reasonable value of healthcare benefits provided
to insureds who are injured under circumstances where a third party, typically
a property or casualty insurer of an individual, is ultimately responsible for
such healthcare benefits.
The Board of Directors (the "Board") has determined that it would be
in the best interest of the Company and its stockholders if Employee were
employed by the Company for a term of three years.
Employee acknowledges the Company's ownership of its goodwill, and the
necessity of the restrictive covenants contained in this Agreement to protect
the Company's interest in such material asset.
STATEMENT OF AGREEMENT
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, the parties agree as follows:
1. Employment. The Company employs Employee and Employee accepts such
employment upon the terms and conditions set forth in this Agreement. For
purposes of Sections 6, 7 and 8 of this Agreement, "employment" shall mean any
period of time during which the Company is paying the Employee salary under
Section 5(a) of this Agreement, whether or not the Employee is currently
performing services for the Company at the time of such payment. For all other
purposes under this Agreement, "employment" shall have its customary meaning.
2. Duties of Employee. Employee agrees to perform and discharge the
usual duties of a Chairman of the Board of Directors and Chief Executive
Officer of a similarly sized
<PAGE> 2
organization, including, without limitation, those presently set forth in the
Bylaws of the Company, and such other duties as may be reasonably assigned by
the Board, and to comply with all of the Company's policies, standards and
regulations. Employee's title shall be Chairman of the Board of Directors and
Chief Executive Officer, and Employee shall report to the Board. All of
Employee's time, attention and energies which are devoted to business endeavors
will be devoted to the Business, and Employee will not, during the term of this
Agreement, be engaged (whether or not during normal business hours) in any
other business or professional activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage, without the prior
written consent of the Board, which consent will not be unreasonably withheld.
This Section will not be construed to prevent Employee from: (a) investing
personal assets in businesses which do not compete with the Company in such
form or manner that will not require any services on the part of Employee in
the operation or the affairs of the companies in which such investments are
made and in which Employee's participation is solely that of an investor; (b)
purchasing securities in any corporation whose securities are listed on a
national securities exchange or regularly traded in the over-the-counter
market, provided that Employee at no time owns, directly or indirectly, in
excess of one percent of the outstanding stock of any class of any such
corporation engaged in a business competitive with that of the Company; or (c)
participating in conferences, preparing and publishing papers or books or
teaching, participating on the board of directors of other companies ("Other
Boards") or providing limited advisory services, so long as these activities
are not contrary to the Company's interests, and, with regard to participation
on Other Boards or the provision of limited advisory services, so long as the
Board approves Employee's participation on any such Other Boards or approves
the provision of such limited advisory services, which approval will not be
unreasonably withheld.
3. Term. The term of this Agreement will be for a period of
three years commencing on the closing of sale of the Company by Medaphis
Corporation ("Medaphis"), the Company's sole stockholder, through public or
private sale, with automatic two year renewals, unless a notice of termination
is given by either party within not less than sixty days prior to the end of a
term or a renewal term, subject to earlier termination as provided for in
Section 4. In the event that Medaphis does not consummate a public or private
sale within six months of the date hereof, this Agreement shall be terminated.
4. Termination and Suspension.
(a) By the Company. Notwithstanding anything contained in
Section 3 to the contrary, the Company has the right to terminate this
Agreement and all of its obligations under this Agreement immediately if the
Board takes action to terminate after any of the following events occurs:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten days after Employee's receipt from the
Company of written notice of such breach, which notice
describes in reasonable detail the Company's belief that
Employee is in breach
- 2 -
<PAGE> 3
(notwithstanding the foregoing, no cure period shall be
applicable to breaches by Employee of Sections 6, 7 or 8 of
this Agreement);
(ii) Employee commits any act in bad faith materially
detrimental to the business or reputation of the Company;
(iii) Employee engages in illegal activities or is
convicted of any crime involving fraud, deceit or moral
turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be materially unable to
perform Employee's duties under this Agreement. Without
limiting the generality of the foregoing, Employee's
inability to adequately perform services under this Agreement
for a period of ninety consecutive days will be conclusive
evidence of such mental or physical incapacity or disability,
unless such inability to adequately perform services under
this Agreement is pursuant to a mental or physical incapacity
or disability covered by the Family Medical Leave Act, in
which case such ninety-day period shall be extended to a one
hundred fifty-day period.
(b) By Employee or by the Company other than for Cause. If
Employee terminates this Agreement pursuant to any of clauses (i) - (v) below
or if the Company terminates this Agreement other than pursuant to Section
4(a), the Company obligations under this Agreement to pay Employee the annual
salary under Section 5(a), to provide for the continued vesting of stock option
awards under Section 5(b) and to provide for health insurance benefits to
Employee under Section 5(c) shall continue in accordance with the terms of this
Agreement for the greater of (i) the remainder of the term or the renewal term,
or (ii) two years.
(i) the Company materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure its
breach within ten days after its receipt from Employee of
written notice of such breach, which notice describes in
reasonable detail Employee's belief that the Company is in
breach;
(ii) without Employee's express written consent, the
Company assigns to Employee duties, or significantly reduces
Employee's assigned duties, in a manner inconsistent with
Employee's position with the Company;
(iii) without Employee's express written consent, the
Company requires Employee's relocation outside of the
metropolitan Louisville, Kentucky area;
(iv) the Company fails to obtain the assumption of this
Agreement by any successors to the Company; or
- 3 -
<PAGE> 4
(v) a Change in Control Event (as defined herein)
occurs, and Employee's employment is terminated by Employee,
within one hundred twenty days thereafter. Upon a Change in
Control Event, the applicable provisions of Section 4(e)
shall apply. For purposes of this Agreement a "Change in
Control Event" shall mean the occurrence of any of the
following:
(1) the adoption of a plan of merger or
consolidation of the Company with any other
corporation as a result of which the holders of the
outstanding voting stock of the Company as a group
would receive less than 50% of the voting stock of
the surviving or resulting corporation;
(2) the adoption of a plan of liquidation or
the approval of the dissolution of the Company;
(3) the sale or transfer of substantially all
of the assets of the Company;
(4) the following individuals cease for any
reason to constitute a majority of the number of
directors then serving: individuals who, on the date
of this Agreement, constitute the Board and any new
director (other than a director whose initial
assumption of office is in connection with an actual
or threatened election contest, including but not
limited to a consent solicitation, relating to the
election of directors of the Company) whose
appointment or election by the Board or nomination
for election by the Company's stockholders was
approved or recommended by a vote of at least
two-thirds of the directors then still in office who
either were directors on the date of this Agreement
or whose appointment, election or nomination for
election was previously so approved or recommended;
or
(5) any individual, entity, group (within the
meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, and the rules
promulgated under such act), or other person
acquires in a single transaction or a series of
transactions more than 30% of the outstanding shares
of the Company's common stock.
(c) Suspension By the Company. If Employee is indicted for any
felony, the Company may immediately suspend Employee without compensation. If
the indictment is dropped, or if Employee is acquitted (the dropping of an
indictment and an acquittal each referred to as an "Acquittal Event"), the
Company shall, within ten days after it receives written notice of any
Acquittal Event, remit to Employee all amounts otherwise payable pursuant to
this Agreement but withheld during the suspension period, together with
interest from each due date paid at the then-current prime rate plus two
percentage points, as reported in The Wall Street Journal. Upon any such
Acquittal Event, the Company's payment obligations to Employee under
- 4 -
<PAGE> 5
this Agreement shall resume and shall continue throughout the remainder of the
term of this Agreement, subject to the terms and conditions of this Agreement,
but the Company shall have the option whether to ask Employee actually to
return to work and to publicly associate with the Company. At the Company's
request in this circumstance, Employee will refrain from working at or for the
Company (notwithstanding his continuing compensation under this Agreement) and
will refrain from representing to any person or entity that he is associated
with the Company.
(d) No Duty to Mitigate. If Employee terminates his employment
under and in accordance with this Agreement or if the Company terminates
Employee's employment under this Agreement for any reason other than those
specified in Section 4(a), Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement (whether seeking new
employment or in any other manner), and the Company's obligations under Section
4(b) shall not be reduced because of any employment of Employee after
termination of employment under this Agreement.
(e) Gross-Up. Upon a Change in Control Event and a termination of
this Agreement by Employee pursuant to Section 4(b)(v), the Company will pay to
Employee (in lieu of an obligation to make further payments to Employee under
or on account of Section 5(a) and to provide benefits to Employee under or on
account of Section 5(c)) the salary that would have been payable to Employee
under this Agreement from the date of termination for the greater of the
remainder of (i) the term or the renewal term, or (ii) two years. The amounts
payable to Employee under the previous sentence of this Section 4(e) shall be
paid by the Company in periodic payments or in a lump sum, at the option of
Employee. If any payment or other benefit (a "Termination Payment") received or
to be received by Employee in connection with a Change in Control Event
(whether or not this Agreement is terminated) or Employee's termination of
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, with any person whose actions result
in a Change in Control Event or with any person affiliated with the Company or
such person) is or will be subject to the tax (the "Excise Tax") imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the
Company shall pay to Employee, a Gross-Up Payment (as defined) to the extent
provided by the second paragraph of this Section 4(e).
A Gross-Up Payment (as defined) shall be payable pursuant to this
Section 4(e) on and subject to the following terms and conditions:
(1) At the time the applicable Termination Payment is
made, an additional amount (the "Gross-Up Payment") shall be paid by the
Company such that the net amount retained by Employee, after deduction of any
Excise Tax on such Termination Payment and any federal, state and local income
tax, employment tax and Excise Tax on the Gross-Up Payment, shall be equal to
the amount or value of such Termination Payment. For purposes of determining
whether any such Termination Payment will be subject to the Excise Tax, all
Termination Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 280G(b)(1) of the
- 5 -
<PAGE> 6
Code shall be treated as being subject to the Excise Tax, unless in the opinion
of tax counsel reasonably acceptable to Employee and selected by the accounting
firm which, immediately prior to the Change in Control Event, was the Company's
independent auditors, such payments (in whole or in part) do not constitute
"parachute payments" within the meaning of Section 280G of the Code or
represent reasonable compensation for services actually rendered in excess of
the "base amount" allocable to such reasonable compensation. The full amount of
the Gross-Up Payment shall be treated as being subject to the Excise Tax. The
value of any non-cash benefits or any deferred payment or benefit shall be
determined in accordance with the principles of Sections 280G(d)(3) and (4) of
the Code.
(2) For purposes of determining the amount of any
Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the applicable Termination Payment or Gross-Up Payment is made, and shall be
deemed to pay state and local income taxes at the highest marginal rates of
taxation in the state and locality of his residence on the date the applicable
Termination Payment or Gross-Up Payment is made, net of the maximum reduction
in federal income taxes that could be obtained from deduction of such state and
local taxes.
(3) If the Excise Tax or income tax payable with respect
to a Gross-Up Payment as finally determined exceeds the amount taken into
account or paid to Employee at the time the applicable Termination Payment or
Gross-Up Payment is made (including by reason of any payment the existence or
amount of which cannot be determined at the time of the applicable Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest payable by Employee with respect to such excess)
at the time that the amount of such excess is finally determined.
5. Compensation and Benefits.
(a) Annual Salary. For all services rendered by Employee under
this Agreement, the Company will pay Employee a base salary of a minimum of Two
Hundred Thousand Dollars per annum in equal bi-weekly installments. Such annual
salary may be increased by the Board.
(b) Incentive Compensation. During the term of the Agreement,
Employee shall be entitled to incentive compensation payments in accordance
with the Management Group Incentive Compensation Plan of Healthcare Recoveries,
Inc.
(c) Stock Option Awards. In the event and only in the event
Medaphis closes the sale of the Company pursuant to a registered public
offering, Employee shall be entitled to receive under the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan options to purchase 40% of the
shares of the Company's common stock reserved under such Plan at such closing
for an exercise price equal to the initial public offering price of the
Company's Common Stock, which options shall have an effective grant date of the
day such shares first begin trading on the Nasdaq National Market and shall
vest over three years as follows: one-third on each of the first three
- 6 -
<PAGE> 7
anniversaries of the effective grant date. In the event of such public
offering, and prior to the closing of such offering, the Company shall reserve
for issuance under the Healthcare Recoveries, Inc. Non-Qualified Stock Option
Plan that number of shares equal to 5% of the Common Stock to be sold by
Medaphis in such offering (but excluding Common Stock sold by the Company
pursuant to an over-allotment option). All stock options contemplated by this
Section 5(b) shall vest upon a Change in Control Event. In addition to any
other rights provided Employee under the Healthcare Recoveries, Inc.
Non-Qualified Stock Option Plan or in the stock options agreement evidencing
the awards contemplated by this Section 5, if an Employee Event (as defined)
shall occur, then the option so awarded, to the extent vested, shall not expire
or terminate prior to the later of the ninetieth day following said Employee
Event and the expiration date otherwise applicable under the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan. For purposes of this Section
5(b), an "Employee Event" shall be deemed to occur upon: (i) Employee's
termination of this Agreement pursuant to the provisions of Section 4(b); or
(ii) involuntary termination of Employee by the Company for any reason other
than set forth in Section 4(a).
(d) Other Benefits. Employee will be entitled to such fringe
benefits as may be provided from time to time by the Company to its executive
employees, including, but not limited to, group health insurance, life and
disability insurance and any other fringe benefits now or hereafter provided by
the Company to its executive employees, if and when Employee meets the
eligibility requirements for any such benefit. The Company reserves the right
to change or discontinue any employee benefit plans or programs now being
offered to its employees; provided, however, that all benefits provided for
executive employees will be provided to Employee on an equal basis.
(e) Business Expenses. Employee will be reimbursed for all
reasonable expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.
(f) Withholding. The Company will deduct and withhold from the
payments made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due employees.
6. Non-Disclosure of Confidential Information. Employee
recognizes and acknowledges that the trade secrets and confidential information
of the Company and its affiliates (the "Proprietary Information"), as they may
exist from time-to-time, are valuable, special and unique assets of the
Company's and its affiliates' businesses. Employee further acknowledges that
access to such Proprietary Information is essential to the performance of
Employee's duties under this Agreement. Therefore, in order to obtain access to
such Proprietary Information, Employee agrees that Employee will not, in whole
or in part, disclose such Proprietary Information to any person, firm,
corporation, association or any other entity for any reason or purpose
whatsoever, nor will Employee make use of any such information for Employee's
own purposes or for the benefit of any person, firm, corporation, association
or other
- 7 -
<PAGE> 8
entity (except the Company or its affiliates) under any circumstances. For
purposes of this Agreement, the term "trade secrets" means the whole or any
portion of any scientific or technical or non-technical information, design,
process, procedure, formula, computer software product, documentation or
improvement relating to the Company's or its affiliates businesses which: (1)
derives economic value, actual or potential, from not being generally known to
other persons who can obtain economic value from its disclosure or use; and (2)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy or confidentiality. The term "confidential information"
means any and all data and information relating to the Company's or its
affiliates' businesses: (1) which has value to the Company or its affiliates;
(2) is not generally known by its competitors or the public; and (3) is treated
as confidential by the Company or its affiliates. The provisions of this
Section 6 will apply during Employee's employment by the Company and for a
three-year period thereafter (without regard to the basis or reason for the
termination of employment) with respect to confidential information, and during
Employee's employment by the Company and at any and all times thereafter with
respect to trade secrets. For purposes of this Agreement, "Proprietary
Information" will not include information which is: (1) disclosed by the
Company to others on an unrestricted basis; (2) is or becomes general public
knowledge through no fault of Employee; or (3) is or becomes available to
Employee from any source not known to Employee to have a duty of nondisclosure
to the Company. This Section 6, together with Sections 7, 8, 9, 10, 11 and 12,
and the applicable provisions of Sections 4 and 5, of this Agreement, shall
survive termination of this Agreement.
7.A Non-Competition Covenant. During Employee's employment by the
Company and for a period of one year following any termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, compete with the Company within the Geographical Area (as defined in
this Agreement). The term "compete" means to engage, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, either as a proprietor, employee, agent, independent contractor,
consultant, director, officer, partner or stockholder (other than a stockholder
of a corporation listed on a national securities exchange or whose stock is
regularly traded in a nationally-recognized stock exchange, provided that
Employee at no time owns, directly or indirectly, in excess of one percent of
the outstanding stock of any class of any such corporation) in providing
Business products or services. For purposes of this Agreement, the term
"Geographical Area" means the entire United States, and all foreign countries
in which Employee or any member of his staff is or has engaged in providing or
marketing Business products or services while employed by the Company.
B. Non-Interference. During Employee's employment by the Company
and for a period of two years following the termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, interfere with, disrupt, or attempt to disrupt the past, present or
prospective relationships, contractual or otherwise, between the Company and
any supplier, consultant, or client of the Company with whom Employee had
material contact during Employee's employment by the Company. The term
"prospective relationship" is defined as any
- 8 -
<PAGE> 9
relationship where the Company has actively sought an individual or entity as a
prospective supplier, consultant, or client.
C. Non-Solicitation of Clients Covenant. Employee agrees that
during Employee's employment by the Company and for a period of two years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, divert, solicit or
attempt to solicit any individual or entity (i) who is a client of the Company
at any time during the six-month period prior to Employee's termination with
the Company ("Client"), or was actively sought by the Company as a prospective
client during such period, and (ii) with whom Employee had material contact
while employed by the Company, to provide Business services to such Clients or
prospects.
D. Construction. The parties agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 will be empowered
to sever any portion of the Geographical Area, client base, prospective
relationship or prospect list or any prohibited business activity from the
coverage of such Section and to apply the provisions of such Section to the
remaining portion of the Geographical Area, the client base or the prospective
relationship or prospect list, or the remaining business activities not so
severed by such judicial authority. In addition, it is the intent of the
parties that the judicial authority replace each such severed provision with a
provision as similar in terms to such severed provision as may be possible and
be legal, valid and enforceable. It is the intent of the parties that Sections
7 and 8 be enforced to the maximum extent permitted by law. For purposes of the
covenant set forth in Section 7.C, Employee at his own suggestion and not at
the request or direction of the Company, asserts that he has constructive
material contact with each and every Client, and further asserts that such
covenant would be unfair to the Company without application of such
constructive material contact. If any provision of either such Section is
determined not to be specifically enforceable, the Company shall nevertheless
be entitled to bring an action to seek to recover monetary damages as a result
of the breach of such provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee further
agrees and represents that during Employee's employment by the Company and for
a period of two years following any termination of Employee's employment for
whatever reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of, or on behalf of any other individual or entity,
divert, solicit or hire away, or attempt to divert, solicit or hire away, to or
for any individual or entity which is engaged in providing Business services,
any person employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such employee is
employed pursuant to written agreement and whether or not such employee is
employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and
warrants that Employee's employment with the Company does not and will not
breach any agreement which Employee has with any former employer to keep in
confidence confidential information, not to
- 9 -
<PAGE> 10
solicit clients or employees, or not to compete with any such former employer.
Employee will not disclose to the Company or use on its behalf any confidential
information of any other party required to be kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that
as a result of Employee's employment with the Company, Employee may come into
the possession and control of Proprietary Information, such as proprietary
documents, drawings, specifications, manuals, notes, computer programs,
customer lists, customer contracts or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the Company all
such items and any copies or excerpts thereof, and any other properties, files
or documents obtained as a result of Employee's employment with the Company,
immediately upon the termination of Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's
employment with the Company, Employee may make, develop or conceive of useful
processes, machines, compositions of matter, computer software, algorithms,
works of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the Company's
Business (the "Inventions"), whether or not subject to copyright or patent
protection, and which may or may not be considered Proprietary Information.
Employee acknowledges that all such Inventions will be "works made for hire"
under United States copyright law and will remain the sole and exclusive
property of the Company. Employee assigns and agrees to assign to the Company,
in perpetuity, all right, title and interest Employee may have in and to such
Inventions, including without limitation, all copyrights, and the right to
apply for any form of patent, utility model, industrial design or similar
proprietary right recognized by any state, country or jurisdiction. Employee
further agrees, at the Company's request and expense, to do all things and sign
all documents or instruments necessary, in the opinion of the Company, to
eliminate any ambiguity as to the ownership of, and rights of the Company to,
such Inventions, including filing copyright and patent registrations and
defending and enforcing in litigation or otherwise all such rights.
Employee will not be obliged to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to any
business or activity in which the Company is or may become engaged, except that
Employee is so obligated if the same relates to or is based on Proprietary
Information to which Employee will have had access during and by virtue of
Employee's employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which may be
wholly conceived by Employee after Employee leaves the employ of the Company,
except that Employee is so obligated if such Invention involves the utilization
of Proprietary Information obtained while in the employ of the Company.
Employee is not obligated to assign any Invention which relates to or would be
useful in any business or activities in which the Company is engaged if such
Invention was conceived and reduced to practice by Employee prior to Employee's
employment with the Company, provided that all such Inventions are listed at
the time of employment on the attached Exhibit A.
- 10 -
<PAGE> 11
12. Remedies. Employee agrees and acknowledges that the violation
of any of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and
11 of this Agreement would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation would be
inadequate, and that the Company will be entitled, in addition to any other
remedy, to temporary and permanent injunctive or other equitable relief without
the necessity of proving actual damages.
13. Insurance. The Company covenants and agrees that, for so long
as Employee shall continue to serve as an officer or director of the Company,
it shall use its reasonable efforts to maintain in full force and effect
directors' and officers' insurance in reasonable amounts from established and
reputable insurers, to cover claims asserted against Employee or liabilities
incurred by Employee for actions taken or omitted in the scope of his capacity
as a director or officer of the Company, and if necessary to purchase
applicable "tail coverage" if it can be obtained for a reasonable price as
determined in good faith by the disinterested members of the Board.
14. Indemnification. The Company agrees to indemnify Employee and
hold Employee harmless to the fullest extent permitted by the Delaware General
Corporation Law as it presently exists or to such greater extent as such law
may hereafter be amended for indemnification of corporate officers and
directors by a Delaware corporation. However, the Company shall be required to
so indemnify Employee in connection with a proceeding initiated by Employee
only if the proceeding was authorized by the Board. Without limitation of the
foregoing, the Company agrees to advance, within ten business days of
Employee's request and upon receipt of an undertaking to repay such advances if
repayment is required by the Delaware General Corporation Law, all reasonable
expenses, including, without limitation, attorneys' fees and expenses and court
costs, incurred by Employee in defending any threatened or actual claim, action
or proceeding to which he is entitled to indemnity hereunder, including, but
not limited to, the investigation, defense, settlement or appeal of any such
claim or action, to which the Employee is a party or threatened to be made a
party by reason of the fact that the Employee is or was an officer or director
of the Company. The indemnification and undertaking to advance expenses of the
Company under this Agreement shall be in addition to and shall not be deemed to
limit any other rights to which Employee may be entitled to indemnification or
advancement of expenses under any bylaw, agreement, articles of incorporation,
vote of stockholders or disinterested directors, at law, or otherwise.
15. Attorneys' Fees. Employee shall be reimbursed promptly upon
request for all fees and costs incurred in disputing any breach or default
hereunder or any issue hereunder relating to the termination of Employee's
employment, in seeking to obtain or enforce any benefit or right provided by
this Agreement, or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided under this Agreement or any other plan or agreement referred
to in Section 4(e)(1), including, without limitation, attorneys' fees and
expenses and court costs. Employee will also be
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<PAGE> 12
reimbursed for all reasonable fees and costs incurred in connection with the
review of Employee's employment arrangements.
16. Notices. Any notice or communication under this Agreement
will be in writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
------------------ ---------------
1400 Watterson Tower 3906 Eagle Way
Louisville, Kentucky 40218 Prospect, Kentucky 40059
Attn: General Counsel Attn: Patrick B. McGinnis
17. Severability. Subject to the application of Section 7(D) to
the interpretation of Sections 7 and 8, if one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, the same will not affect any other provision in
this Agreement, and this Agreement will be construed as if such invalid or
illegal or unenforceable provision had never been contained in this Agreement.
It is the intent of the parties that this Agreement be enforced to the maximum
extent permitted by law.
18. Entire Agreement. This Agreement, the stock option agreements
that evidence the options provided for in Section 5, and the option and other
benefit plans applicable to Employee in accordance with the terms of this
Agreement, constitute the entire agreement of the parties relating to the
subject matter of this Agreement and supersede all other prior agreements,
discussions and negotiations, oral or written, regarding the subject matter of
this Agreement. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the parties.
19. Binding Effect. This Agreement will be binding upon the
parties and their respective heirs, representatives, successors, transferees
and permitted assigns. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall be bound by, and shall assume, the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For purposes of this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection or which becomes bound by the terms of this
Agreement by operation of law.
20. Assignment. This Agreement is one for personal services and
will not be assigned by Employee. The Company may assign this Agreement only
upon the prior written consent of Employee.
- 12 -
<PAGE> 13
21. Governing Law. This Agreement is entered into and will be
interpreted and enforced pursuant to the laws of the Commonwealth of Kentucky.
The parties agree that the appropriate forum and venue for any disputes between
any of the parties arising out of this Agreement shall be any federal court in
the Commonwealth of Kentucky and each of the parties submits to the personal
jurisdiction of any such court. The foregoing shall not limit the rights of any
party to obtain execution of a judgment in any other jurisdiction. The parties
further agree, to the extent permitted by law, that a final and unappealable
judgment against either of them in any action or proceeding contemplated above
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified exemplified copy
of which shall be conclusive evidence of the fact and amount of such judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HEALTHCARE RECOVERIES, INC.: EMPLOYEE:
/s/ David E. McDowell /s/ Patrick B. McGinnis
- ------------------------------------ -------------------------------
DAVID E. McDOWELL PATRICK B. MCGINNIS
Chairman and Chief Executive Officer
Medaphis Corporation
- 13 -
<PAGE> 14
EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
PBM
-------------------
Employee Initials
<PAGE> 15
AMENDMENT TO EMPLOYMENT AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") by and between
the undersigned employee and HEALTHCARE RECOVERIES, INC., a Delaware
corporation, is entered into effective as of May 28, 1997 and amends the
Employment Agreement between the parties dated May 28, 1997 (the "Employment
Agreement").
The parties agree as follows:
1. Section 4(a)(ii) of the Employment Agreement is deleted in its
entirety and the following is substituted:
"Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company."
2. The first two sentences of Section 5(c) of the Employment
Agreement are deleted in their entirety, and the following is
substituted:
"The Company shall issue to Employee under the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan for Eligible
Employees options to purchase that number of shares of the
Company's common stock (at an exercise price equal to the
initial offering price) listed next to Employee's name as
follows:
Patrick B. McGinnis 200,000
Dennis K. Burge 78,750
Douglas R. Sharps 78,750
Bobby T. Tokuuke 65,000
Debra M. Murphy 65,000
These options shall have an effective grant date on the day
the Company's common stock first begins trading on the Nasdaq
National Market and shall vest over three years as follows:
one-third on each of the first three anniversaries of the
effective grant date."
3. Section 5(a) of the Employment Agreement is hereby amended by
adding the following immediately after the first sentence of
Section 5(a):
"Such annual salary will be subject to annual percentage
increases for inflation equivalent to those increases given in
the normal course of business to employees of the Company,
pursuant to the Company's present policy or, as the case may
be, a future policy approved by the Board to apply
substantially on a Company-wide basis."
4. Section 5(b) of the Employment Agreement is deleted in its
entirety and the following is substituted:
<PAGE> 16
"Incentive Compensation. During the term of the Agreement,
Employee shall be entitled to incentive compensation payments
in accordance with the Management Group Incentive Compensation
Plan of Healthcare Recoveries, Inc. If Employee is terminated
by the Company without Cause, Employee shall be entitled to a
pro rata share of incentive compensation payments. A 'pro
rata' share of incentive compensation payments shall mean that
portion of the incentive compensation payments that would have
been paid to Employee had Employee not been terminated without
Cause, assuming Employee worked for the balance of the term
and performed consistently with Employee's past performance."
IN WITNESS WHEREOF, each party has executed this Amendment individually
or by its duly authorized representative.
HEALTHCARE RECOVERIES, INC.
By:/s/ Douglas R. Sharps
------------------------------------------
Douglas R. Sharps
Executive Vice President - Finance and
Administration, Chief Financial Officer and
Secretary
EMPLOYEE
/s/ Patrick B. McGinnis
- ---------------------------------------------
Patrick B. McGinnis
Chairman and Chief Executive Officer
<PAGE> 1
ATTACHED FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.2
The attached Employment Agreement, as amended, of Douglas R. Sharps
serves as a form of Employment Agreement for Dennis K. Burge, Bobby T. Tokuuke
and Debra M. Murphy, whose individual agreements differ from such form only
with respect to base annual compensation as follows: Mr. Burge, $125,000; Mr.
Tokuuke, $110,000 and Ms. Murphy, $110,000.
<PAGE> 2
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 28th day of May, 1997, by and between HEALTHCARE RECOVERIES, INC., a
Delaware corporation (the "Company"), and DOUGLAS R. SHARPS, (the "Employee").
STATEMENT OF BACKGROUND INFORMATION
The Company provides subrogation and related recovery services for
healthcare payors (the "Business"), including health maintenance organizations,
indemnity insurers, Blue Cross and Blue Shield organizations, third-party
administrators, self-funded employee health welfare benefit plans, and provider
hospital organizations. The Company's services consist of assisting healthcare
payors to recover the cost or reasonable value of healthcare benefits provided
to insureds who are injured under circumstances where a third party, typically a
property or casualty insurer of an individual, is ultimately responsible for
such healthcare benefits.
The Company desires to obtain the services of Employee and Employee
desires to accept such employment.
STATEMENT OF AGREEMENT
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, the parties agree as follows:
1. Employment. The Company employs Employee and Employee accepts such
employment upon the terms and conditions set forth in this Agreement. For
purposes of Sections 6, 7 and 8 of this Agreement, "employment" shall mean any
period of time during which the Company is paying the Employee salary under
Section 5(a) of this Agreement, whether or not the Employee is currently
performing services for the Company at the time of such payment. For all other
purposes under this Agreement, "employment" shall have its customary meaning.
Notwithstanding anything in this Agreement to the contrary, if the Company is
paying the Employee salary, wages, benefits, severance or any other sums of
money after termination of Employee's employment with the Company, and Employee
obtains any other employment for consideration in any capacity, then such
payments will (i) cease immediately if Employee's employment with the Company
was terminated as a result of the occurrence of any events described in Section
4(a)(i) through 4(a)(iv) ("terminated for cause"), or (ii) be reduced by an
amount equal to the value of consideration received in connection with or as a
result of such other employment if Employee was terminated other than as a
result of the occurrence of any events described in Section 4(a)(i) through
4(a)(iv) ("terminated without cause"). Cessation of payments by the Company
shall not apply to incentive compensation payments to Employee.
<PAGE> 3
2. Duties of Employee. Employee agrees to perform and discharge the
Business duties which may be assigned to Employee from time to time by the
Company to the reasonable satisfaction of the Company. Employee also agrees to
comply with all of the Company's policies, standards and regulations, as
promulgated by the officers of the Company. Employee will devote Employee's full
professional and business-related time, skills and best efforts to the Business
and, will not, during the term of this Agreement, be engaged (whether or not
during normal business hours) in any other business or professional activity,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage, without the prior written consent of the President of the Company,
which consent will not be unreasonably withheld. This Section will not be
construed to prevent Employee from (a) investing personal assets in businesses
which do not compete with the Company in such form or manner that will not
require any services on the part of Employee in the operation or the affairs of
the companies in which such investments are made and in which Employee's
participation is solely that of an investor; (b) purchasing securities in any
corporation whose securities are listed on a national securities exchange or
regularly traded in the over-the-counter market, provided that Employee at no
time owns, directly or indirectly, in excess of one percent of the outstanding
stock of any class of any such corporation engaged in a business competitive
with that of the Company; or (c) participating in conferences, preparing and
publishing papers or books or teaching, so long as the President of the Company
gives prior approval to such participation, preparation and publication or
teaching.
3. Term. The term of this Agreement will be for a period of three years
commencing on the closing of sale of the Company by Medaphis Corporation
("Medaphis"), through public or private sale, and expiring on the third
anniversary of that date, subject to earlier termination as provided for in
Section 4. In the event that Medaphis does not consummate the public or private
sale of the Company within six months of the date of this Agreement, this
Agreement shall be terminated.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate this Agreement
and all of its obligations under this Agreement immediately if any of the
following events occur:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to
cure such breach within ten days after Employee's
receipt from the Company of written notice of such
breach, which notice shall describe in reasonable
detail the Company's belief that Employee is in
breach (notwithstanding the foregoing, no cure period
shall be applicable to breaches by Employee of
Sections 6, 7 or 8 of this Agreement);
(ii) Employee commits any other act materially detrimental
to the business or reputation of the Company;
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<PAGE> 4
(iii) Employee intentionally engages in dishonest or
illegal activities or commits or is convicted of any
crime involving fraud, deceit or moral turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to
perform Employee's duties under this Agreement.
Without limiting the generality of the foregoing,
Employee's inability adequately to perform services
under this Agreement for a period of sixty
consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless
such inability adequately to perform services under
this Agreement is pursuant to a mental or physical
incapacity or disability covered by the Family
Medical Leave Act, in which case such sixty day
period shall be extended to a one hundred and twenty
day period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate Employee's
employment pursuant to this Agreement without cause upon at least thirty days'
prior written notice to Employee. Subject to the provisions of clause (ii) of
Section 1, if Employee's employment with the Company is terminated by the
Company without cause, the Company shall remain subject to its obligations
hereunder as if Employee remained employed hereunder for the balance of the
term, as provided in Section 3.
5. Compensation and Benefits.
(a) Annual Salary. For all services rendered by Employee under this
Agreement, the Company will pay Employee a base salary of $125,000 dollars per
annum in equal bi-weekly installments. Such annual salary will be subject to
annual adjustments by any increases given in the normal course of business.
(b) Incentive Compensation. During Employee's Employment with the
Company, Employee shall be entitled to incentive compensation payments in
accordance with the Management Group Incentive Compensation Plan of Healthcare
Recoveries, Inc. If Employee is terminated by the Company without Cause,
Employee shall be entitled to a pro rata share of incentive compensation
payments.
(c) Stock Option Awards. In the event and only in the event Medaphis
closes the sale of the Company pursuant to a registered public offering,
Employee shall be entitled to receive under the Healthcare Recoveries, Inc.
Non-Qualified Stock Option Plan options to purchase 15.75% of the shares of the
Company's common stock reserved under such Plan at such closing for an exercise
price equal to the initial offering price of the Company's Common Stock on the
Nasdaq National Market, which options shall have an effective grant date of the
day such shares first begin trading on the Nasdaq National Market and shall vest
over three years as follows: one-third on each of the first three anniversaries
of the effective grant date. In the event of such public offering, and prior to
the closing of such offering, the Company shall reserve for issuance under the
Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan that number of
shares equal to 5% of the
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<PAGE> 5
Common Stock sold by Medaphis in such offering (but excluding Common Stock sold
by the Company pursuant to an over-allotment option).
(d) Other Benefits. Employee will be entitled to such fringe benefits
as may be provided from time-to-time by the Company to its employees, including,
but not limited to, group health insurance, life and disability insurance,
vacations and any other fringe benefits now or hereafter provided by the Company
to its employees, if and when Employee meets the eligibility requirements for
any such benefit. The Company reserves the right to change or discontinue any
employee benefit plans or programs now being offered to its employees; provided,
however, that all benefits provided for employees of the same position and
status as Employee will be provided to Employee on an equal basis.
(e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this Agreement
pursuant to the Company's standard reimbursement policies.
(f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes, FICA and
other amounts normally withheld from compensation due employees.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets and Confidential Information of the Company
and its affiliates and all physical embodiments of the same (as they may exist
from time-to-time, collectively, the "Proprietary Information") are valuable,
special and unique assets of the Company's and its affiliates' businesses.
Employee further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information, Employee
agrees that Employee shall hold in confidence all Proprietary Information and
will not reproduce, use, distribute, disclose, publish or otherwise disseminate
any Proprietary Information, in whole or in part, and will take no action
causing, or fail to take any action necessary to prevent causing, any
Proprietary Information to lose its character as Proprietary Information, nor
will Employee make use of any such information for Employee's own purposes or
for the benefit of any person, firm, corporation, association or other entity
(except the Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means the whole or any
portion of any scientific or technical or other information, design, process,
procedure, formula, computer software product, documentation or improvement
relating to the Company's or its affiliates' businesses which (1) derives
economic value, actual or potential, from not being generally known to other
persons who can obtain economic value from its disclosure or use; and (2) is the
subject of efforts that are reasonable under the circumstances to maintain its
secrecy or confidentiality. The term "Confidential Information" means any and
all data and information relating to the Company's or its affiliates' Business,
other than Trade Secrets, (1) which has value to the Company or its affiliates;
(2) is not generally known by its competitors or the public; and (3) is treated
as confidential by the Company
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<PAGE> 6
or its affiliates. The provisions of this Section 6 will apply during Employee's
employment by the Company and for a two year period thereafter with respect to
Confidential Information, and during Employee's employment by the Company and at
any and all times thereafter with respect to Trade Secrets. These restrictions
will not apply to any Proprietary Information which is in the public domain,
provided that Employee was not responsible, directly or indirectly, for such
Proprietary Information entering the public domain without the Company's
consent. This Section 6, together with Sections 7, 8, 9, 10, 11 and 12 of this
Agreement, shall survive termination of this Agreement.
7.A. Non-Competition Covenant. During Employee's employment by the
Company and for a period of two years following any termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, compete with the Company within the Geographical Area (as defined).
The term "compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any kind to,
directly or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, either as a proprietor, employee,
agent, independent contractor, consultant, director, officer, partner or
stockholder (other than a stockholder of a corporation listed on a national
securities exchange or whose stock is regularly traded in the over-the-counter
market, provided that Employee at no time owns, directly or indirectly, in
excess of one percent of the outstanding stock of any class of any such
corporation) any business which provides Business services. For purposes of this
Agreement, the term "Geographic Area" means the territory located within a
seventy-five mile radius of each facility for which Employee has management
responsibility during Employee's employment with the Company.
B. Non-Interference. During Employee's employment by the Company and
for a period of two years following the termination of Employee's employment for
whatever reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of or on behalf of any other individual or entity,
interfere with, disrupt, or attempt to disrupt the past, present or prospective
relationships, contractual or otherwise, between the Company and any supplier,
consultant, or client of the Company with whom Employee had material contact
during Employee's employment by the Company. The term "prospective relationship"
is defined as any relationship where the Company has actively sought an
individual or entity as a prospective supplier, consultant, or client.
C. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two years following the
termination of Employee's employment for whatever reason, Employee will not,
directly or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, divert, solicit or attempt to solicit
or accept business from any individual or entity (i) who is a client of the
Company at any time during the six month period prior to Employee's termination
of employment with the Company ("Client"), or was actively sought by the Company
as a prospective client, and (ii) with whom Employee had material contact while
employed by the Company to provide Business services to such Clients or
prospects. Employee further agrees that during Employee's employment by the
Company and for a period of two years following the termination of Employee's
employment for
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<PAGE> 7
whatever reason in accordance with this agreement, Employee will not, directly
or indirectly, as an employee, independent contractor, agent or in any other
capacity, be employed by any Client:
(i) which received Business services from Employee, or
with which Employee otherwise had material contact
while employed by the Company; or
(ii) which received Business services from any employee or
office of the Company over which Employee had
management responsibility;
in either case to provide, directly or indirectly, Business services.
D. Construction. The parties agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 will be empowered
to sever any portion of the Geographical Area, client base, prospective
relationship or prospect list or any prohibited business activity from the
coverage of such Section and to apply the provisions of such Section to the
remaining portion of the Geographical Area, the client base or the prospective
relationship or prospect list, or the remaining business activities not so
severed by such judicial authority. In addition, it is the intent of the parties
that the judicial authority replace each such severed provision with a provision
as similar in terms to such severed provision as may be possible and be legal,
valid and enforceable. It is the intent of the parties that Sections 7 and 8 be
enforced to the maximum extent permitted by law. If any provision of either such
Section is determined not to be specifically enforceable, the Company shall
nevertheless be entitled to bring an action to seek to recover monetary damages
as a result of the breach of such provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee agrees and
represents that during Employee's employment by the Company and for a period of
two years following any termination of Employee's employment for whatever
reason, Employee will not, directly or indirectly, on Employee's own behalf or
in the service of, or on behalf of any other individual or entity, divert,
solicit or hire away, or attempt to divert, solicit or hire away, to or for any
individual or entity which is engaged in providing Business services, any person
employed by the Company, whether or not such employee is a full-time employee or
temporary employee of the Company, whether or not such employee is employed
pursuant to a written agreement and whether or not such employee is employed for
a determined period or at will.
9. Existing Restrictive Covenants. Employee represents and warrants
that Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in confidence
confidential information or not to compete with any such former employer.
Employee will not disclose to the Company or use on its behalf any confidential
information of any other party required to be kept confidential by Employee.
10. Return of Confidential Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come into the
possession and control of Proprietary Information, such as proprietary
documents, drawings, specifications, manuals, notes,
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<PAGE> 8
computer programs, or other proprietary material. Employee acknowledges,
warrants and agrees that Employee will return to the Company all such items and
any copies or excerpts thereof, and any other properties, files or documents
obtained as a result of Employee's employment with the Company, immediately upon
the termination of Employee's employment with the Company.
11. Proprietary Rights. During the course of Employee's employment with
the Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works of
authorship expressing any such algorithm, or any other discovery, idea, concept,
document or improvement which relates to or is useful to the Company's Business
(the "Inventions"), whether or not subject to copyright or patent protection,
and which may or may not be considered Proprietary Information. Employee
acknowledges that all such Inventions will be "works made for hire" under United
States copyright law and will remain the sole and exclusive property of the
Company. Employee assigns and agrees to assign to the Company, in perpetuity,
all right, title and interest Employee may have in and to such Inventions,
including without limitation, all copyrights, and the right to apply for any
form of patent, utility model, industrial design or similar proprietary right
recognized by any state, country or jurisdiction. Employee further agrees, at
the Company's request and expense, to do all things and sign all documents or
instruments necessary, in the opinion of the Company, to eliminate any ambiguity
as to the ownership of, and rights of the Company to, such Inventions, including
filing copyright and patent registrations and defending and enforcing in
litigation or otherwise all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to any
business or activity in which the Company is or may reasonably be expected to
become engaged, except that Employee is so obligated if the same relates to or
is based on Proprietary Information to which Employee will have had access
during and by virtue of Employee's employment or which arises out of work
assigned to Employee by the Company. Employee will not be obligated to assign
any Invention which may be wholly conceived by Employee after Employee leaves
the employ of the Company, except that Employee is so obligated if such
Invention involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any Invention
which relates to or would be useful in any business or activities in which the
Company is engaged if such Invention was conceived and reduced to practice by
Employee prior to Employee's employment with the Company, provided that all such
Inventions are listed at the time of employment on the attached Exhibit A.
12. Remedies. Employee agrees and acknowledges that the violation of
any of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that the remedy
at law for any such violation or threatened violation thereof would be
inadequate, and that the Company will be entitled, in addition to any other
remedy, to temporary and permanent injunctive or other equitable relief without
the necessity of proving actual damages.
13. Notices. Any notice or communication under this Agreement will be
in writing and
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<PAGE> 9
sent by registered or certified mail addressed to the respective parties as
follows:
If to the Company: If to Employee:
1400 Watterson Tower 4043 Ormond Road
Louisville, Kentucky 40218 Louisville, KY 40207
Attn: General Counsel
14. Severability. Subject to the application of Section 7(D) to the
interpretation of Sections 7 and 8, if one or more of the provisions contained
in this Agreement is for any reason held to be invalid, illegal or unenforceable
in any respect, the same will not affect any other provision in this Agreement,
and this Agreement will be construed as if such invalid or illegal or
unenforceable provision had never been contained in this Agreement. It is the
intent of the parties that this Agreement be enforced to the maximum extent
permitted by law.
15. Entire Agreement. This Agreement embodies the entire agreement of
the parties relating to the subject matter of this Agreement and supersedes all
prior agreements, oral or written, regarding the subject matter of this
Agreement. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the parties.
16. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and permitted
assigns.
17. Assignment. This Agreement is one for personal services and will
not be assigned by Employee. The Company may assign this Agreement to any of its
subsidiaries or affiliated companies; provided that such subsidiary or affiliate
fulfills the obligations of the Company under this Agreement.
18. Governing Law. This Agreement is entered into and will be
interpreted and enforced pursuant to the laws of the Commonwealth of Kentucky.
The parties agree that the appropriate forum and venue for any disputes between
any of the parties arising out of this Agreement shall be any federal court in
the Commonwealth of Kentucky and each of the parties submits to the personal
jurisdiction of any such court. The foregoing shall not limit the rights of any
party to obtain execution of judgment in any other jurisdiction. The parties
further agree, to the extent permitted by law, that a final and unappealable
judgment against either of them in any action or proceeding contemplated above
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified exemplified copy
of which shall be conclusive evidence of the fact and amount of such judgment.
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<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
HEALTHCARE RECOVERIES, INC.
/s/ DAVID E. McDOWELL /s/ DOUGLAS R. SHARPS
- ------------------------------------ -----------------------------------
DAVID E. McDOWELL DOUGLAS R. SHARPS
Chairman and Chief Executive Officer
Medaphis Corporation
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<PAGE> 11
EXHIBIT A
INVENTIONS
Employee represents that there are no Inventions.
/s/ DRS
---------------------------
Employee Initials
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<PAGE> 12
AMENDMENT TO EMPLOYMENT AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") by and between
the undersigned employee and HEALTHCARE RECOVERIES, INC., a Delaware
corporation, is entered into effective as of May 28, 1997 and amends the
Employment Agreement between the parties dated May 28, 1997 (the "Employment
Agreement").
The parties agree as follows:
1. Section 4(a)(ii) of the Employment Agreement is deleted in its
entirety and the following is substituted:
"Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company."
2. The first two sentences of Section 5(c) of the Employment
Agreement are deleted in their entirety, and the following is
substituted:
"The Company shall issue to Employee under the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan for Eligible
Employees options to purchase that number of shares of the
Company's common stock (at an exercise price equal to the
initial offering price) listed next to Employee's name as
follows:
Patrick B. McGinnis 200,000
Dennis K. Burge 78,750
Douglas R. Sharps 78,750
Bobby T. Tokuuke 65,000
Debra M. Murphy 65,000
These options shall have an effective grant date on the day
the Company's common stock first begins trading on the Nasdaq
National Market and shall vest over three years as follows:
one-third on each of the first three anniversaries of the
effective grant date."
3. Section 5(a) of the Employment Agreement is hereby amended by
deleting the last sentence and substituting the following for
such sentence:
"Such annual salary will be subject to annual percentage
increases for inflation equivalent to those increases given in
the normal course of business to employees of the Company,
pursuant to the Company's present policy or, as the case may
be, a future policy approved by the Board to apply
substantially on a Company-wide basis."
4. Section 5(b) of the Employment Agreement is deleted in its
entirety and the following is substituted:
<PAGE> 13
"Incentive Compensation. During the term of the Agreement,
Employee shall be entitled to incentive compensation payments
in accordance with the Management Group Incentive Compensation
Plan of Healthcare Recoveries, Inc. If Employee is terminated
by the Company without Cause, Employee shall be entitled to a
pro rata share of incentive compensation payments. A 'pro
rata' share of incentive compensation payments shall mean that
portion of the incentive compensation payments that would have
been paid to Employee had Employee not been terminated without
Cause, assuming Employee worked for the balance of the term
and performed consistently with Employee's past performance."
IN WITNESS WHEREOF, each party has executed this Amendment individually
or by its duly authorized representative.
HEALTHCARE RECOVERIES, INC.
By: /s/ PATRICK B. MCGINNIS
------------------------------------------
Patrick B. McGinnis
Chairman and Chief Executive Officer
EMPLOYEE
/s/ DOUGLAS R. SHARPS
- ---------------------------------------------
Printed Name: Douglas R. Sharps
--------------------------------
<PAGE> 1
EXHIBIT 10.6
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of May 28, 1997 (this "Agreement") is
entered into by and between (i) HEALTHCARE RECOVERIES, INC., a Delaware
corporation (together with all entities that hereafter become Participating
Partnerships or Participating Subsidiaries, hereinafter collectively referred
to each individually as a "Borrower" and collectively as the "Borrowers"), and
(ii) NATIONAL CITY BANK OF KENTUCKY, a national banking association (the
"Lender").
P R E L I M I N A R Y S T A T E M E N T:
A. The Borrowers desire to borrow funds for their corporate
purposes.
B. The Lender has agreed to make available to the Borrowers a
revolving line of credit in the maximum principal amount of $10,000,000 (the
"Revolving Facility").
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements set forth herein and for other good and valuable consideration,
the sufficiency and receipt of which are hereby acknowledged, the parties
hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
The terms defined in this article have the meanings attributed
to them in this article. Singular terms shall include the plural as
well as the singular, and vice versa. Words of masculine, feminine or
neuter gender shall mean and include the correlative words of other
genders.
All references herein to a separate instrument are to such
separate instrument as the same may be amended or supplemented from
time to time pursuant to the applicable provisions thereof.
All accounting terms not otherwise defined herein have the
meanings assigned to them, and all computations herein provided for
shall be made, in accordance with generally accepted accounting
principles applied on a consistent basis. All references herein to
"generally accepted accounting principles" refer to such principles as
they exist at the date of application thereof.
All references herein to designated "Articles", "Sections" and
other subdivisions or to lettered Exhibits are to
<PAGE> 2
the designated Articles, Sections and other subdivisions hereof and the
lettered Exhibits annexed hereto unless the context otherwise clearly
indicates. All Article, Section, other subdivision and Exhibit
captions herein are used for reference only and in no way limit or
describe the scope or intent of, or in any way affect, this Agreement.
The terms "herein", "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
The terms "include," "including" and similar terms shall be
construed as if followed by the phrase "without being limited to."
No inference in favor of or against either party shall be
drawn from the fact that such party or its counsel has drafted any
portion hereof.
Actual/360 Basis shall mean a method of computing interest or
other charges hereunder on the basis of an assumed year of 360 days
for the actual number of days elapsed, meaning that interest or other
charges accrued for each day will be computed by multiplying the rate
applicable on that day by the unpaid principal balance (or other
relevant sum) on that day and dividing the result by 360.
Acquisition shall mean each Consolidated Entity that is
hereafter acquired or created in compliance with Section 6.09(5).
Advance shall mean a borrowing under the Revolving Facility
pursuant to Section 2.01.
Affiliate of any specified person shall mean any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For purposes of
this definition, "control" when used with respect to any specified
person means the power to direct the management and policies of such
person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the
foregoing.
Agreement shall mean this Credit Agreement, as the same may be
amended in writing in accordance with Section 8.08.
Anniversary Date shall mean May 31 of each year.
Assumption Agreement shall have the meaning attributed to that
term in Section 2.01(b).
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<PAGE> 3
Availability Fee shall have the meaning attributed to that
term in Section 2.05(b).
Base Rate shall mean the rate per annum equal to higher of (a)
the Prime Rate or (b) the Federal Funds Effective Rate plus 50 basis
points.
Borrower and Borrowers shall have the meanings attributed to
those terms in the preamble to this Agreement.
Business Day shall mean (a) any day on which the Lender's r's
Principal Office is open for business and (b) if such day relates to
the giving of notices or quotes in connection with a LIBOR Quote or to
a borrowing of, a payment or prepayment of principal of or interest on
or a LIBOR-Based Rate Period for, a LIBOR-Based Rate Segment or a
notice by the Borrowers with respect to any such borrowing, payment,
prepayment or LIBOR-Based Rate Period, any day on which dealings in
Dollar deposits are carried out in the London interbank market.
Capital Expenditure shall mean any payment by the Borrowers or
any of the other Consolidated Entities for the purpose of acquiring or
constructing any real property, plant and equipment or other fixed
assets, including any such payment made under a title retention
agreement or capital lease obligation, and any other expenditure or
liability (excluding capital expenditures related to Acquisitions,
capitalized loan costs or other amortized Acquisition costs, to the
extent properly so classified in accordance with generally accepted
accounting principles) that is properly charged to a capital account
or otherwise capitalized on the Borrowers' consolidated balance sheet
in accordance with generally accepted accounting principles.
Capital Stock of any person shall mean any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock of such person.
Capitalized Contingent Obligations shall mean such amounts
payable from future events that arise from Acquisitions and that are
reflected in the Borrowers' financial statements as liabilities.
Closing Date shall mean _____________, 1997.
Commitment Amount shall mean the obligation of the Lender to
make Advances pursuant to Section 2.01 hereof in an aggregate amount
at any one time outstanding up to but not exceeding Ten Million
Dollars ($10,000,000).
Common Stock of any person shall mean Capital Stock of such
person that does not rank prior, as to the payment of dividends or as
to the distribution of assets upon any volun-
3
<PAGE> 4
tary or involuntary liquidation, dissolution or winding up of such
person, to shares of Capital Stock of any other class of such person.
Compliance Certificate shall have the meaning attributed to
that term in Section 6.03(3).
Consolidated Entity shall mean any person the financial
statements of which are appropriately consolidated with the Borrowers'
financial statements under generally accepted accounting principles.
Consolidated Net Income shall mean, for any period, the net
income of the Borrowers and its Consolidated Entities (on a
consolidated basis and excluding intercompany items), for such period,
determined in accordance with generally accepted accounting
principles.
Contracts shall mean the agreements entered into by the
Borrowers pursuant to which the Borrowers provide recovery services
for subrogated claims and is compensated for such services based upon
a percentage of the amount of the claims successfully recovered.
Controlled Partnership shall mean a general partnership of
which the Borrowers or a Subsidiary is a general partner, or a limited
partnership whose sole general partner is the Borrowers or a
Subsidiary and with respect to which partnership the Borrowers or a
Subsidiary is entitled to receive not less than 50% of any
distributions of cash made to the partners thereof, other than any
preferred cash distribution arrangement approved by the Lender in
writing.
Credit Obligations shall mean the Revolving Facility
Obligations and all other obligations and debts owing to the Lender
before or after the Maturity Date, and arising under the terms of this
Agreement, the Note, and the other Loan Documents, whether now or
hereafter incurred, existing or arising, including the principal
amount of all Advances, any sums expended by Lender in exercising the
rights and remedies described in Section 7.02, all accrued interest on
Advances, and all costs, fees, charges and expenses incurred and
payable in connection therewith, including fees payable under the
terms of, or in connection with, this Agreement, and all other
obligations and debts owing to the Lender arising in connection with,
ancillary to, or in support of Advances, and all extensions,
alterations, modifications, revisions and renewals of any of the
foregoing.
Debt of any person shall mean (i) the Credit Obligations and
all other indebtedness, whether or not represented by bonds,
debentures, notes or other securities, for the repayment of borrowed
money or for reimbursement of drafts drawn or
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<PAGE> 5
available to be drawn under letters of credit, (ii) all capitalized
lease obligations, (iii) Guaranteed Obligations with respect to Debt
of all persons that are not Consolidated Entities, (iv) all
indebtedness secured by any mortgage or pledge of, or Lien on,
property of such person, whether or not any indebtedness secured
thereby shall have been assumed and (v) Capitalized Contingent
Obligations.
Default shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
Deferred Tax Assets shall mean deferred tax assets as on
the Borrowers' financial statements in a manner consistent with
release number 109 of the Financial Accounting Standards Board.
Dollar and the symbol "$" shall mean dollars constituting
legal tender for the payment of public and private debts in the United
States of America.
ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended.
ERISA Affiliate shall mean any corporation, partnership or
other trade or business under common control with the Borrowers within
the meaning of Sections 414(b), (c) or (m) of the Internal Revenue
Code, as amended.
Exchange Act shall mean the Securities Exchange Act of 1934
as amended.
Events of Default shall have the meaning attributed to that
term in Section 7.01.
Federal Funds Effective Rate shall mean, for any day, an
interest rate per annum equal to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as
published for such day (or, if such day is not a Business Day, for the
immediately preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations at approximately 10:00
a.m. Lender's Local Time on such day on such transactions received by
the Lender from three Federal funds brokers of recognized standing
selected by the Lender in its sole discretion.
Funded Debt shall mean all Debt of the Borrowers and the
Consolidated Entities, on a consolidated basis, that matures by its
terms more than one year after, or is renewable or extendable at the
option of the debtor to a date more than one
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year after, the date as of which Funded Debt is being determined.
Governmental Authority shall mean any national, federal,
state, county, municipal or other agency, authority, department,
commission, bureau, board, court or other instrumentality thereof.
Governmental Requirements shall mean all laws, rules,
regulations, requirements, ordinances, judgments, decrees, codes and
orders of any Governmental Authority applicable to the Borrowers or
any other Consolidated Entity.
Guaranteed Obligations of any person shall mean all guaranties
(including guaranties of guaranties and guaranties of dividends and
other monetary obligations), endorsements, assumptions and other
contingent obligations with respect to, or to purchase or to otherwise
pay or acquire, Debt of others.
Hazardous Substance(s) shall have the meaning ascribed in and
shall include (a) any asbestos or insulation or other material
composed of or containing asbestos and (b) those substances listed
under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. 9601 et seq. and the regulations promulgated
thereunder (as amended from time to time) and the Clean Air Act, 42
U.S.C. 7401, et seq. and the regulations promulgated thereunder (as
amended from time to time) and includes oil, waste oil, and used oil
as those terms are defined in the Clean Water Act, 33 U.S.C. 1251
et seq. and regulations promulgated thereunder (as amended from time
to time) and the Resource, Conservation and Recovery Act, 42 U.S.C.
6901 et seq. and regulations promulgated thereunder (as amended from
time to time) and the Oil Pollution Act of 1990, 33 U.S.C. 2701 et
seq. and regulations promulgated thereunder (as amended from time to
time) and shall include any other pollutant or contaminant designated
as such by Congress or the United States Environmental Protection
Agency (EPA) or defined by any other federal, state or local statute,
law, ordinance, code, rule, regulation, order or decree regulating,
relating to, or imposing liability or standards of conduct concerning
any hazardous, toxic or dangerous waste, substance or material, as
now or at any time hereafter in effect.
Interest Expense shall mean all interest incurred on Debt
(including obligations payable under capital leases attributable to
interest) during the period in question.
Lender's Local Time shall mean the time in effect in
Louisville, Kentucky.
Lender shall mean National City Bank of Kentucky, its
successors and assigns.
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Liabilities shall mean all Debt and all other items (including
taxes accrued as estimated) that, in accordance with generally
accepted accounting principles, would be included in determining total
liabilities as shown on the liabilities side of a balance sheet.
LIBOR-Based Rate shall mean a rate per annum equal to the
LIBOR Quote plus 225 basis points.
LIBOR-Based Rate Period shall mean the period of time,
selected by the Borrowers under Section 3.01, with respect to which
the LIBOR-Based Rate is (or is proposed to be) applicable to a
Segment.
LIBOR-Based Rate Segment shall mean a Segment to which the
LIBOR-Based Rate is (or is proposed to be) applicable.
LIBOR Quote shall mean, with respect to any time at which the
LIBOR-Based Rate is to be determined, the rate of interest determined
by the Lender at such time, based upon such factors (including the
LIBOR Reserve Requirement) as the Lender deems relevant, as the
Lender's best estimate of the cost of funds available to the Lender
from the purchase on the London interbank market of funds in the form
of time deposits in Dollars in the approximate amount of the Segment
that is to bear interest at the LIBOR-Based Rate, having a maturity
comparable to the LIBOR-Based Rate Period during which the LIBOR-Based
Rate is to be in effect, it being expressly understood that (a) the
Lender may not actually purchase any such time deposits and obtain
such funds and (b) the LIBOR Quote will be an estimate, and for a
variety of reasons, including changing market conditions, the actual
cost of funds to the Lender (if the Lender elects to purchase funds in
the form of time deposits on such date) might vary from the LIBOR
Quote.
LIBOR Reserve Requirement shall mean the percentage (expressed
as a decimal) prescribed by the Board of Governors of the Federal
Reserve System (or any successor Governmental Authority), on the date
on which the LIBOR-Based Rate is determined, for determining the
reserve requirements of the Lender (including any marginal, emergency,
supplemental, special or other reserves) with respect to liabilities
relating to time deposits purchased in the London interbank market
having a maturity equal to the period during which the LIBOR-Based
Rate will be in effect and in an amount equal to the LIBOR-Based Rate
Segment involved, without any benefit or credit for any proration,
exemptions or offsets under any now or hereafter applicable
regulations.
Lien shall mean any mortgage, pledge, encumbrance, charge,
security interest, assignment or other preferential
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arrangement of any kind, including any conditional sale agreement or
other title retention agreement.
Loan Documents shall mean this Agreement, the Note, the
Assumption Agreements, and all other agreements, instruments and
documents executed or delivered at any time in connection with the
Credit Obligations, or to evidence or secure any of the Credit
Obligations, and all amendments thereto.
Loans shall mean the aggregate outstanding principal amount of
all Advances and all extensions and renewals thereof.
Margin Stock shall have the meaning attributed to that term in
Regulation U of the Board of Governors of the Federal Reserve System,
as amended.
Maturity Date shall mean May 31, 1999, or such later date as
may be mutually agreed upon in writing by the Borrowers and the Lender.
Net Worth shall mean the sum of the amounts set forth on the
Borrowers' consolidated balance sheet determined in accordance with
GAAP as shareholders' equity (including the par or stated value of all
outstanding capital stock, retained earnings, additional paid-in
capital, capital surplus and earned surplus), less the sum of (i) any
surplus resulting from any write-up of assets, and (ii) any amounts
due from or owed by any stockholder or Affiliate in excess of
$100,000.
Note shall have the meaning attributed to such term in
Section 2.01.
Opinion of Counsel shall mean a favorable written opinion,
with such changes and modifications as may be required by the Lender
or its counsel, of the corporate general counsel of the Borrowers or
attorney or firm of attorneys duly licensed to practice law in the
jurisdiction the laws of which are applicable to the legal matters in
question.
Participating Partnership shall mean any Controlled
Partnership approved by the Lender that hereafter executes and
delivers to the Lender an Assumption Agreement, and all other
documents necessary to assume joint and several liability as to the
Credit Obligations to the extent of its Partnership Liabilities.
Participating Subsidiary shall mean any Subsidiary approved by
the Lender that hereafter executes and delivers to the Lender an
Assumption Agreement, and all other documents necessary to assume
joint and several liability as to the Credit Obligations (in the
maximum amount provided for in such Assumption Agreement).
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Partnership Liability shall mean, with respect to a
Participating Partnership, that part, if any, of an Advance (together
with interest thereon and fees, prepayment premiums and other charges
properly attributable thereto) that is received by and used by or for
the benefit of such Participating Partnership, as certified to the
Lender by the Borrowers, under Section 2.02, in connection with the
Borrowers' request for such Advance; and Partnership Liabilities shall
mean the aggregate amount of all such parts of Advances that are
received by and used by or for the benefit of such Participating
Partnership.
Permitted Encumbrances shall mean:
(1) taxes, assessments and other governmental charges
that are not delinquent or that are being contested in good faith by
appropriate proceedings duly pursued;
(2) Liens in favor of the Lender;
(3) the existing Liens described in Schedule 2 hereto; and
(4) Liens in favor of landlords, the amount secured by
which landlords' Liens, in the aggregate, would not materially
adversely affect the Borrowers.
Permitted Investments shall mean investments consistent with
the type of investments permitted by the "Investment Policy" of the
Borrowers as such Investment Policy exists on the Closing Date, and
other investments made with the express prior written approval of the
Lender.
person shall include natural persons, sole proprietorships,
corporations, trusts, unincorporated organizations, associations,
companies, institutions, entities, joint ventures, partnerships and
Governmental Authorities.
Prime Rate means for any day, the "Prime Rate" of interest
generally charged by the National City Bank of Kentucky on such day to
its most substantial and credit-worthy commercial borrowers for 90 day
unsecured loans, it being understood and agreed by the Borrowers that
the "Prime Rate" is the rate of interest designated by the National
City Bank of Kentucky as its "Prime Rate", and such term does not
necessarily mean or imply that it is the lowest or best rate then
available from the National City Bank of Kentucky on floating rate
loans to specific borrowers of the class described above.
Principal Office shall mean the principal office of the Lender
located at National City Tower, 101 S. Fifth Street, Louisville,
Kentucky 40202.
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Quarterly Payment Date shall have the meaning attributed to
that term in Section 2.03.
Related Person of any person means any other person owning (a)
5% or more of the outstanding Common Stock of such person or (b) 5% or
more of the Voting Stock of such person.
Request for Advances shall have the meaning attributed to that
term in Section 2.02.
Revolving Facility shall mean the credit facility made
available to the Borrowers under the terms of Article II.
Revolving Facility Obligations shall mean the outstanding
principal amount of all Advances, all interest accrued thereon, all
costs, charges, fees and expenses payable in connection therewith and
all extensions and renewals thereof.
Segment shall mean a portion of the Advances (or all thereof)
with respect to which a particular interest rate is (or is proposed to
be) applicable. The aggregate amount of all Advances that bear
interest at the Base Rate shall be deemed to constitute a single
Segment. The aggregate amount of all Advances that bear interest at
the same LIBOR-Based Rate and for the same LIBOR-Based Rate Period
shall be deemed to constitute a single LIBOR-Based Rate Segment.
Solvent shall mean, as to any person, on a particular date,
that such person has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to
engage, is able to pay its debts as they mature, owns property having
a value, both at fair valuation and at present fair saleable value,
greater than the amount required to pay its probable liability on
existing debts as they become mature (including known reasonable
contingencies and contingencies that should be included in notes of
such person's financial statements pursuant to generally accepted
accounting principles), and does not intend to, and does not believe
that it will, incur debts or probable liabilities beyond its ability
to pay such debts or liabilities as they mature.
Subsidiary shall mean any corporation, more than 50% of the
shares of Voting Stock of which is owned and controlled directly or
indirectly by the Borrowers.
Voting Stock of any person shall mean Capital Stock of such
person that ordinarily has voting power for the election of directors
(or persons performing similar functions) of such person, whether at
all times or only so long as no senior class of securities has such
voting power by reason of any contingency.
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ARTICLE II
REVOLVING FACILITY TERMS
SECTION 2.01. Revolving Facility.
(a) From and after the Closing Date, on the terms and subject to
the conditions set forth in this Agreement, the Lender agrees to lend to the
Borrowers (except as limited by the terms of subsection (d) of this Section
2.01 or by the terms of the Assumption Agreements), and the Borrowers may
borrow, repay and reborrow, an amount not exceeding the Commitment Amount in
effect from time to time. All Advances made by the Lender to the Borrowers
under this Agreement shall be evidenced by the master promissory note (the
"Note") in the form attached hereto as Exhibit A dated the Closing Date payable
to the order of the Lender, duly executed by the Borrowers, and joined in by
each Subsidiary and Controlled Partnership that becomes a Participating
Subsidiary or Participating Partnership after the Closing Date under the terms
of an Assumption Agreement, and in a face amount equal to the Commitment
Amount. The Advances shall bear interest as provided in Article III below. The
unpaid principal amount of all Loans hereunder shall not exceed the Commitment
Amount.
(b) Each Subsidiary and Controlled Partnership that is to become
after the Closing Date a Participating Subsidiary or Participating Partnership,
as the case may be, shall, at the time it is to become a Participating
Subsidiary or Participating Partnership, execute and deliver to the Lender, in
accordance with the provisions of Section 6.14, an Assumption Agreement in the
form attached hereto as Exhibit B ("Assumption Agreement").
(c) Each Borrower, Participating Subsidiary and Participating
Partnership, separately and severally, hereby appoints and designates
Healthcare Recoveries, Inc. as such party's agent and attorney-in-fact to act
on behalf of such party for all purposes of the Loan Documents. Healthcare
Recoveries, Inc. shall have authority to exercise on behalf of each Borrower,
Participating Subsidiary and Participating Partnership all rights and powers
that Healthcare Recoveries, Inc. deems necessary, incidental or convenient in
connection with the Loan Documents, including the authority to execute and
deliver certificates, documents, agreements and other instruments referred to
in or contemplated by the Loan Documents, request Advances, receive all
proceeds of Advances, give all notices, approvals and consents required or
requested from time to time by the Lender and take any other actions and steps
that a Borrower, Participating Subsidiary or a Participating Partnership could
take for its own account in connection with the Loan Documents from time to
time, it being the intent of the Borrowers, Participating Subsidiaries and the
Participating Partnerships to grant to Healthcare Recoveries, Inc. plenary
power to act on behalf of the Borrowers, Participating Subsidiaries and the
Participating Partnerships in connection with and pursuant to the Loan
Documents. The appointment of Healthcare Recoveries, Inc. as agent and
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attorney-in-fact for the Borrowers, Participating Sunsidiaries and the
Participating Partnerships hereunder shall be coupled with an interest and be
irrevocable so long as any Loan Document shall remain in effect. The Lender
need not obtain the consent or approval of any Borrower, Participating
Subsidiary or Participating Partnership for any act taken by Healthcare
Recoveries, Inc. pursuant to any Loan Document, and all such acts shall bind
and obligate the Borrowers, the Participating Subsidiaries and the
Participating Partnerships, jointly and severally. Each Borrower,
Participating Subsidiary and Participating Partnership forever waives and
releases any claim (whether now or hereafter arising) against the Lender based
on the lack of authority of Healthcare Recoveries, Inc. to act on behalf of any
Borrower, Participating Subsidiary or Participating Partnership in connection
with the Loan Documents.
(d) The liability of each Participating Partnership with respect
to the Credit Obligations shall be limited to an amount equal to its
Partnership Liabilities. The liability of each Participating Subsidiary with
respect to the Credit Obligations shall be limited to an amount equal to the
greater of (i) $1.00 less than the greatest of (A) the Participating
Subsidiary's Net Worth (as hereinafter defined) as of the end of the most
recently concluded fiscal quarter of the Participating Subsidiary ended on or
prior to the date the Participating Subsidiary became a Co-Borrower, (B) the
highest Net Worth of the Participating Subsidiary at the end of any fiscal
quarter ending after the Participating Subsidiary became a Borrower and prior
to the earlier of the date of the commencement of a case under the United
States Bankruptcy Code (the "Bankruptcy Code") involving the Participating
Subsidiary or the date enforcement of this Agreement or any of the other Loan
Documents is sought against the Participating Subsidiary, and (C) the Net Worth
of the Participating Subsidiary at the earlier of the date of the commencement
of a case under the Bankruptcy Code involving the Participating Subsidiary or
the date enforcement of this Agreement or any of the other Loan Documents is
sought against the Participating Subsidiary, or (ii) the amount that in a legal
proceeding brought within the applicable limitations period is determined by
the final, non-appealable order of a court having jurisdiction over the issue
and the applicable parties to be the amount of value or benefit given by the
Lender, or received by the Participating Subsidiary, in exchange for the
obligations of the Participating Subsidiary under this Agreement and the other
Loan Documents. As used in this subsection (e), "Net Worth" shall mean (x) the
fair value of the property of the Participating Subsidiary from time to time
(taking into consideration the value, if any, of rights of subrogation,
contribution and indemnity), minus (y) the total liabilities of the
Participating Subsidiary (including contingent liabilities [discounted in
appropriate instances], but excluding liabilities of the Participating
Subsidiary under this Agreement and the other Loan Documents) from time to
time.
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(e) No Borrower will exercise any rights that it may acquire by
way of subrogation under this Agreement or any of the other Loan Documents, by
any payment made hereunder or under any of the other Loan Documents or
otherwise, until all the Credit Obligations have been paid in full and this
Agreement has been terminated and is no longer subject to reinstatement under
the final sentence of Section 8.13. If any amount shall be paid to a Borrower
on account of any such subrogation rights at any time when all of the Credit
Obligations shall not have been paid in full and this Agreement terminated,
such amount shall be held in trust for the benefit of the Lender and shall be
paid forthwith to the Lender to be credited and applied upon the Credit
Obligations, whether matured or unmatured, in accordance with the terms of the
Loan Documents.
SECTION 2.02. Advances. The Advances made by the Lender pursuant to
each request for Advances shall be in an aggregate amount not less than
$500,000 or a greater integral multiple of $100,000; provided, however, that a
request for Advances may be in an amount of less than $500,000 if the
difference between the Commitment Amount and the amount of the Loans then
outstanding is less than $500,000. No more than ten Advances may be
outstanding at any time. The maximum borrowing for each Advance will be
limited to the Commitment Amount. Each request for Advances must be in writing
(which may be by facsimile transmission) and must be received by the Lender not
later than 10:00 a.m. Lender's Local Time, on the day on which the Advances are
to be made, except that, if the Advances are to bear interest at the
LIBOR-Based Rate, the request must be received by the Agent not later than
10:00 a.m., Lender's Local Time, three Business Days prior to the day on which
the Advances are to be made. Each request for Advances shall be in the form
attached hereto as Exhibit C ("Request for Advances or Interest Rate Election")
and shall specify the aggregate amount of the Advances requested, the day as of
which the Advances are to be made and the part or parts, if any, of the
Advances that are to be received by and used by or for the benefit of
Participating Partnerships and Participating Subsidiaries, specifying the part
allocable to each Participating Partnership and Participating Subsidiary and
shall provide the interest rate information called for in Section 3.02. All
the Advances requested in a single Request for Advances or Interest Rate
Election shall be subject to the same interest rate terms. The Lender shall
make available the amount of the Advance to be made by it on such date to the
Borrowers, by (a) depositing the proceeds thereof into an account with the
Lender in the name of Healthcare Recoveries, Inc., acting in its capacity as
agent for itself, the Borrowers and each of the Participating Subsidiaries and
Participating Partnerships pursuant to Section 2.01(c) above. The Lender's
obligation to make Advances shall terminate, if not sooner terminated pursuant
to the provisions of this Agreement, 14 days prior to the Maturity Date. The
Lender shall have no obligation to make Advances if a Default or an Event of
Default has occurred and is continuing. Each Request for Advances shall be
signed by an officer of the Borrowers designated
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as authorized to sign and submit Request for Advances in the documnets
submitted to the Lender pursuant to Section 5.03(a) below. In lieu of
delivering a written Request for Advances, Borrowers may give the Lender
telephonic notice by the required time of the requested Advance under this
Section 2.02; provided that such notice shall be promptly confirmed in writing
by delivery of a Request for Advances to the Lender on or before the
date the Advances are to be made. Lender shall not incur any liability to the
Borrowers in acting upon any telephonic notice referred to herein which the
Lender believes in good faith to have been given by a duly authorized officer
of the Borrowers. The Borrowers may, from time to time, by written notice to
the Lender, terminate the authority of any person to submit Request for
Advances, such termination of authority to become effective upon actual receipt
by the Lender of such notice of termination. The Borrowers may from time to
time authorize other persons to sign and submit Request for Advances by
delivering to the Lender a certificate of the Secretary of the Borrowers
certifying the incumbency and specimen signature of each such person. The
Lender shall be entitled to rely conclusively upon the authority of any person
so designated by the Borrowers.
SECTION 2.03. Payments. All interest accrued at the Base Rate shall
be payable on the first day of each successive July, October, January and April
("Quarterly Payment Date"), commencing on July 1, 1997; and all interest
accrued on each LIBOR-Based Rate Segment shall be payable on the earlier of a
Quarterly Payment Date or last day of the applicable LIBOR-Based Rate Period.
The principal amount of the Advances outstanding shall be due and payable,
together with accrued interest thereon, on the Maturity Date.
SECTION 2.04. Prepayment.
(a) The Borrowers may at any time prepay all or any part of the
Advances, without premium or penalty; provided, however, that (i) no
LIBOR-Based Rate Segment may be prepaid during a LIBOR-Based Rate Period, and
(ii) the amount of any partial prepayment shall be in increments of $100,000.
The Borrowers shall pay, on the date of prepayment, all interest accrued to the
date of prepayment on any amount prepaid in connection with the prepayment in
full of the Credit Obligations and the concurrent termination of this
Agreement.
(b) If at any time the principal amount of the Advances is greater
than the Commitment Amount, the Borrowers shall immediately make a prepayment
(notwithstanding the provisions of clause (a) of this section, but subject to
the provisions of Section 3.07) on the Advances equal to the difference between
said aggregate principal amount of the Advances and the Commitment Amount.
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SECTION 2.05. Other Fees.
(a) The Borrowers shall pay to the Lender on or before the Closing
Date a nonrefundable closing fee in the amount of $25,000.
(b) The Borrowers shall pay to the Lender an availability fee (the
"Availability Fee") computed at the rate of one-quarter of one percent (.25%)
per annum times the daily average difference between (i) the Commitment Amount
and (ii) the sum of the aggregate outstanding principal amount of the Advances
made by the Lender. The Availability Fee shall be payable in arrears on each
Quarterly Payment Date, commencing on July 1, 1997, and on the Maturity Date.
The Availability Fee shall be computed on an Actual/360 Basis.
SECTION 2.06. Time, Place and Application of Payments. The Credit
Obligations shall be payable to the Lender in Dollars on or before 11:00 a.m.
(Lender's Local Time) on the date on which due, at the Principal Office, in
immediately available funds, free and clear of any and all rights of setoff and
counterclaim. Payments received by the Lender shall be applied first to
expenses, fees and charges, then to accrued interest and finally to principal.
ARTICLE III
INTEREST
SECTION 3.01. Applicable Interest Rates. The Borrowers shall have the
option to elect to have any Segment bear interest at the Base Rate or the
LIBOR-Based Rate. For any period of time and for any Segment with respect to
which the Borrowers do not elect the LIBOR-Based Rate, such Segment shall bear
interest at the Base Rate. The Borrowers' right to elect the LIBOR-Based Rate
shall be subject to the following requirements: (a) each LIBOR-Based Rate
Segment shall be in the amount of $500,000 or an integral multiple of $100,000
or more and in an integral multiple thereof, (b) each LIBOR-Based Rate Segment
shall have a maturity selected by the Borrowers of one, two, three or six
months, (c) no more than nine Segments may be outstanding at any time, and (d)
no LIBOR-Based Rate Segment may have a maturity date later than the Maturity
Date.
SECTION 3.02. Procedure for Exercising Interest Rate Options. Health
Care Recoveries, Inc., on behalf of itself and the other Borrowers, may elect
to have a particular interest rate apply to a Segment by notifying the Lender
in writing (which may be by facsimile transmission) not later than 10:00 a.m.,
Lender's Local Time, on the day on which a requested interest rate is to
become-applicable, except that, if the Segment is to bear interest at the
LIBOR-Based Rate, the notice must be received by the Lender not later than
10:00 a.m. Lender's Local Time, three Business Days before the day on which the
requested interest rate is to become applicable. Any notice of interest rate
election hereunder shall
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be irrevocable and shall be in the form of attached hereto as Exhibit C and
shall set forth the following: (a) the amount of the Segment to which the
requested interest rate will apply, (b) the date on which the selected interest
rate will become applicable, (c) whether the interest rate selected is the Base
Rate or the LIBOR-Based Rate and (d) if the interest rate selected is the
LIBOR-Based Rate, the maturity selected for the LIBOR-Based Rate Period. On
the day that the Lender receives a notice hereunder requesting that the
LIBOR-Based Rate be applicable, the Lender shall use its best efforts to notify
Health Care Recoveries, Inc. by telephone or by facsimile transmission of the
applicable LIBOR-Based Rate as early on that day or the next Business Day as
may be practical in the circumstances. The Lender shall not be required to
provide the quote of the LIBOR-Based Rate on any day on which dealings in
deposits in Dollars are not transacted in the London interbank market. If
Health Care Recoveries, Inc. does not immediately accept the LIBOR-Based Rate
quoted by the Lender, the Lender may, in view of changing market conditions,
revise the quoted LIBOR-Based Rate at any time. No LIBOR-Based Rate shall be
effective until mutually agreed upon by Health Care Recoveries, Inc. and the
Lender. If the Lender and Health Care Recoveries, Inc. attempt to agree on the
LIBOR-Based Rate but fail so to agree, or if there is any uncertainty as to
whether or not the Lender and Health Care Recoveries, Inc. have agreed upon the
LIBOR-Based Rate, interest shall accrue on the Segment for which the
LIBOR-Based Rate has been selected at the then applicable Base Rate.
SECTION 3.03. Base Rate. Each Segment subject to the Base Rate shall
bear interest at the Base Rate until payment in full, or until the LIBOR-Based
Rate is selected by the Borrowers and becomes applicable thereto, on the unpaid
principal balance of such Segment on an Actual/360 Basis. Any change in the
Base Rate caused by a change in the Prime Rate or the Federal Funds Effective
Rate shall take effect on the effective date of such change in the Prime Rate
designated by the Lender or the Federal Funds Effective Rate, without notice to
the Borrowers and without any further action by the Lender. Upon and after the
occurrence of an Event of Default, each Segment subject to the Base Rate shall
bear interest from the date of such Event of Default until payment in full at a
per annum rate (computed on an Actual/360 Basis) equal to two percent (2%) in
excess of the Base Rate that would otherwise have been applicable.
Notwithstanding the foregoing, for the purpose of enabling the Lender to send
periodic billing statements in advance of each interest payment date reflecting
the amount of interest payable on such interest payment date, the Prime Rate or
Federal Funds Effective Rate in effect 15 days prior to each interest payment
date shall be deemed to be the Prime Rate or the Federal Funds Effective Rate,
as applicable, as continuing in effect until the date prior to such interest
payment date for purposes of computing the amount of interest payable on such
interest payment date. If the Lender elects to use the Prime Rate or the
Federal Funds Effective Rate, as applicable, 15 days prior to the interest
payment date for billing purposes, and if the Prime Rate or the
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Federal Funds Effective Rate, as Effective Rate, as applicable, changes during
such 15-day period, the difference between the amount of interest that in fact
accrues during such period and the amount of interest actually paid will be
added to or subtracted from, as the case may be, the interest otherwise payable
in preparing the periodic billing statement for the next succeeding interest
payment date. In determining the amount of interest payable at the Maturity
Date or upon full prepayment of the Credit Obligations, all changes in the
Prime Rate or the Federal Funds Effective Rate, as applicable, occurring on or
prior to the day before the Maturity Date or the date of such full prepayment
shall be taken into account.
SECTION 3.04. LIBOR-Based Rate. Each LIBOR-Based Rate Segment shall
bear interest from the date the LIBOR-Based Rate becomes applicable thereto
until the end of the applicable LIBOR-Based Rate Period on the unpaid principal
balance of such LIBOR-Based Rate Segment at the LIBOR-Based Rate on an
Actual/360 Basis. Upon and after the occurrence of an Event of Default, each
LIBOR-Based Rate Segment shall bear interest from the date of such Event of
Default until payment in full at a per annum rate (computed on an Actual/360
Basis) equal to two percent (2) in excess of the LIBOR-Based Rate that would
otherwise have been applicable.
SECTION 3.05. Termination of LIBOR-Based Rate; Increase in LIBOR-Based
Rate; Reduction of Return.
(a) If at any time the Lender shall determine (which determination
shall be final, conclusive and binding upon all parties) that:
(i) by reason of any changes arising after
Closing Date affecting the London interbank market or affecting the
position of the Lender in such market, adequate and fair means do not
exist for ascertaining the LIBOR-Based Rate by reference to the LIBOR
Quote with respect to a LIBOR-Based Rate Segment; or
(ii) the continuation by the Lender of LIBOR-Based
Rate Segments at the LIBOR-Based Rate or the funding thereof in the
London interbank market would be unlawful by reason of any law,
governmental rule, regulation, guidelines or order; or
(iii) the continuation by the Lender of LIBOR-Based
Rate Segments at the LIBOR-Based Rate or the funding thereof in the
London interbank market would be impracticable as a result of a
contingency occurring after the Closing Date that materially and
adversely affects the London interbank market;
then, and in any such event, the Lender shall on such date give notice (by
telephone and confirmed in writing) to Health Care Recoveries, Inc. of such
determination. The obligation of the Lender to make or maintain LIBOR-Based
Rate Segments so affected or
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to permit interest to be computed thereon at the LIBOR-Based Rate,
as the case may be, shall be terminated, and interest shall thereafter be
computed on the affedted Segment or Segments at the then applicable Base Rate.
(b) It is the intention of the parties hereto that the LIBOR-Based Rate
shall accurately reflect the cost to the Lender of maintaining any LIBOR-Based
Rate Segment during the applicable LIBOR-Based Rate Period. Accordingly, if by
reason of any change after the date hereof in any applicable law or
governmental rule, regulation or order (or any interpretation thereof and
including the introduction of any new law, governmental rule, regulation,
guideline or order), including any change in the LIBOR Reserve Requirement, the
cost to Lender of maintaining any LIBOR- Based Rate Segment or funding the same
by means of a London interbank market time deposit, as the case may be, shall
increase, the LIBOR-Based Rate applicable to such LIBOR-Based Rate Segment
shall be adjusted as necessary to reflect such change in cost to the Lender,
effective as of the date on which such change in any applicable law,
governmental rule, regulation, guideline or order becomes effective.
(c) If the Lender shall have determined that the adoption after the
Closing Date of any law, governmental rule, regulation, guideline or order
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender (or any lending office of
the Lender) or the Lender's holding company with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
Governmental Authority, central bank or comparable agency, has or would have
the effect of reducing the rate of return on the Lender's capital or on the
capital of the Lender's holding company, as a consequence of the Lender's
obligations under this Agreement or the Advances made by the Lender pursuant
hereto to a level below that which the Lender or the Lender's holding company
could have achieved but for such adoption, change or compliance (taking into
consideration the Lender's guidelines with respect to capital adequacy) by an
amount deemed by the Lender to be material, then from time to time the
Borrowers shall pay to the Lender such additional amount or amounts as will
compensate the Lender or the Lender's holding company for any such reduction
suffered.
SECTION 3.06. Compensation. The Borrowers shall compensate the
Lender for all losses, expenses and liabilities (including any interest paid by
the Lender to lenders on funds borrowed by the Lender to make or carry any
LIBOR-Based Rate Segment and any loss sustained by the Lender in connection
with the re-employment of such funds), that the Lender may sustain: (a) if for
any reason (other than a default by the Lender) following agreement between
Health Care Recoveries, Inc. and the Lender as to the LIBOR-Based
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Rate applicable to the LIBOR-Based Rate Segment, Health Care Recoveries, Inc.
fails to accept such LIBOR-Based Rate Segment, (b) as a consequence of any
authorized action taken or default by the Borrowers in the repayment of any
LIBOR-Based Rate Segment when required by the terms of this Agreement, or (c)
as a consequence of the prepayment of any LIBOR-Based Rate Segment pursuant to
Section 2.04. A certificate as to the amount of any additional amounts payable
pursuant to this section or Section 3.05(c) (setting forth in reasonable detail
the basis for requesting such amounts) submitted by the Lender to Health Care
Recoveries, Inc. shall be conclusive, in the absence of manifest error. The
Borrowers shall pay to the Lender the amount shown as due on any such
certificate delivered by the Lender within 30 days after receipt of the same by
Health Care Recoveries, Inc.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrowers represent and warrant to the Lender as follows:
SECTION 4.01. Organization, Powers, Existence. etc. Each Borrower
and each Consolidated Entity is duly organized, validly existing and in good
standing under the laws of the state in which it is incorporated or formed.
Each Borrower and each Consolidated Entity (a) has the power and authority to
own its properties and assets and to carry on its business as being conducted
at the Closing Date, (b) has the power to execute, deliver and perform the Loan
Documents to which it is a party, (c) is duly qualified to do business in each
state in which it is required to be so qualified and with respect to which the
failure to be so qualified would have a material adverse effect on its
properties or business and (d) except as set forth in Schedule 4.01 hereto, has
not done business under any other name, trade name or otherwise within the five
years immediately preceding the Closing Date.
SECTION 4.02. Authorization of Borrowings, etc. The execution, delivery and
performance of the Loan Documents by the Borrowers and the borrowings
thereunder by the Borrowers (a) have been duly authorized by all requisite
action (including any required shareholder action) and (b) will not violate any
Governmental Requirement, the articles or certificate of incorporation or
by-laws of the Borrowers, or any indenture, agreement or other instrument to
which the Borrowers or any Consolidated Entity is a party, or by which the
Borrowers or any Consolidated Entity or any of their respective properties and
assets are bound, or be in conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under, any such indenture,
agreement or other instrument, or result in the creation or position of any
Lien upon any of the properties or assets of the Borrowers or any Consolidated
Entity, except as required by the terms of this Agreement and the other Loan
Documents.
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SECTION 4.03. Financial Condition. The Borrowers have furnished to
the Lender a copy of the consolidated balance sheet and the Consolidated
Entities as of March 31, 1997, and related consolidated statements of
operations, stockholders' equity and cash flows, as of March 31, 1997. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied consistently throughout the period involved, are
in accordance with the books and records of the Borrowers and the Consolidated
Entities, are correct and complete and present fairly the financial condition,
assets, liabilities and stockholders' equity of the Borrowers and the
Consolidated Entities as of the date of such balance sheet, and the results of
operations for the periods covered by such related statements, and, since March
31, 1997, no material adverse change in the financial condition, business or
operations of the Borrowers or any of the Consolidated Entities has occurred.
Neither the Borrowers nor any Consolidated Entity has any Liabilities,
Guaranteed Obligations or other obligations or liabilities, direct or
contingent, that are material in amount, other than the Liabilities reflected
in such balance sheet and the notes thereto.
SECTION 4.04. Taxes. The Borrowers and each Consolidated Entity has
filed or caused to be filed all federal, state and local tax returns that are
required to be filed and has paid all taxes as shown on said returns or on any
assessment received by the Borrowers or any Consolidated Entity to the extent
that such taxes have become due.
SECTION 4.05. Litigation. Except as set forth in Schedule 4.05
hereto, there are no actions, suits or proceedings (whether or not purportedly
on behalf of the Borrowers or any Consolidated Entity) pending or, to the best
knowledge of the Borrowers, threatened against or affecting the Borrowers or
any Consolidated Entity, at law or in equity, by or before any Governmental
Authority that involve any of the transactions provided for in this Agreement
or the possibility of any judgment or liability that may result in a material
adverse change in the operations or financial condition of the Borrowers or any
of the Consolidated Entities; and neither the Borrowers nor any Consolidated
Entity is in default with respect to any material Governmental Requirement.
SECTION 4.06. Agreements. Neither the Borrowers nor any Consolidated
Entity is a party to any agreement or instrument, or subject to any charter,
partnership agreement or other corporate or partnership restriction, that
materially and adversely affects its business, properties or assets, operations
or condition, financial or otherwise, or is in default in the performance,
observance or fulfillment of any of the obligations contained in any agreement
or instrument to which it is a party, which default could have a material
adverse effect upon the operations or financial condition of the Borrowers or
any of the Consolidated Entities.
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SECTION 4.07. Use of Proceeds. The Borrowers do not intend to use any
part of the proceeds of the Advances to purchase or carry, or to reduce or
retire or refinance any credit incurred to purchase or carry, any Margin Stock,
or to extend credit to others for the purpose of purchasing or carrying any
Margin Stock, or for any other purpose not permitted under Section 6.13.
SECTION 4.08. ERISA. (a) The execution, delivery and performance of
the Loan Documents will not involve any prohibited transaction within the
meaning of ERISA or Section 4975 of the Internal Revenue Code, as amended, with
respect to any employee benefit plan (as defined in Section 3(3) of ERISA)
maintained by the Borrowers and each ERISA Affiliate, (b) as of the Closing
Date the Borrowers and each ERISA Affiliate have fulfilled their respective
obligations under the minimum funding standards imposed by ERISA and are in
compliance in all material respects with the applicable provisions of ERISA,
and (c) as of the Closing Date neither the Borrowers nor any of the ERISA
Affiliates maintains any plan subject to Title IV of ERISA.
SECTION 4.09. Investment Company Act. The Borrowers are not an
"investment company," or a company "controlled" by an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
SECTION 4.10. Subsidiaries. The Borrowers have no direct or indirect
equity ownership in any person other than Controlled Partnerships and
Subsidiaries, all of which are either Participating Partnerships or
Participating Subsidiaries, except for equity ownerships that constitute
Permitted Investments. None of the Subsidiaries or Controlled Partnerships has
any direct or indirect equity ownership in any person other than Consolidated
Entities, except for equity ownerships that constitute Permitted Investments.
The Stock of and the Partnership Interest in each Subsidiary and Controlled
Partnership is free and clear of all Liens, warrants, options, rights to
purchase and other interests of any person, except as set out in Schedule 2
hereto. All shares of Capital Stock of the Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable. All
now-existing Subsidiaries and Controlled Partnerships are listed in Schedule
4.10 hereto.
SECTION 4.11. Principal Place of Business. The principal place of
business and chief executive office of the Borrowers is at their addresses
shown in Schedule 4.11 and will not be changed from each such address unless,
prior to such change, the Borrowers shall have notified the Lender of the
proposed change, and in no event will the Borrowers' principal places of
business or chief executive offices be located outside of Jefferson County,
Kentucky.
SECTION 4.12. Environmental Laws. Except as set forth in Schedule
4.12 hereto (a) the Borrowers and all Consolidated
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Entities are in material compliance with all applicable Governmental
Requirements relating to air, Borrowers nor any Consolidated Entity has ever
caused or permitted any Hazardous Substance to be placed, held, located,
released or disposed of in violation of any Governmental Requirement on, under
or at any facility legally or beneficially owned by the Borrowers or any
Consolidated Entity; (c) neither the Borrowers nor any Consolidated Entity has
received notice that any Hazardous Substance has been placed, held, located,
released or disposed of in violation of any Governmental Requirement on, under
or at any facility or any other real property legally or beneficially owned,
leased or operated by the Borrowers or any Consolidated Entity; (d) no facility
or any other real property legally or beneficially owned, leased or operated by
the Borrowers or any Consolidated Entity has ever been used by the Borrowers or
any Consolidated Entity as a dump site or permanent or temporary storage site,
in violation of any Governmental Requirement, for any Hazardous Substance; and
(e) neither the Borrowers nor any Consolidated Entity has any Liabilities with
respect to Hazardous Substances, and no facts or circumstances exist that could
give rise to any such Liabilities. None of the matters set forth in the
documents listed in Schedule 4.12 individually or in the aggregate, has caused
or will cause a material adverse change in the financial condition, business
or affairs of the Borrowers and the Consolidated Entities.
SECTION 4.13. Licenses. All material certificates of need, licenses,
permits, accreditation and approvals required by all Governmental Authorities
necessary in order for the Borrowers to conduct its business have been obtained
and are in full force and effect.
SECTION 4.14. Title to Properties. The Borrowers and the Consolidated
Entities have good and marketable title to all their properties and assets, and
all such properties and assets are free and clear of all Liens, other than
Permitted Encumbrances and except as otherwise permitted or required by the
provisions of the Loan Documents.
SECTION 4.15. Enforceability. This Agreement and each of the other
Loan Documents, when duly executed and delivered by the Borrowers in accordance
with the provisions of this Agreement, will constitute the legal, valid and
binding, joint and several, obligations of the Borrowers, enforceable in
accordance with their respective terms, subject to the effect of bankruptcy,
insolvency, reorganization, receivership, moratorium and similar laws affecting
the rights and remedies of creditors generally.
SECTION 4.16. Consents, Registrations, Approvals. etc. No
registration with or consent or approval of, or other action by, any
Governmental Authority is required for the execution, delivery
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and performance of this Agreement or the other Loan Documents, or the
borrowings under this Agreement, by the Borrowers.
SECTION 4.17. Solvency. The Borrowers is Solvent, and the Borrowers
will not, as a result of the transactions provided for herein (i) become not
Solvent, (ii) be left with unreasonably small capital, (iii) incur debts beyond
its ability to pay them as they mature or (iv) have Liabilities (including
reasonable contingencies) in excess of the fair saleable value of its assets.
SECTION 4.18. Compliance with Laws. The Borrowers and all
Consolidated Entities are in material compliance with all applicable
Governmental Requirements, other than Governmental Requirements covered by
Section 4.12.
SECTION 4.19. Disclosure. To the best knowledge of the Borrowers, no
financial statement, document, certificate or other written communication
furnished to the Lender by or on behalf of the Borrowers in connection with any
Loan Document contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading. There is no fact known to the Borrowers that
materially adversely affects the business or condition of the Borrowers or any
Consolidated Entity that has not been disclosed herein or in such financial
statements, other than economic trends or other factors that affect or may
affect the health care industry as a whole.
SECTION 4.20. Consummation of Initial Public Offering. Health Care
Recoveries, Inc. shall have closed on the sale of its common stock in its
initial public offering. As of the time immediately preceding the consummation
of the initial public offering of stock of Health Care Recoveries, Inc., the
Borrowers shall have had a Net Worth of at least $500,000.
ARTICLE V
CONDITIONS OF MAKING ADVANCES
The Lender's obligation to make each Advance hereunder are each subject
to the following conditions precedent:
SECTION 5.01. Representations and Warranties. On the date of each
Advance hereunder, and on the date the Borrowers presents to the Lender each
Request for Advances, the representations and warranties set forth in this
Agreement and in all other Loan Documents shall be true and correct in all
material respects on and as of each such date with the same effect as though
such representations and warranties had been made on the date of the Advance or
on the date the Borrowers presents to the Lender a Request for Advances. Each
such warranty and representation shall be deemed to be continuing in effect so
long as this Agreement remains in effect. The presentation by the Borrowers of
each Request for Ad-
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vances shall constitute a representation and warranty by the Borrowers to
the Lender that no material adverse change in the financial condition of the
Borrowers and the Consolidated Entities, as reflected in the financial
statements referred to in Section 4.03 and each financial statement submitted
by the Borrowers pursuant to Section 4.03 has occurred since the date of such
financial statements.
SECTION 5.02. No Default. On the date of each Advance hereunder, the
Borrowers shall be in compliance with all the terms and conditions set forth in
this Agreement on their part to be observed or performed, and no Default or
Event of Default shall have occurred and be continuing. The presentation by
the Borrowers of each Request for Advances shall constitute a representation
and warranty by the Borrowers to the Lender that no Default or Event of Default
has occurred and is continuing.
SECTION 5.03. Supporting Documents.
(a) The Lender shall have received on the Closing Date (i) a copy
of resolutions of the Board of Directors of the Borrowers, certified as in full
force and effect on the Closing Date by the Secretary of the Borrowers,
authorizing the execution, delivery and performance of the Loan Documents and
authorizing designated officers of the Borrowers to execute and deliver the
Loan Documents on behalf of the Borrowers and to execute and deliver to the
Lender Requests for Advances; (ii) a certificate of the Secretary of the
Borrowers, dated the Closing Date, certifying the incumbency and specimen
signatures of the designated officers referred to in clause (i) above; (iii) a
copy of the Certificate of Incorporation and By-laws of the Borrowers,
certified as true and correct on and as of the date on which Loan Documents are
executed and delivered; (iv) Opinion of Counsel to the Borrowers in
substantially the same form as attached hereto as Exhibit D; (v) Certificate of
the Secretary of Healthcare Recoveries, Inc., and copies of Cross- Receipts
evidencing that Healthcare Recoveries, Inc., has closed on the sale of its
common stock in its initial public offering; and (vi) such additional
supporting documents as the Lender may request.
(b) The Lender shall also have received on or before the date on
which a Subsidiary becomes a Participating Subsidiary (i) a copy of resolutions
of the Board of Directors and, if necessary, the shareholders of such
Subsidiary certified as in full force and effect on the date thereof by the
Secretary of such Subsidiary, authorizing such Subsidiary's execution, delivery
and performance of, the Loan Documents and all other agreements and instruments
that this Agreement requires to be executed, delivered and performed by such
Subsidiary; (ii) a copy of the Certificate of Incorporation or Articles of
Incorporation, as the case may be, and By-laws of such Subsidiary, certified as
true and correct on and as of the date on which loan documents are executed and
delivered by such Subsidiary; (iii) certificates of good standing with respect
to
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such Subsidiary from the appropriate Governmental Authorities in the
jurisdiction under the laws of which such Subsidiary is incorporated; (iv) an
Opinion of Counsel to such Subsidiary consistent with the form of the Opinions
of Counsel to the Borrowers delivered pursuant to subsection (a) of this
Section 5.03 (with such changes therein as are appropriate in the
circumstances) as to the execution and delivery by such Subsidiary of the Loan
Documents and other matters related thereto; (v) fully executed copies of all
Loan Documents that this Agreement requires to be executed or delivered (or
both) by such Subsidiary (including a fully executed Assumption Agreement, in
the case of any Subsidiary that becomes a Participating Subsidiary after the
Closing Date); and (vi) such additional supporting documents as the Lender or
its counsel may request.
(c) The Lender shall also have received on or before the date on
which a Controlled Partnership becomes a Participating Partnership (i) a copy
of the partnership agreement (and a copy of the relevant certificate of limited
partnership, if such Controlled Partnership is a limited partnership) under
which such Controlled Partnership was formed, certified as true and correct on
and as of the date of which Loan Documents are executed and delivered by such
Controlled Partnership; (ii) if such Controlled Partnership is a limited
partnership, certificates of good standing from the appropriate Governmental
Authorities in the jurisdiction under the laws of which such Controlled
Partnership was formed; (iii) an Opinion of Counsel to such Controlled
Partnership consistent with the form of the Opinion of Counsel to the Borrowers
delivered pursuant to subsection (a) of this Section 5.03 (with such changes
therein as are appropriate in the circumstances) as to the execution and
delivery by such Controlled Partnership of the Loan Documents and other matters
related thereto; (iv) fully executed copies of all Loan Documents that this
Agreement requires to be executed or delivered (or both) by such Controlled
Partnership (including a fully executed Assumption Agreement; and (v) such
additional supporting documents as the Lender may request.
(d) All documents delivered to the Lender under this Section 5.03
shall be in form and substance satisfactory to the Lender and its counsel.
SECTION 5.04. No Liens. On the date of each advance, the Borrowers
should have good and marketable title to all their properties and assets (which
includes all accounts maintained with the Lender), and all such properties and
assets shall be free and clear of all liens, other than Permitted Encumbrances
and except as otherwise permitted or required by the provisions of the Loan
Documents.
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ARTICLE VI
COVENANTS OF BORROWERS
The Borrowers covenant and agree that, from the Closing Date until
payment in full of the Credit Obligations and the termination in writing of
this Agreement, except to the extent the Lender may otherwise agree in writing:
SECTION 6.01. Existence, Properties, etc. The Borrowers shall, and
(to the extent of its right to do so) shall cause each other Consolidated
Entity to (a) do or cause to be done all things necessary to preserve and keep
in full force and effect its existence, rights and franchises and comply with
all Governmental Requirements applicable to it and (b) at all times maintain,
preserve and protect all franchises and trade names and preserve all of its
property used or useful in the conduct of its business and keep the same in
good repair, working order and condition, and from time to time make, or cause
to be made, all needful and proper repairs, renewals and replacements,
betterments and improvements thereto, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
and at all times keep its insurable properties adequately insured and maintain
(i) insurance on its properties to such extent and against such risks,
including fire, as is customary with companies the same or a similar business,
(ii) necessary workmen's compensation insurance and (iii) such other insurance
(including liability insurance) as may be required by law or as may otherwise
be customarily maintained by companies in the same or a similar business.
SECTION 6.02. Payment of Indebtedness, Taxes, etc. The Borrowers
shall, and (to the extent of its right to do so) shall cause each other
Consolidated Entity to (a) pay its Liabilities in accordance with normal terms
and (b) pay and discharge or cause to be paid and discharged promptly all
taxes, assessments and other charges or levies of Governmental Authorities
imposed upon it or upon its income and profits or upon any of its properties,
real, personal or mixed before the same shall become in default, as well as all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might become a Lien upon such properties or any part thereof; provided,
however, that the Borrowers and the other Consolidated Entities shall not be
required to pay and discharge or cause to be paid and discharged any such tax,
assessment, charge, levy or claim so long as the validity thereof shall be duly
pursued and contested in good faith by appropriate proceedings and the
Borrowers and the other Consolidated Entities shall maintain adequate reserves
for such taxes, assessments, charges or levies during the pendency of such
proceedings.
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SECTION 6.03. Financial Statements, Reports, etc.
The Borrowers shall furnish and deliver to the Lender:
(1) not later than 30 days after the end of each month that is not
the end of a fiscal quarter and not later than 45 days after the end of each
month that is the end of a fiscal quarter, a balance sheet and a statement of
revenues and expenses of the Borrowers and its Consolidated Entities on a
consolidated and consolidating basis for such month and for the period
beginning on the first day of the fiscal year and ending on the last day of
such month and certified by the President, chief financial officer or chief
accounting officer of the Borrowers, and such other information and
documentation contained in a sample delivered by the Borrowers to the Lender
prior to the Closing Date);
(2) not later than 120 days after the end of each fiscal year,
financial statements (including a balance sheet, a statement of operations, a
statement of changes in stockholders' equity and a statement of cash flows) of
the Borrowers and its Consolidated Entities on a consolidated basis (including
consolidating entries) for such fiscal year in sufficient detail to indicate
the Borrowers' and each other Consolidated Entity's compliance with the
financial covenants set forth in this Article, together with statements in
comparative form for the preceding fiscal year, and accompanied by an opinion
of certified public accountants acceptable to the Lender, which opinion shall
state in effect that such financial statements (A) were audited using generally
accepted auditing standards, (B) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis, and (C) present
fairly the financial condition and results of operations of the Borrowers and
its Consolidated Entities for the periods covered;
(3) not later than 45 days after the end of each fiscal quarter, a
compliance certificate duly executed by the President, chief financial officer
or chief accounting officer of the Borrowers in a form acceptable to the Lender
("Compliance Certificate");
(4) promptly upon receipt thereof, copies of all reports,
management letters and other documents submitted to the Borrowers or any other
Consolidated Entity by independent accountants in connection with any annual or
interim audit of the books of the Borrowers or other Consolidated Entity made
by such accountants;
(5) contemporaneously with the distribution thereof to the
stockholders or partners of the Borrowers or other Consolidated Entity (or the
filing thereof with the Securities and Exchange Commission), as the case may
be, copies of all statements, reports, notices and filings distributed by the
Borrowers or other Consolidated Entity to its stockholders or partners (or
filed with the
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Securities and Exchange Commission, including reports on SEC Forms l0-K,
l0-Q and 8-k);
(6) promptly after the Borrowers know or have reason to know of
the occurrence of any "reportable event" under Section 4043 of ERISA applicable
to the Borrowers or other ERISA Affiliate, a certificate of the president or
chief financial officer of the Borrowers setting forth the details as to such
"reportable event" and the action that the Borrowers or other ERISA Affiliate
has taken or will take with respect thereto, and promptly after the filing or
receiving thereof, copies of all reports and notices respecting such reportable
event that the Borrowers or other ERISA Affiliate files under ERISA with the
Internal Revenue Service, the Pension Benefit Guaranty Corporation or the
United States Department of Labor;
(7) promptly after the Borrowers or any other Consolidated Entity
becomes aware of the commencement thereof, notice of any investigation, action,
suit or proceeding before any Governmental Authority involving the condemnation
or taking under the power of eminent domain of any of its property or the
revocation or suspension of any permit, license, certificate of need or other
Governmental Requirement;
(8) within ten (10) days of the receipt by the Borrowers or any
other Consolidated Entity, copies of (A) all notices of default or breach under
any subrogation and recovery services agreement; and (B) all other material
notices of noncompliance, adverse reports issued by any Governmental Authority
or private insurance company pursuant to a subrogation and recovery services
agreement, which, if not promptly complied with or cured, could result in the
suspension or forfeiture of any license or certification, necessary for the
Borrowers to carry on its business as then conducted or the termination of any
subrogation and recovery services agreement;
(9) on the Closing Date and at any time the Lender requests,
copies of certificates of insurance issued by the insurers for all insurance
maintained by the Borrowers and its Consolidated Entities and, if the Lender
shall so request, copies of the policies providing such insurance; provided,
however, the Borrowers shall promptly notify the Lender of any material change
in insurance coverages; and
(10) as soon as practicable, such other information regarding the
business affairs, financial condition or operations of the Borrowers or its
Consolidated Entities (including a detailed listing of subrogation and recovery
services agreements and a summary aging of accounts receivable of the Borrowers
and its Consolidated Entities) as the Lender shall request from time to time or
at any time.
The Lender shall have no obligation to make Advances if at any time at
which the Borrowers is delinquent in the preparation
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and delivery of any of the items described above, whether or not such
delinquency constitutes an Event of Default.
SECTION 6.04. Litigation Notice. The Borrowers shall, immediately,
and in no event later than ten (10) days, after the same shall have become
known to any officer of the Borrowers, notify the Lender in writing of any
action, suit or proceeding at law or in equity or by or before any Governmental
Authority that, if adversely determined, might impair the ability of the
Borrowers or any other Consolidated Entity to perform its obligations under
this Agreement or any other loan Document or the ability of the Borrowers or
other Consolidated Entity to carry on its business substantially as now
conducted, or might materially and adversely affect the business, operations,
properties and assets or condition, financial or other, of the Borrowers or
other Consolidated Entity.
SECTION 6.05. Default Notice. Immediately, and in no event later than
three (3) days, after the Borrowers or any officer of the Borrowers becomes
aware of the existence of an Event of Default under any of the Loan Documents
or an event of default under any instrument evidencing or securing any other
indebtedness or contingent liability of the Borrowers or any Consolidated
Entity, or the occurrence and continuation of any event that, with notice or
lapse of time or both, would constitute an Event of Default under any of the
Loan Documents or an event of default under any instrument evidencing or
securing any other indebtedness or contingent liability of the Borrowers or any
Consolidated Entity, if the aggregate amount of indebtedness involved in all
such instruments in default exceeds $150,000, the Borrowers will deliver to the
Lender a written notice specifying the nature and period of existence thereof
and the action being taken and proposed to be taken with respect thereto.
SECTION 6.06. Further Assurances. The Borrowers shall at their cost
and expense, upon the request of the Lender, duly execute and deliver, or cause
to be duly executed and delivered, such further instruments and do and cause to
be done such further acts as may be necessary or proper in the opinion of the
Lender or its counsel to carry out more effectively the provisions and purposes
of the Loan Documents.
SECTION 6.07. Insurance. The Borrowers and each Consolidated Entity
shall at all times maintain in force, and pay all premiums and costs related
to, insurance coverages comparable to the coverages reviewed by the Lender
prior to the Closing Date and any other coverages required under applicable
Governmental Requirements.
SECTION 6.08. Cash Deposits. All cash of the Borrowers (excluding
deposits in transit) shall be consolidated no less frequently than once a week
in an account or accounts maintained with the Lender.
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SECTION 6.09. Covenants Regarding Financial Condition. Except as
otherwise expressly provided in this Section 6.09, the Borrowers shall also
cause and require each of the Consolidated Entities to observe and perform each
of the covenants and agreements of this section to be observed and performed by
the Borrowers, whether or not a specific reference is made to the Consolidated
Entities in each such covenant.
The Borrowers covenant and agree that:
(1) Minimum Net Worth. Net Worth shall not at any time be less
than the sum of (A) the Net Worth of the Borrowers on the Closing Date plus (B)
80% of Consolidated Net Income (if positive), after taxes, for the period from
closing through the date of determination, determined on a quarterly basis,
plus (C) the aggregate amount of all increases, if any, in its capital accounts
resulting from the issuance of capital stock or other securities properly
classified as equity in accordance with generally accepted accounting
principles from closing through the date of determination.
(2) Interest Coverage Ratio. The ratio of (A) Consolidated Net
Income plus Interest Expense and income taxes for the immediately preceding
period of four (4) consecutive quarters to (B) Interest Expense for the
Borrowers and the Consolidated Entities on a consolidated basis for such period
shall not at any time be less than 2.25 to 1.0.
(3) Capital Expenditures. The Borrowers and the Consolidated
Entities on a consolidated basis may, without the necessity for obtaining the
consent of the Lender, make in the aggregate in any consecutive 12-month period
Capital Expenditures that do not exceed $2,000,000.
(4) Debt. The Borrowers and the Consolidated Entities on a
consolidated basis will not incur, create, assume or permit to exist, or
otherwise be or become liable with respect to, any Debt other than (A) the
Credit Obligations and Debt reflected on the Borrowers' consolidated balance
sheet as of March 31, 1997, delivered to the Lender after the Closing Date
(other than Debt to be paid with the proceeds of Advances), and (B) Debt
arising under the endorsement of negotiable instruments in the ordinary course
of business for collection.
(5) Investments and Loans. The Borrowers and the Consolidated
Entities on a consolidated basis will not, directly or indirectly, purchase or
otherwise acquire any stock, security, obligation or evidence of indebtedness
of, make any capital contribution to, own any equity interest in, or make any
loan or advance to, any other person; provided, however, that it may make loans
to its employees in the aggregate amount outstanding at any time not to exceed
$100,000 and hold (A) all Stock of Partnership Interests in the persons that
constitute Consolidated Entities
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on the Closing Date; (B) Stock of, Partnership Interests in, and assets
of, Participating Partnerships and Participating Subsidiaries acquired
subsequent to the Closing Date with the approval of the Lender; and (C)
Permitted Investments.
(6) Disposition of Assets; Merger. The Borrowers and the
Consolidated Entities on a consolidated basis will not (A) sell, lease,
transfer, swap, exchange or otherwise dispose of, in a single transaction or a
series of related transactions, all or substantially all of its business or
assets; or (B) liquidate, wind up or dissolve, or enter into any consolidation,
merger, syndication or other combination or engage in any other reorganization
or recapitalization; provided, however, that (i) any Consolidated Entity
hereafter created or acquired may sell, lease, transfer or otherwise dispose of
all or any portion of its business or assets to the Borrowers or any other
Consolidated Entity or Consolidated Entities or merge into or consolidate with
the Borrowers or one or more other Consolidated Entities, so long as the entity
to which such business or assets are sold, leased, transferred or disposed of
or which survives or results from any such merger or consolidation is the
Borrowers, a Participating Subsidiary or a Participating Partnership; and (ii)
any Consolidated Entity, whether now existing or hereafter created or acquired
(the "Transferring Consolidated Entity") may sell, lease, transfer or otherwise
dispose of all or any portion of its business or assets to, or merge into, the
Borrowers or any other Consolidated Entity that directly or indirectly controls
the Transferring Consolidated Entity. The Borrowers may sell, lease, transfer
or otherwise dispose of furniture, fixtures and equipment in an amount not to
exceed $250,000 in any twelve month period.
(7) Liens. The Borrowers will not, and will not permit any
Consolidated Entity to, incur, create, assume or permit to exist any Lien upon
any of its accounts receivable, contract rights, chattel paper, inventory,
equipment, instruments, documents, general intangibles or other personal or
real property of any character, whether now owned or hereafter acquired, other
than Liens that constitute Permitted Encumbrances.
(8) Dividends and Distributions of Consolidated Entities. The
Borrowers will not permit any Consolidated Entity to be or become subject to
any restriction on the ability of such Consolidated Entity to pay dividends or
to make partnership distributions.
(9) Restricted Payments. The Borrowers will not, directly or
indirectly, declare, pay any dividend, or make any distribution, of any kind or
character (whether in cash, property or securities) on or with respect to any
class of its Capital Stock now or hereafter outstanding or to the holders of
any class of its Capital Stock now or hereafter outstanding (including pursuant
to a merger or consolidation of the Borrowers, but excluding any dividends or
distributions payable solely in shares of its Common
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Stock), or apply, or permit any Consolidated Entity to apply, any of its funds,
property or assets to the purchase, redemption or other retirement of any class
of the Borrowers' Capital Stock, now or hereafter outstanding.
(10) Material Adverse Change. The Borrowers will not permit a
material adverse change in the financial condition (as reflected in the
financial statements referred to in Section 4.03 since the date of such
financial statements), business or operations of the Borrowers or any of the
Consolidated Entities to occur.
SECTION 6.10. Continuation of Current Business. Neither the Borrowers
nor any other Consolidated Entity will change its primary business of providing
health care subrogation and other recovery services under contract.
Notwithstanding the foregoing, nothing contained in this Section 6.10 shall
prohibit the Borrowers or any Consolidated Entity from acquiring any health
care business so long as, after giving effect to such Acquisition, not less
than 90% of the net operating revenues of the Borrowers and the Consolidated
Entities on a consolidated basis can reasonably be expected to be derived from
providing health care subrogation and recovery services.
SECTION 6.11. Management Contracts. Neither the Borrowers nor any
other Consolidated Entity will enter into any agreement whereby the management,
supervision or control of its business as a whole shall be delegated to or
placed in any persons other than its governing body and officers, the Borrowers
or a Consolidated Entity.
SECTION 6.12. Cooperation; Inspection of Properties. The Borrowers
shall, and shall cause the Consolidated Entities to, permit the Lender and its
representatives to inspect the Borrowers' and the Consolidated Entities'
properties and assets, and to inspect, review and audit the Borrowers' and the
Consolidated Entities' books and records from time to time and at any time.
SECTION 6.13. Use of Proceeds. The Borrowers shall use the proceeds
of Advances exclusively to provide financing for general corporate and other
capital needs for expenditures or Acquisitions, or both. None of the proceeds
of the Advances shall be used to purchase or carry, or to reduce or retire or
refinance any credit incurred to purchase or carry, any Margin Stock, or to
extend credit to others for the purpose of purchasing or carrying any Margin
Stock. If requested by the Lender, the Borrowers will complete and sign Part I
of a copy of Federal Reserve Form U-1 referred to in Regulation U and deliver
such copy to the Lender.
SECTION 6.14. Additional Consolidated Entities. The Borrowers will
cause each Consolidated Entity that is hereafter acquired or created, promptly
(but in no event more than 30 days) after such Consolidated Entity is acquired
or created, to become a
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Participating Subsidiary or Participating Partnership by execution of an
Assumption Agreement, and all other documents necessary to cause it to become
jointly and severally liable for the Credit Obligations (subject to the
limitations provided in the Assumption Agreement).
SECTION 6.15. Sale of Receivables. Neither the Borrowers nor any
other Consolidated Entity will sell, assign or discount, or grant or permit to
exist any Lien on, any of its accounts receivable or any promissory note held
by it, with or without recourse, other than the discount of notes in the
ordinary course of business for collection, and Liens in favor of the Lender.
SECTION 6.16. Transactions with Affiliates. Neither the Borrowers nor
any other Consolidated Entity will, directly or indirectly, enter into any
lease or other transaction with any Affiliate (other than the Borrowers or
another Consolidated Entity) on terms that are less favorable to the Borrowers
or Consolidated Entity entering into such lease or other transaction than those
that might be obtained at the time from persons who are not Affiliates of the
Borrowers or other Consolidated Entity.
SECTION 6.17. Non-Scheduled Redemption of Preferred Stock, etc. The
Borrowers will not (a) give any notice of election to redeem the outstanding
shares of its preferred stock or make or permit to be made any dividend on
account of, or repurchase, redeem or otherwise retire (whether at the option of
the holder or otherwise), or make or permit to be made any other payment of any
nature with respect to any of the preferred stock.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
SECTION 7.01. Events of Default. The following shall constitute
Events of Default under this Agreement:
(a) the Borrowers shall fail to pay when due any principal or
interest payable under the terms of the Note or any other amount payable under
this Agreement or any other of the Credit Obligations or any other amount owed
to the Lender or in connection with any of the Loan Documents; or
(b) the Borrowers shall default in the observance or performance
of any provision in Sections 6.09, 6.10, 6.11, 6.13, 6.14, 6.15, 6.16, or 6.17;
or
(c) the Borrowers shall default in the performance or observance
of any provision of this Agreement, except those covered by clauses (a) and (b)
above, and shall not cure such default within 30 days after the first to occur
of (i) the date the Lender gives
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written or telephonic notice of the default to the Borrowers or (ii) the date
the Borrowers otherwise has actual notice thereof; or
(d) the Lender shall determine that any statement, certification,
representation or warranty contained herein, or in any of the other Loan
Documents or in any report, financial statement, certificate or other
instrument delivered to the Lender by or on behalf of the Borrowers, was
misleading or untrue in any material respect at the time it was made; or
(e) default shall be made with respect to any Debt or obligations
(other than the Credit Obligations) of the Borrowers or of any other
Consolidated Entity to the Lender, and the Borrowers or other Consolidated
Entity or Affiliate shall not cure such default within 30 days (including any
days of grace available under the documents with respect to which such Debt or
obligations were incurred) after the first to occur of (i) the date the Lender
gives written or telephonic notice of the default to the Borrowers or (ii) the
date the Borrowers otherwise has actual notice thereof; or
(f) default shall be made with respect to any Debt (other than
Debt to the Lender) of the Borrowers or of any other Consolidated Entity when
due or the performance of any other obligation incurred in connection with any
Debt of the Borrowers or other Consolidated Entity, if the effect of such
default is to accelerate the maturity of such Debt or to permit the holder
thereof to cause such Debt to become due prior to its stated maturity, or any
such Debt shall not be paid when due, if the aggregate amount of all such Debt
involved exceeds $150,000; or
(g) an Event of Default, as therein defined, shall occur under any
of the other Loan Documents; or
(h) the Borrowers or any other Consolidated Entity shall (i) apply
for or consent to the appointment of a receiver, trustee, liquidator or other
custodian of it or any of its properties or assets, (ii) fail or admit in
writing its inability to pay its debts generally as they become due, (iii) make
a general assignment for the benefit of creditors, (iv) suffer or permit an
order for relief to be entered against it in any proceeding under the federal
Bankruptcy Code, or (v) file a voluntary petition in bankruptcy, or a petition
or an answer seeking an arrangement with creditors or seeking to take advantage
of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any such law
or statute, or if corporate or partnership action shall be taken by the
Borrowers or any other Consolidated Entity for the purpose of effecting any of
the foregoing; or
(i) a petition shall be filed, without the application, approval
or consent of the Borrowers or any other Consolidated Entity, in any court of
competent jurisdiction, seeking bankruptcy,
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reorganization, rearrangement, dissolution or liquidation of the Borrowers or
other Consolidated Entity or of all or a substantial part of the properties or
assets of the Borrowers or other Consolidated Entity, or seeking any other
relief under any law or statute of the type referred to in clause (v) of
paragraph (h) above against the Borrowers or other Consolidated Entity, or the
appointment of a receiver, trustee, liquidator or other custodian of the
Borrowers or any other Consolidated Entity or of all or a substantial part of
the properties or assets of the Borrowers or any other Consolidated Entity, and
such petition shall not have been dismissed within 30 days after the filing
thereof; or
(j) any final judgment for the payment of money shall be rendered
against the Borrowers or any other Consolidated Entity and the same shall
remain undischarged for a period of 30 days during which execution shall not be
effectively stayed, unless such judgment is adequately covered by valid and
collectible insurance, which coverage is approved by the Lender; or
(k) there shall occur the insolvency, dissolution, liquidation or
suspension of business of the Borrowers or any other Consolidated Entity or the
issuance of a writ of execution, attachment or garnishment against the assets
of the Borrowers or any other Consolidated Entity, and such writ of execution,
attachment or garnishment shall not be dismissed, discharged or quashed within
30 days of issuance; or
(l) the Borrowers or any other Consolidated Entity shall default
under any agreement material to the operation of its business as conducted on
the Closing Date or proposed to be conducted;
(m) either (i) any person or any persons, other than persons
holding capital stock or options on the capital stock of either Borrower on the
date hereof, acting together that would constitute a "group" (a "Group") for
purposes of Section 13(d) of the Exchange Act, or any successor provision
thereto, together with any Affiliates or Related Persons thereof, other than
any trust for the employee stock ownership plans of the Borrowers or any of the
Consolidated Entities, shall beneficially own (as defined in Rule 13d-3 of the
Exchange Act or any successor provision thereto) at least 50% of the aggregate
voting power of all classes of Voting Stock of the Borrowers; or (ii) any
person or Group, together with any Affiliates or Related Persons thereof, shall
succeed in having its or their nominees elected to the Board of Directors of
the Borrowers such that such nominees, when added to any existing directors
remaining on the Board of Directors of the Borrowers after such election who is
an Affiliate or Related Person of such person or Group, shall constitute a
majority of the Board of Directors of the Borrowers; or
(n) enactment of health care reform legislation that has, in the
opinion of the Lender, an adverse effect on the collection of (or reduce the
ability to collect) the amounts under the Contracts
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entered into prior to the date of such health care reform legislation.
SECTION 7.02. Remedies. Upon the occurrence of an Event of Default
and at any time thereafter, if such Event of Default shall then be continuing:
(a) either or both of the following actions shall be taken by the
Lender, at its sole option: (i) the Lender shall terminate any obligation to
make further Advances, whereupon the obligation of the Lender to make further
Advances hereunder shall terminate immediately, and/or (ii) the Lender shall
declare by notice to the Borrowers any or all of the Credit Obligations to be
immediately due and payable, and the same, including all interest accrued
thereon and all other obligations of the Borrowers to the Lender, shall
forthwith become immediately due and payable without presentment, demand,
protest, notice or other formality of any kind, all of which are hereby
expressly waived, anything contained herein or in any instrument evidencing the
Credit Obligations to the contrary notwithstanding; provided, however, that
notwithstanding the above, if there shall occur an Event of Default under
clause (h) or (i) of Section 7.01, then the obligation of the Lender to lend
hereunder shall automatically terminate and any and all of the Credit
Obligations shall be immediately due and payable without the necessity of any
action by the Lender or notice to the Lender; and
(b) the Lender may exercise any and all rights and remedies
available to the Lender under the Loan Documents and applicable law.
SECTION 7.03. No Election of Remedies. In case any one or more Events
of Default shall occur and be continuing, the Lender may proceed to protect and
enforce its rights or remedies either by suit in equity or by action at law, or
both, whether for the specific performance of any covenant, agreement or other
provision contained herein or in any other Loan Document, or to enforce the
payment of the Credit Obligations or any other legal or equitable right or
remedy.
SECTION 7.04. Rights Cumulative. No right or remedy herein conferred
upon the Lender is intended to be exclusive of any other rights or remedies
contained herein or in any other Loan Document, and every such right or remedy
shall be cumulative and shall be in addition to every other such right or
remedy contained herein and therein or now or hereafter existing at law or in
equity or by statute or otherwise.
SECTION 7.05. Allocation of Proceeds. If an Event of Default has
occurred and is continuing, and the maturity of the Note has been accelerated
pursuant to Section 7.02, all payments received by the Lender hereunder with
respect to any principal of or interest on the Credit Obligations or any other
amounts payable
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by the Borrowers hereunder shall be applied by the Lender in the following
order:
(i) amounts due to the Lender pursuant to Section 2.05(b);
(ii) payments of interest, to be applied in accordance with
Section 2.09;
(iii) payments of principal, to be applied in accordance
with Section 2.09; and
(iv) payments of all other amounts due under this
Agreement, if any, to be applied in accordance with the outstanding principal
balance of the Lender's Loans.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Notices.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other document provided or permitted by this Agreement or
the other Loan Documents to be made upon, given or furnished to, or filed with,
the Borrowers or the Lender must (except as otherwise provided in this
Agreement or the other Loan Documents) be in writing and be delivered by one of
the following means: (1) by personal delivery at the hand delivery address
specified below, (2) by first-class, registered or certified mail, postage
prepaid and addressed as specified below, or (3) if facsimile transmission
facilities for such party are identified below or pursuant to a separate notice
from such party, sent by facsimile transmission to the number specified below
or in such notice.
(b) The hand delivery address, mailing address and (if applicable)
facsimile transmission number for receipt of notice or other documents by such
parties are as follows:
If to the Borrowers at:
1400 Watterson Tower
Louisville, Kentucky 40218
Attn: Douglas R. Sharps, Esq.
Executive Vice President-Finance
and Administration, Chief Financial
Officer and Secretary
Facsimile: (502) 454-1350
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If to the Lender at:
101 South Fifth Street
Louisville, Kentucky 40202
Attn: Deroy Scott, Vice President
Facsimile: (502) 581-4424
with a copy to:
Robert B. Vice
Reed Weitkamp Schell Cox & Vice
2400 Citizens Plaza
Louisville, Kentucky 40202
Facsimile: (502) 562-2200
Any of such parties may change its address or facsimile transmission number for
receiving any such notice or other document by giving notice of the change to
the other parties named in this Section 8.01.
(c) Any such notice or other document shall be deemed delivered
when actually received by an officer, director, partner or other legal
representative of the party) at the address or number specified pursuant to
this Section 8.01, or, if sent by mail, three Business Days after such
notice or document is deposited in the United States mail, addressed as
provided above.
(d) Five Business Days' written notice to the Borrowers as
provided above shall constitute reasonable notification to the Borrowers when
notification is required by law; provided, however, that nothing contained in
the foregoing shall be construed as requiring five Business Days' notice if,
under applicable law and the circumstances then existing, a shorter period of
time would constitute reasonable notice.
SECTION 8.02. Survival; Successors and Assigns. All covenants,
agreements, representations and warranties made in this Agreement or in any of
the other Loan Documents and in the certificates delivered pursuant to any of
the Loan Documents shall survive the making by the Lender of each Advance and
the execution and delivery to the Lender of the Loan Documents and shall
continue in full force and effect so long as any of the Credit Obligations are
outstanding and unpaid and this Agreement has not been terminated by the Lender
and the Borrowers in writing. Whenever in any Loan Document a party is
referred to, such reference shall be deemed to include the successors and
assigns of such party, except that the Borrowers may not assign or transfer any
Loan Document without the prior written consent of the Lender. All covenants,
promises and agreements by or on behalf of the Borrowers that are contained in
any Loan Document shall bind the Borrowers' successors and assigns and shall
inure to the benefit of the respective successors and assigns of the Lender.
Notwithstanding any other provision set forth in this Agreement, the Lender may
at any time (i) create a
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security interest in all or any portion of its rights under this Agreement
(including the Advances owing to it and the Note held by it) in favor of any
Federal Reserve Board in accordance with Regulation A of the Board of Governors
of the Federal Reserve System or (ii) assign or transfer its interests and
rights under this Agreement or any of the other Loan Documents, in whole or in
part, to any Affiliate of the Lender.
SECTION 8.03. Expenses. The Borrowers shall promptly pay all fees and
expenses (including reasonable legal fees and expenses of counsel for the
Lender, insurance premiums, recording, filing and transfer fees and taxes, and
other costs and expenses related to the Credit Obligations or required by any
of the Loan Documents. If the Borrowers fail to pay any such cost or expense,
the Lender may, but shall have no obligation to, pay the same from the Lender's
funds or by making an Advance for such purpose, without notice to the
Borrowers. The Borrowers shall reimburse the Lender on demand for, and
shall indemnify and hold the Lender harmless from and against, all such costs
and expenses paid by the Lender and all other costs and expenses (including the
reasonable fees and disbursements of the Lender's counsel) of every kind
incurred by the Lender in connection with (i) the making or collection of the
Credit Obligations, (ii) the preparation and review of the Loan Documents
(whether or not the transactions provided for in this Agreement shall be
consummated) and any other documents related thereto, (iii) the enforcement of
any of the Loan Documents, the protection of the Lender's rights in any
collateral and the defense of any claim, cross-claim or counterclaim asserted
against the Lender by the Borrowers or any other person that relates to the
Credit Obligations or the Loan Documents, and (iv) the transactions provided
for in the Loan Documents. Any amount paid or advanced by the Lender under
this section or the other Loan Documents shall bear interest until paid at a
rate equal to two percent (2%) in excess of the Base Rate in effect from time
to time, or the highest rate permitted by law, whichever is less. The
Borrowers shall pay all costs and expenses of performing and satisfying their
obligations under this Agreement. The Borrowers' obligations under this
Section 8.03 shall survive the payment in full of the Credit Obligations and
the termination of this Agreement.
SECTION 8.04. Indemnification. The Borrowers agree to indemnify and
hold harmless the Lender, and its employees, officers, directors and other
representatives (the "Indemnified Parties") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever
(including attorneys' fees) (the "Indemnified Obligations") that may at any
time (including at any time following the termination of this Agreement) be
imposed on, incurred by or asserted against any of the Indemnified Parties in
any way relating to or arising out of this Agreement or any of the other Loan
Documents or the transactions provided for herein or therein or any action
taken or omitted
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by any of the Indemnified Parties under or in regulations with respect to
Hazardous Substances and other environmental matters), or as a result of any
inaccurate representation made by the Borrowers in this Agreement or any other
Loan Document (including any inaccurate representation with respect to
Hazardous Substances and other environmental matters) or any breach of any of
the warranties or obligations of the Borrowers under this Agreement or any
other Loan Document (including any breach of any warranty or obligation with
respect to Hazardous Substances or other environmental matters) provided,
however, that no Indemnified Party shall be indemnified for any Indemnified
Obligation arising from its own gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction.
SECTION 8.05. Governing Law. This Agreement and the other Loan
Documents shall be construed in accordance with and governed by the laws of the
Commonwealth of Kentucky.
SECTION 8.06. Non-Waiver. No failure or delay on the part of the
Lender in exercising any right, power or privilege under this Agreement or any
of the other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise or
the exercise of any other right, power or privilege. Without limiting the
generality of the foregoing, the Lender may waive or not enforce any
requirements or condition applicable to the making of any Advance without
waiving the right to require strict compliance with such requirement or
condition in connection with other Advances.
SECTION 8.07. Non-Business Days. If any payment with respect to the
Credit Obligations becomes due and payable on a day that is not a Business Day,
the maturity thereof shall be extended to the next succeeding Business Day, and
in the case of a payment of principal, interest shall be payable thereon at the
then applicable rate specified in this Agreement during such period of
extension.
SECTION 8.08. Modification. etc. Subject to the provisions of
Section 8.02, no modification, amendment or waiver of any provision of this
Agreement or any of the other Loan Documents, and no consent to any departure
by the Borrowers therefrom, shall be effective unless the same shall be in
writing and signed by an authorized officer of the Lender, and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given. No notice to or demand on the Borrowers not otherwise
expressly required hereby in any case shall entitle the Borrowers to any other
or further notice or demand in the same, similar or other circumstances.
SECTION 8.09. Set-off. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby autho-
40
<PAGE> 41
rized at any time and from time to time, without notice to the Borrowers
(any such notice being expressly waived by the Borrowers) to set off and apply
any and all deposits (general or special, time or demand, provisional or final
but not deposits of "Restricted Cash" so designated on Schedule 8.09 by the
Borrowers to the Lender and as amended and updated by the Borrowers in the
Compliance Certificate) at any time held and other indebtedness at any time
owing to the Lender (including any branches, agencies or Affiliates of the
Lender, wherever located) to or for the credit or the account of the Borrowers
against any and all of the obligations of the Borrowers now or hereafter
existing under any of the Loan Documents, irrespective of whether or not any
demand shall have been made under the Loan Documents and although such
obligations may be unmatured prior to any acceleration of the maturity date.
The Lender agrees promptly to notify the Borrowers after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application or impose any liability on the Lender.
The rights of the Lender under this Section 8.09 are in addition to all other
rights and remedies (including other rights of set- off or pursuant to any
banker's lien) that the Lender may have.
SECTION 8.10. Severability. Any provision of any of the Loan
Documents that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
thereof or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but when taken
together all such counterparts shall constitute but one agreement, and any
party may execute this Agreement by executing any one or more of such
counterparts.
SECTION 8.12. Participation. The Borrowers understands that the
Lender may from time to time enter into a participation agreement or agreements
with one or more other participants pursuant to which each such participant
shall be given a participation in the Lender's Note, Loans and interest in the
Credit Obligations and the Loan Documents and that any such participant may
from time to time similarly grant to one or more subparticipants
subparticipations in the Note, Loans and interest in the Credit Obligations and
the Loan Documents; provided, however, that all communications with the
Borrowers shall be solely with the Lender and not with any participant. The
Borrowers agree that any participant or subparticipant (including any branches,
agencies or Affiliates thereof, wherever located) may exercise any and all
rights of banker's lien or set-off with respect to the Borrowers, as fully as
if such participant or subparticipant had made a loan directly to the Borrowers
in the amount of the participation or subparticipation given to such
participant or subparticipant in the Credit Obligations and the Loan Documents.
For purposes of this Section 8.12
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<PAGE> 42
only, the Borrowers shall be deemed to be directly obligated to each
participant or subparticipant in the amount of its participating interest in
the amount of the principal of, and interest on, the Credit Obligations.
Nothing contained in this section shall affect the Lender's right of set-off
(under Section 8.09 or applicable law) with respect to the entire amount of the
Credit Obligations, notwithstanding any such participation or subparticipation.
The Lender may divulge to any participant or subparticipant all information,
reports, financial statements, certificates and documents obtained by the
Lender from the Borrowers or any other person under any provisions of this
Agreement or the other Loan Documents or otherwise.
SECTION 8.13. Termination. This Agreement shall continue until the
Credit Obligations shall have been paid in full and the Lender shall have no
obligation to make any further Advances or extend any other credit hereunder.
This Agreement, and the obligations of the Borrowers hereunder, shall continue
to be effective, or be automatically reinstated, as the case may be, if at any
time payment in whole or in part of any payment made with respect to the Credit
Obligations is rescinded or must otherwise be restored or returned to the
person making such payment upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of such person, or upon or as a result of the
appointment of a custodian, receiver, trustee or other officer with similar
powers with respect to such person or with respect to any part of the property
thereof, or otherwise, all as though such payment had not been made.
SECTION 8.14. Obligations of the Borrowers Absolute. The Borrowers
hereby agree that its obligations and liabilities with respect to the Credit
Obligations are continuing, absolute and unconditional. Without limiting the
generality of the foregoing, the obligations and liabilities of the Borrowers
with respect to the Credit Obligations shall not be released, discharged,
impaired, modified or in any way affected by (a) the invalidity or
unenforceability of any Loan Document executed by any other person with respect
to the Credit Obligations, (b) the failure of the Lender to give the Borrowers
a copy of any notice given to any other person, (c) any modification, amendment
or supplement of any obligation, covenant or agreement contained in any Loan
Document executed by any other person with respect to the Credit Obligations,
(d) any compromise, settlement, release or termination of any obligation,
covenant or agreement in any Loan Document executed with respect to the Credit
Obligations, (e) any waiver of payment, performance or observance by or in
favor of any Participating Subsidiary or Participating Partnership of any
obligation, covenant or agreement under any Loan Document, (f) any consent,
extension, indulgence or other action or inaction, or any exercise or
non-exercise of any right, remedy or privilege with respect to any Loan
Document executed by any other person with respect to the Credit Obligations,
(g) the extension of time for payment or performance of any Credit Obligation
by any Participating Subsidiary or Participating Partnership, or (h) the
release or discharge of the Lender's claims
42
<PAGE> 43
against any collateral now or at any time hereafter securing any of the Credit
Obligations, or any Participating Subsidiary or Participating Partnership by
operation of law or otherwise.
IN WITNESS WHEREOF, the Borrowers and the Lender have caused this
Credit Agreement to be executed and delivered by their duly authorized
corporate officers as of the day and year first above written.
HEALTHCARE RECOVERIES, INC.
By: /s/ Patrick B. McGinnis
---------------------------------------
Title: Chairman and Chief Executive Officer
------------------------------------
NATIONAL CITY BANK OF KENTUCKY
By: /s/ Deroy Scott
-----------------------------------
Deroy Scott
Vice President
43
<PAGE> 1
EXHIBIT 10.7
SEPARATION AGREEMENT
BY AND BETWEEN
MEDAPHIS CORPORATION
AND
HEALTHCARE RECOVERIES, INC.
DATED AS OF MAY 28, 1997
<PAGE> 2
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT, dated as of the IPO Effective Date, is
entered into by and between Medaphis and HRI. Capitalized terms used in this
Agreement and not otherwise defined shall have the respective meanings assigned
to them in Section 1.
WHEREAS, the Board of Directors of Medaphis has determined that it is
appropriate and desirable for Medaphis to sell for its account all of the
shares of HRI Common Stock owned by Medaphis; and
WHEREAS, it is appropriate and desirable to set forth certain
agreements of the parties in connection with the Separation.
NOW, THEREFORE, the parties agree as follows:
Section 1. Definitions.
For the purpose of this Agreement the following terms shall have the
following meanings:
"Action" means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.
"Affiliate" of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein, "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.
"Agreement" means this Separation Agreement, including all of the
Schedules.
"Ancillary Agreements" means any and all supplemental and other
agreements and instruments contemplated by this Agreement or entered into in
connection with this Agreement.
"Arbitration Act" means the Federal Arbitration Act, 9 U.S.C. Sections
1-14, as the same may be amended from time to time.
"Arbitration Demand Date" has the meaning set forth in Section 20.3.
<PAGE> 3
"Arbitration Demand Notice" has the meaning set forth in Section 20.3.
"Closing" means the receipt by Medaphis of the proceeds of the IPO in
accordance with the terms of the Underwriting Agreement.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"CPR" means the Center for Public Resources.
"Environmental Law" means any federal, state, local, foreign or
international statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law (including tort and environmental
nuisance law), legal doctrine, order, judgment, decree, injunction, requirement
or agreement with any Governmental Authority, now or hereafter in effect
relating to health, safety, pollution or the environment (including ambient
air, surface water, groundwater, land surface or subsurface strata) or to
emissions, discharges, releases or threatened releases of any substance
currently or at any subsequent time listed, defined, designated or classified
as hazardous, toxic, waste, radioactive or dangerous, or otherwise regulated,
under any of the foregoing, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any such substances, including the Comprehensive Environmental
Response, Compensation and Liability Act, the Superfund Amendments and
Reauthorization Act and the Resource Conservation and Recovery Act and
comparable provisions in state, local, foreign or international law.
"Environmental Liabilities" means all Liabilities relating to, arising
out of or resulting from any Environmental Law or contract or agreement
relating to environmental, health or safety matters (including all removal,
remediation or cleanup costs, investigatory costs, governmental response costs,
natural resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability
and indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection with such
liabilities.
"Escalation Notice" has the meaning set forth in Section 20.2.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under the Exchange Act.
"GAAP" means generally accepted accounting principles.
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<PAGE> 4
"Governmental Authority" shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
"HRI" means Healthcare Resources, Inc., a Delaware corporation.
"HRI Audited Balance Sheet" means the audited balance sheet of HRI,
including the notes thereto, as of December 31, 1996, a copy of which is
included in the Registration Statement when it becomes effective.
"HRI April 30 Balance Sheet" means the unaudited balance sheet of HRI
as of April 30, 1997, prepared in accordance with GAAP on a basis consistent
with the preparation of the HRI Audited Balance Sheet.
"HRI Common Stock" means the Common Stock, $0.001 par value per share,
of HRI.
"HRI Indemnitees" has the meaning set forth in Section 15.3.
"Indemnifying Party" has the meaning set forth in Section 15.4.
"Indemnitee" has the meaning set forth in Section 15.4.
"Indemnity Payment" has the meaning set forth in Section 15.4.
"Information" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
"Insurance Proceeds" means those monies:
(a) received by an insured from an insurance carrier;
(b) paid by an insurance carrier on behalf of the insured; or
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<PAGE> 5
(c) received (including by way of set off) from any third party in the
nature of insurance, contribution or indemnification in respect of any
Liability; in any such case net of any applicable premium adjustments
(including reserves and retrospectively rated premium adjustments) and net of
any costs or expenses (including allocated costs of in-house counsel and other
personnel) incurred in the collection of proceeds.
"IPO" means the public offering for sale by Medaphis of shares of HRI
Common Stock pursuant to the IPO Registration Statement.
"IPO Effective Date" means May __, 1997, which is the date on which the
IPO Registration Statement was declared effective by the Commission.
"IPO Registration Statement" means the registration statement,
Registration No. 333-23287, on Form S-1 filed under the Securities Act,
pursuant to which the HRI Common Stock to be sold in the IPO has been
registered.
"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, costs and
expenses, including those arising under any law, rule, regulation, Action,
threatened or contemplated Action (including the costs and expenses of demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses (including allocated costs
of in-house counsel and other personnel) whatsoever reasonably incurred in
investigating, preparing or defending against any such Actions or threatened or
contemplated Actions), order or consent decree of any Governmental Authority or
any award of any arbitrator or mediator of any kind.
"Medaphis" means Medaphis Corporation, a Delaware corporation.
"Medaphis Group" means Medaphis and each Person (other than HRI) that
is an Affiliate of Medaphis immediately after the Closing Date.
"Medaphis Indemnitees" has the meaning set forth in Section 17.2.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
limited liability entity, any other entity and any Governmental Authority.
"Prime Rate" means the rate which SunTrust Bank (or any successor or
other major money center commercial bank agreed to by the parties) announces
from time to time as its prime lending rate, as in effect from time to time.
"Prospectus" means each preliminary, final or supplemental prospectus
forming a part of the IPO Registration Statement.
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<PAGE> 6
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under the Securities Act.
"Separation" means the transactions, arrangements and agreements
embodied in this Agreement entered into by the parties in preparation for the
sale by Medaphis of all HRI Common Stock held by Medaphis.
"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however that no Person that is not directly or indirectly wholly
owned by any other Person shall be a Subsidiary of such other Person unless
such other Person controls, or has the right, power or ability to control, that
Person.
"Tax" or "Taxes" means all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupations, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees
and charges, imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof, whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest, fines, penalties or additional amounts attributable to or imposed
on or with respect to any such taxes, charges, fees, levies or other
assessments.
"Third Party Claim" has the meaning set forth in Section 15.5
"Underwriters" means the managing Underwriters for the IPO.
"Underwriting Agreement" means the underwriting agreement entered into
among Medaphis, HRI and the Underwriters with respect to the IPO.
Section 2. Effect of Agreement. This Agreement is being executed and
delivered on the IPO Effective Date to memorialize actions that have been taken
by the parties prior to the IPO Effective Date in connection with the
Separation, and to govern the conduct of the parties subsequent to the IPO
Effective Date as to the matters addressed in this Agreement. If the Closing
does not occur, this Agreement shall terminate.
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<PAGE> 7
Section 3. HRI Stockholders' Equity and Net Tangible Assets.
3.1 HRI April 30, 1997 Balance Sheet. A copy of the HRI April 30, 1997
Balance Sheet is attached as Schedule 3.1. As of April 30, 1997, as reflected
in the HRI April 30, 1997 Balance Sheet, the stockholders' equity of HRI was
not less than $4,110,000, and the net tangible assets of HRI were not less than
$4,110,000. After December 31, 1996 and prior to April 30, 1997, Medaphis and
HRI took the following actions affecting HRI's stockholders' equity and net
tangible assets:
(a) On May 19, 1997 (the "Dividend Date"), HRI declared
a dividend to Medaphis in the amount of $8,559,727, which dividend
was paid by means of satisfaction of the account receivable from
Medaphis on the books of HRI in the amount of $8,599,727 (no cash
owed or to be paid to Medaphis under this Section 3.1(a)).
(b) From the HRI April 30, 1997 Balance Sheet, HRI
transferred to Medaphis from time to time all of HRI's
unrestricted cash on hand in excess of cash required for working
capital. Such transfers were effected by transferring all of
HRI's cash to Medaphis, with Medaphis then providing funds as
necessary for HRI's working capital requirements, by HRI's
funding its working capital requirements and transferring excess
cash to Medaphis, or by a combination of the foregoing, as was
convenient from time to time.
(c) On or before the Closing Date, HRI will declare a
dividend in the amount equal to stockholders' equity of HRI on
April 30, 1997 (the Balance Sheet date) minus $4,110,000, which
dividend equals $591,194. The dividend will be paid and evidenced
by HRI's non-interest bearing promissory note due on the earlier
of (i) thirty days after the Closing Date and (ii) the date on
which HRI receives net proceeds from exercise of the Underwriters'
over-allotment option in an amount equal to or greater than the
amount of such dividend.
3.2 Closing Date Stockholders' Equity and Net Tangible Assets.
Medaphis shall take such actions as shall be necessary, including, without
limitation, any required contribution to capital, so that, at the Closing Date,
(i) the stockholders' equity of HRI is not less than $4,110,000, and the net
tangible assets of HRI are not less than $4,110,000, in each case as determined
in accordance with GAAP on a basis consistent with the determination thereof in
connection with the HRI Audited Balance Sheet, (ii) the assets of HRI do not
include any indebtedness of Medaphis to HRI (except for obligations expressly
created by this Agreement and any Ancillary Agreements), and (iii) the
liabilities of HRI do not include any indebtedness of HRI
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<PAGE> 8
to Medaphis (except for obligations expressly created by this Agreement and
any Ancillary Agreements). The parties acknowledge and agree that, as of the
Closing Date, HRI's unrestricted cash on hand is not likely to exceed a nominal
amount, and that there is no requirement that Medaphis take any action to
cause HRI's unrestricted cash on hand to be any particular amount. Prior to the
Closing Date, Medaphis shall be entitled to all unrestricted cash of HRI
subject to the restrictions set forth in the first sentence of this Section
3.2.
Section 4. Certain Tax Matters.
4.1 Federal Income Tax Returns. Medaphis will include the income of
HRI (including any deferred income required to be recognized under Treasury
Regulation ss. 1.1502-13 and any excess loss account taken into income under
Treasury Regulation ss. 1.1502-19) on the Medaphis consolidated federal income
tax returns for all periods from August 29, 1995 through the Closing Date and
will pay all Taxes assessed with respect to such consolidated federal income
tax returns. HRI will furnish all information reasonably required by Medaphis
for inclusion in Medaphis' federal consolidated income tax returns in
accordance with HRI's past custom and practice. Medaphis will allow HRI an
opportunity to review and comment on such federal consolidated income tax
returns (including any amended returns) to the extent they relate to HRI. HRI
will include its income on its separate federal income tax returns for all
taxable periods ended on or before August 28, 1995, and all taxable periods
beginning after the Closing Date. The income of HRI will be apportioned to the
period up to and including the Closing Date and the period after the Closing
Date by closing the books of HRI as of the end of the Closing Date, unless
Medaphis and HRI elect ratable allocation pursuant to Treasury Regulation ss.
1.1502-76(b)(2)(ii).
4.2 State, Local and Foreign Income Tax and Other Tax Returns. Medaphis
and HRI will file their tax returns for state, local and foreign income tax
purposes and all other Tax returns on a separate basis and shall be separately
responsible for all Taxes assessed with respect to such returns.
4.3 Audits. Medaphis will allow HRI and its counsel to participate at
HRI's own expense in any audits of the consolidated federal income tax returns
of Medaphis to the extent that such returns relate to HRI. Medaphis will not
settle any such audit in a manner that would adversely affect HRI after the
Closing Date unless such settlement would be reasonable in the case of a person
that owned HRI both before and after the Closing Date.
4.4 Post-Closing Elections. At Medaphis' request, HRI will make or
join with Medaphis in making any election for Tax purposes if the making of
such election does not have a material adverse impact on HRI for any taxable
period after the Closing Date.
4.5 Termination of Other Tax Sharing Agreements. Any Tax sharing or
allocation agreements between Medaphis and HRI other than this Agreement shall
terminate on the Closing Date.
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<PAGE> 9
Section 5. Insurance Matters.
5.1 New Policies. As of the respective dates indicated on Schedule
5.1, HRI obtained binders for the new business insurance policies listed on
such Schedule, which policies by their terms became or become effective no
later than the Closing Date. HRI is responsible for paying all premiums
required under such policies, and to the extent any such premiums became due
prior to the IPO Effective Date HRI has paid such premiums.
5.2 Tail Coverages. HRI is or has been a named insured under various
blanket business insurance policies owned by Medaphis that in their current
forms are listed on Schedule 5.2 (the "Medaphis Blanket Policies"). Medaphis
has made available to HRI the opportunity to purchase extended discovery period
coverage for the benefit of HRI under the Medaphis Blanket Policies, and HRI
has purchased the extended discovery period coverages listed on Schedule 5.2.
5.3 Refunds. The parties acknowledge that certain of the premiums paid
by Medaphis under the Medaphis Blanket Policies are subject to reduction after
the applicable insurer audits the related claims history. Refunds reflecting
any such reductions shall be solely for the account of Medaphis, and HRI shall
have no claim with respect thereto. To the extent that HRI receives any such
refund, HRI shall immediately pay it over to Medaphis.
5.4 Workers' Compensation. Effective as of Closing Date (the "WC
Switch Date"), HRI obtained the workers' compensation insurance arrangements
described on Schedule 5.4, and HRI shall be solely responsible for all workers'
compensation claims of HRI employees incurred after the WC Switch Date. As of
the WC Switch Date, Medaphis' recorded reserve for workers' compensation claims
by HRI employees was $68,615.00 (which amount, plus that amount of reserve to
be determined within one month of the date hereof by Medaphis' insurance
carrier with respect to those HRI employees who have reported or filed claims
prior to the WC Switch Date but whose claims are not reflected in the
$68,615 figure, are referred to as the "WC Reserve"). Medaphis shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims do not exceed the WC Reserve. HRI shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims exceed the WC Reserve.
Section 6. Telecommunications Services. Since April 25, 1997 (the
"Telecom Switch Date"), HRI has obtained telecommunications services,
separately billed from Medaphis, from one or more vendors selected by HRI. To
the extent known at the date of the HRI April 30, 1997 Balance Sheet,
telecommunications charges incurred by HRI prior to the Telecom Switch Date
were taken into account and charged to HRI in determining the amount of the
account payable from Medaphis to HRI as of that date that is referred to in
Section 3.1(b). Subject to Medaphis' obligation under Section 3.2, to the
extent that, as of the Closing Date, the parties have been able to identify
telecommunications charges incurred by HRI prior to the Telecom Switch Date
that have not been previously taken into account, HRI shall reimburse Medaphis
for such charges on the Closing Date. The parties have diligently attempted to
identify all telecommunications charges incurred by HRI prior to the Telecom
Switch Date, to minimize any need to settle such charges after the Closing
Date. Upon presentation by Medaphis of reasonable
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<PAGE> 10
supporting documentation after the Closing Date, HRI will reimburse
Medaphis for any telecommunications charges incurred by HRI prior to the Telecom
Switch Date and not previously taken into account as of the Closing Date or the
date of the HRI April 30, 1997 Balance Sheet.
Section 7. Pittsburgh Telephone Equipment. On the Closing Date,
Medaphis shall execute and deliver to HRI a bill of sale transferring to HRI,
free and clear of any lien or other encumbrance, the assets identified on
Schedule 7 relating to the telephone system in HRI's Pittsburgh, Pennsylvania
offices. The parties acknowledge that such assets originally were acquired by
HRI and later were included as collateral in a financing lease facility
obtained by Medaphis, the lien of which shall be released as contemplated by
Section 8 and title to which shall be (if necessary) transferred to HRI.
Section 8. Lien and Guaranty Releases. It is the parties' intention
that, from and after the Closing Date, (a) no assets (including, without
limitation, cash balances in bank accounts and rights as lessee) or capital
stock of HRI will be subject to any lien, security interest, mortgage or other
encumbrance relating to any indebtedness of Medaphis or of any member of the
Medaphis Group, and (b) HRI will have no obligation, as guarantor or otherwise,
for any indebtedness of Medaphis or of any member of the Medaphis Group. To
that end, the parties have conducted a lien search in all jurisdictions deemed
by them to be relevant, and have otherwise diligently attempted to identify all
such liens and guaranties. Medaphis shall cause all such liens and guaranties
to be released on or before the Closing Date. If, after the Closing Date, any
lien or guaranty is discovered that encumbers any asset or capital stock of
HRI, or under which HRI has any obligation, and that relates to any
indebtedness of Medaphis or of any member of the Medaphis Group, Medaphis shall
take all actions that shall be necessary to obtain the release of such lien or
guaranty.
Section 9. Asset Transfer. As of the Closing Date, Medaphis shall
execute and deliver to HRI a quitclaim bill of sale, transferring to HRI any
interest Medaphis might have in any of the assets used by HRI in the conduct of
its business.
Section 10. Payroll. Since May 2, 1997 (the "Payroll Switch Date") and
effective for the payroll period ended April 26, 1997, HRI has obtained,
separately from Medaphis, payroll and employment tax administrative services
from one or more vendors selected by HRI and approved by Medaphis. Since the
Payroll Switch Date, HRI has borne all costs relating to payroll services for
its employees and has funded all payroll costs incurred with respect to its
employees. In determining the amount of the account due from Medaphis to HRI
that has been addressed as described in Section 3.1(b), the parties have taken
into account the obligation of HRI to fund all payroll related costs after the
Payroll Switch Date. Without limiting the foregoing, the parties have taken
such steps as they have deemed to be appropriate to cause HRI to have the
benefit of any deposits of payroll or withholding taxes for periods prior to
the Payroll Switch Date, to the extent that, under applicable law and
regulations, HRI will have liability for such taxes.
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Section 11. Purchases of Goods and Services. Prior to the IPO
Effective Date, those vendors specified by Medaphis that have supplied goods or
services to HRI through Medaphis' centralized purchasing program have
been notified that, from and after the Closing Date, all goods and services
ordered by HRI are for the account of HRI and that Medaphis has no obligation
with respect thereto. To the extent deemed appropriate by HRI, on or prior to
the Closing Date HRI shall enter into purchase contracts with such vendors,
under which Medaphis shall have no liability. Any purchases made by HRI prior
to the date of the HRI April 30, 1997 Balance Sheet through Medaphis'
centralized purchasing program were taken into account in the settlement
referred to in Section 3.1(b). Any such purchases made by HRI since such date
shall be paid for by HRI on or prior to the Closing Date, subject to Medaphis'
obligation set forth in Section 3.2.
Section 12. Bank Accounts/Cash Management. Prior to the IPO Effective
Date, HRI has established such bank accounts as it deems to be necessary to
conduct its business (and/or, with the assistance of Medaphis, has amended the
authorizations relating to mutually agreed existing bank accounts so that they
are controlled exclusively by HRI personnel), and all authorizations, standing
wire instructions and the like relating to HRI's participation in Medaphis'
cash management system have been terminated.
Section 13. Employee Benefit Plans. Simultaneously with the execution
of this Agreement, HRI and Medaphis have executed the Agreement Respecting
Employee Benefits Matters attached as Schedule 13, which agreement constitutes
the agreement between HRI and Medaphis with respect to employee benefit aspects
of the Separation.
Section 14. Termination of Agreements. Except for this Agreement and
any Ancillary Agreements, in furtherance of the Separation, HRI and Medaphis
hereby terminate any and all agreements, arrangements, commitments or
understandings, whether or not in writing, between or among HRI, on the one
hand, and Medaphis and/or any member of the Medaphis Group, on the other hand,
effective as of the Closing Date.
Section 15. Mutual Releases; Indemnification.
15.1 Release of Pre-Closing Claims. (a) Except as provided in Section
15.1(c), effective as of the Closing Date, HRI does, for itself and its
successors and assigns, remise, release and forever discharge Medaphis, the
members of the Medaphis Group, their respective Affiliates (other than HRI),
successors and assigns, and all Persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of any
member of the Medaphis Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities to HRI, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or
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<PAGE> 12
events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date.
(b) Except as provided in Section 15.1(c), effective as of the Closing
Date, Medaphis does, for itself and each other member of the Medaphis Group,
their respective Affiliates (other than HRI), successors and assigns, remise,
release and forever discharge HRI, and all Persons who at any time prior to the
Closing Date have been shareholders, directors, officers, agents or employees
of HRI (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all Liabilities to Medaphis or any of the Medaphis Group, whether at law or
in equity (including any right of contribution), whether arising under any
contract or agreement, by operation of law or otherwise, existing or arising
from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur or any conditions existing or alleged to
have existed on or before the Closing Date.
(c) Nothing contained in Section 15.1(a) or (b) shall impair any
obligation under this Agreement or any Ancillary Agreement or any right of any
Person to enforce this Agreement or any Ancillary Agreement.
15.2 Indemnification by HRI. Except as provided in Section 15.4, HRI
shall indemnify, defend and hold harmless Medaphis, each member of the Medaphis
Group and each of their respective directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Medaphis Indemnitees"), from and against any and all
Liabilities of the Medaphis Indemnitees relating to, arising out of or
resulting from any of the following items (without duplication):
(i) the conduct by HRI of its business after the Closing Date;
(ii) the conduct by HRI of its business prior to August 28, 1995;
and
(iii) any breach by HRI of this Agreement or any Ancillary
Agreement;
(iv) Taxes incurred by HRI, or arising with respect to the
business conducted by HRI, during or with respect to any and all
periods ending on or prior to August 28, 1995, or after the Closing
Date.
15.3 Indemnification by Medaphis. Medaphis shall indemnify, defend and
hold harmless HRI, and each of its directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "HRI Indemnitees"), from and against any and all Liabilities
of the HRI Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):
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<PAGE> 13
(i) the conduct by Medaphis or any member of the Medaphis Group,
of its business at any time;
(ii) any breach by Medaphis or any member of the Medaphis Group of
this Agreement or any Ancillary Agreement; and
(iii) federal income Taxes incurred by, or arising with respect
to the business conducted by, HRI or any member of the Medaphis Group,
and state and local income and other Tax liabilities relating to
Medaphis or any member of the Medaphis Group, during or with respect
to any and all periods ending after August 28, 1995 and on or prior to
the Closing Date.
15.4 Indemnification Obligations Net of Insurance Proceeds and Other
Amounts. The parties intend that any Liability subject to indemnification or
reimbursement pursuant to this Section 15 will be net of Insurance Proceeds.
15.5 Procedures for Indemnification of Third Party Claims. (a) If an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
of any claim or of the commencement by any such Person of any Action
(collectively, a "Third Party Claim") with respect to which an Indemnifying
Party may be obligated to provide indemnification to such Indemnitee pursuant
to Section 15.2 or 15.3, or any other Section of this Agreement or any
Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written
notice within 20 days after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the failure of any Indemnitee or other Person to
give notice as provided in this Section 15.5(a) shall not relieve the related
Indemnifying Party of its obligations under this Section 15, except to the
extent that such Indemnifying Party is actually prejudiced by such failure to
give notice.
(b) An Indemnifying Party may elect to defend (and to seek to settle
or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 15.5(a) (or
sooner, if the nature of such Third Party Claim so requires), the Indemnifying
Party shall notify the Indemnitee whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 15.5(d), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel
and other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.
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<PAGE> 14
(e) No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
15.6 Additional Matters. (a) Any claim on account of a Liability that
does not result from a Third Party Claim shall be asserted by written notice
given by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice within
which to respond. If such Indemnifying Party does not respond within such
30-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such 30-day period or rejects such claim in whole or in part,
such Indemnitee shall be free to pursue such remedies as may be available to
such party as contemplated by this Agreement and any Ancillary Agreement.
(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnitee in connection with any Third Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnitee as
to any events or circumstances in respect of which such Indemnitee may have any
right, defense or claim relating to such Third Party Claim against any claimant
or plaintiff asserting such Third Party Claim or against any other person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner,
and at the cost and expense (including allocated costs of in-house counsel and
other personnel) of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.
15.7 Remedies Cumulative. The remedies provided in this Section 15
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
15.8 Survival of Indemnities. The rights and obligations of each of
Medaphis and HRI and their respective Indemnitees under this Section 15 shall
survive the Closing for a period of three years.
15.9 Certain HRI Directors. Medaphis shall, by a separate agreement,
indemnify those persons who have agreed to become HRI directors upon the
Closing against Liabilities relating to the IPO to the extent customary for
indemnification of directors by issuers relating to initial public offerings.
Section 16. Certain Business Matters. (a) Neither HRI, Medaphis nor
any member of the Medaphis Group shall have any duty to refrain from (i)
engaging in the same or similar activities or lines of business as any other of
such Persons, (ii) doing business with any potential or actual supplier or
customer of any other of such Persons, or (iii) engaging in, or refraining
from, any other activities relating to any of the potential or actual suppliers
or
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<PAGE> 15
customers of any other of such Persons. Until the first anniversary of the
Closing Date, HRI shall not solicit any employee of Medaphis or of any member of
the Medaphis Group to become an employee of HRI, and neither Medaphis nor any
member of the Medaphis Group shall solicit any employee of HRI to become an
employee of Medaphis or of any member of the Medaphis Group.
Section 17. Late Payments. Any amount not paid when due pursuant to
this Agreement or any Ancillary Agreement shall accrue interest at a rate per
annum equal to the Prime Rate plus 1%.
Section 18. Exchange of Information; Confidentiality.
18.1 Exchange of Information. (a) Each of Medaphis and HRI agrees to
provide, or cause to be provided, to each other, at any time after the Closing
Date, as soon as reasonably practicable after written request, any Information
in its possession or under its control that the requesting party reasonably
needs (i) to comply with reporting, disclosure, filing or other requirements
imposed on the requesting party (including under applicable securities or tax
laws) by a Governmental Authority having jurisdiction over the requesting
party, (ii) for use in any other judicial, regulatory, administrative, tax or
other proceeding or in order to satisfy audit, accounting, claims, regulatory,
litigation, tax or other similar requirements, or (iii) to comply with its
obligations under this Agreement or any Ancillary Agreement; provided, however,
that if any party determines that any such provision of Information could be
commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.
(b) Ownership of Information. Any Information that is provided to a
requesting party pursuant to Section 18.1(a) shall be deemed to remain the
property of the providing party. Unless specifically set forth in this
Agreement, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such Information.
(c) Costs of Providing Information. The party requesting Information
agrees to reimburse the other party for the reasonable costs, if any, of
creating, gathering and copying such Information, to the extent that such costs
are incurred for the benefit of the requesting party.
(d) Record Retention. To facilitate the possible exchange of
Information pursuant to this Section 18 after the Closing Date, the parties
agree to use their reasonable best efforts to retain all Information in their
respective possession or control on the Closing Date in accordance with the
policies of Medaphis as in effect on the Closing Date. No party will destroy,
or permit any of its Subsidiaries to destroy, any Information that the other
party may have the right to obtain pursuant to this Agreement prior to the
third anniversary of the date of this Agreement without first using its
reasonable best efforts to notify the other party of the proposed destruction
and giving the other party the opportunity to take possession of such
Information
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<PAGE> 16
prior to such destruction; provided, however, that in the case of any
Information relating to Taxes or to Environmental Liabilities, such period shall
be extended to the expiration of the applicable statute of limitations (giving
effect to any extensions).
(e) Production of Witnesses; Records; Cooperation. (i) After the
Closing Date, except in the case of an adversarial Action by one party against
another party, each party shall use its reasonable best efforts to make
available to each other party, upon written request, the former, current and
future directors, officers, employees, other personnel and agents of the
members of its respective organization as witnesses and any books, records or
other documents within its control or that it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any Action in which the requesting party may from time to time be involved,
regardless of whether such Action is a matter with respect to which
indemnification may be sought under this Agreement. The requesting party shall
bear all costs and expenses (including allocated costs of in-house counsel and
other personnel) in connection with complying with the request.
(ii) If an Indemnifying Party chooses to defend or to
seek to compromise or settle any Third Party Claim, the other
parties shall make available to such Indemnifying Party, upon
written request, the former, current and future directors,
officers, employees, other personnel and agents of the members
of its respective organization as witnesses and any books,
records or other documents within its control or which it
otherwise has the ability to make available, to the extent
that any such person (giving consideration to business demands
of such directors, officers, employees, other personnel and
agents) or books, records or other documents may reasonably be
required in connection with such defense, settlement or
compromise, or such prosecution, evaluation or pursuit, as the
case may be, and shall otherwise cooperate in such defense,
settlement or compromise, or such prosecution, evaluation or
pursuit, as the case may be.
(ii) In connection with any matter contemplated by
this Section 18(e), the parties will enter into a mutually
acceptable joint defense agreement so as to maintain to the
extent practicable any applicable attorney-client privilege or
work product immunity.
Section 19. Confidentiality. (a) Each of Medaphis and HRI agrees to
hold, and to cause its respective directors, officers, employees, agents,
accountants, counsel, other advisors and representatives, and Subsidiaries to
hold, in strict confidence, with at least the same degree of care that applies
to Medaphis' confidential and proprietary information pursuant to policies in
effect as of the Closing Date, all Information concerning the other that is
either in its possession (including Information in its possession prior to the
Closing Date) or furnished by such other or its respective directors, officers,
employees, agents, accountants, counsel and other advisors and
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<PAGE> 17
representatives at any time pursuant to this Agreement, any Ancillary Agreement
or otherwise, and shall not use any such Information other than for such
purposes as shall be expressly permitted by such agreements, except, in each
case, to the extent that such Information has been (i) in the public domain
through no fault of such party or any of its directors, officers, employees,
agents, accountants, counsel and other advisors and representatives, (ii) later
lawfully acquired from other sources by such party, which sources are not
themselves bound by a confidentiality obligation), or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.
(b) Protective Arrangements. In the event that any party either
determines on the advice of its counsel that it is required to disclose any
Information pursuant to applicable law or receives any demand under lawful
process or from any Governmental Authority to disclose or provide Information
of any other party that is subject to the confidentiality provisions of this
Agreement, such party shall notify the other party prior to disclosing or
providing such Information and shall cooperate at the expense of the requesting
party in seeking any reasonable protective arrangements requested by such other
party. Subject to the foregoing, the Person that received such request may
subsequently disclose or provide Information to the extent required by such law
(as so advised by counsel) or by lawful process or such Governmental Authority.
Section 20. Arbitration; Dispute Resolution.
20.1 Agreement to Arbitrate. The procedures for discussion,
negotiation and arbitration set forth in this Section 20 shall apply to all
disputes, controversies or claims that may arise out of or relate to, or arise
under or in connection with this Agreement or any Ancillary Agreement, or the
transactions contemplated by any such agreement. Each party agrees that the
procedures set forth in this Section 20 shall be the sole and exclusive remedy
in connection with any dispute, controversy or claim relating to any of the
foregoing matters and irrevocably waives any right to commence any Action in or
before any Governmental Authority, except to the extent provided under the
Arbitration Act in the case of judicial review of arbitration results or
awards. Each party irrevocably waives any right to any trial by jury with
respect to any claim, controversy or dispute set forth in the first sentence of
this Section 20.1.
20.2 Escalation. (a) It is the intent of the parties to use their
respective reasonable best efforts to resolve expeditiously any dispute,
controversy or claim between or among them with respect to the matters covered
hereby that may arise from time to time on a mutually acceptable negotiated
basis. In furtherance of the foregoing, any party involved in a dispute,
controversy or claim may deliver a notice (an "Escalation Notice") demanding an
in person meeting involving representatives of the parties at a senior level of
management of the parties (or if the parties agree, of the appropriate
strategic business unit or division within such entity). A copy of any such
Escalation Notice shall be given to the general counsel, or like officer or
official, of each party involved in the dispute, controversy or claim (which
copy shall state that it is an Escalation Notice pursuant to this Agreement) .
Any agenda, location or procedures for such discussions or negotiations between
the parties may be established by the parties from
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time to time; provided, however, that the parties shall use their
reasonable best efforts to meet within 30 days of the Escalation Notice.
(b) The parties may, by mutual consent, retain a mediator to aid the
parties in their discussions and negotiations by informally providing advice to
the parties. Any opinion expressed by the mediator shall be strictly advisory
and shall not be binding on the parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceedings. Mediation is not a
prerequisite to a demand for arbitration under Section 20.3.
20.3 Demand for Arbitration. At any time after the first to occur of
(i) the date of the meeting actually held pursuant to the applicable Escalation
Notice or (ii) 45 days after the delivery of an Escalation Notice (as
applicable, the "Arbitration Demand Date"), any party involved in the dispute,
controversy or claim (regardless of whether such party delivered the Escalation
Notice) may make a written demand (the "Arbitration Demand Notice") that the
dispute be resolved by binding arbitration.
20.4 Arbitrators. (a) Within 15 days after a valid Arbitration Demand
Notice is given, the parties involved in the dispute, controversy or referenced
claim shall attempt to select a sole arbitrator satisfactory to all such
parties.
(b) If such parties are not able jointly to select a sole arbitrator
within such 15- day period, such parties shall each appoint an arbitrator (who
need not be disinterested as to the parties or the matter) within 30 days after
delivery of the Arbitration Demand Notice. If one party appoints an arbitrator
within such time period and the other party or parties fail to appoint an
arbitrator within such time period, the arbitrator appointed by the one party
shall be the sole arbitrator of the matter.
(c) If a sole arbitrator is not selected pursuant to paragraph (a) or
(b) above and, instead, two or three arbitrators are selected pursuant to
paragraph (b) above, the two or three arbitrators will, within 30 days after
the appointment of the later of them to be appointed, select an additional
arbitrator who shall act as the sole arbitrator of the dispute. After selection
of such sole arbitrator, the initial arbitrators shall have no further role
with respect to the dispute. In the event that the arbitrators so appointed do
not, within 30 days after the appointment of the later of them to be appointed,
agree on the selection of the sole arbitrator, any party involved in such
dispute may apply to CPR, New York, New York to select the sole arbitrator,
which selection shall be made by such organization within 30 days after such
application. Any arbitrator selected pursuant to this paragraph (c) shall be
disinterested with respect to any of the parties and the matter and shall be
reasonably competent in the applicable subject matter.
(d) The sole arbitrator selected pursuant to paragraph (a), (b) or (c)
above will set a time for the hearing of the matter which will commence no
later than 90 days after the date of appointment cf the sole arbitrator
pursuant to paragraph (a), (b) or (c) above and which hearing will be no longer
than 30 days (unless in the judgment of the arbitrator the matter is
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unusually complex and sophisticated and thereby requires a longer time, in which
event such hearing shall be no longer than 90 days) . The final decision or such
arbitrator will be rendered in writing to the parties not later than 60 days
after the last hearing date, unless otherwise agreed by the parties in writing.
(e) The place of any arbitration will be Atlanta, Georgia, unless
otherwise agreed by the parties.
20.5 Hearings. Within the time period specified in Section 20.4(d),
the matter shall be presented to the arbitrator at a hearing by means of
written submissions of memoranda and verified witness statements, filed
simultaneously, and responses, if necessary in the judgment of the arbitrator
or both the parties. If the arbitrator deems it to be essential to a fair
resolution of the dispute, live cross-examination or direct examination may be
permitted, but is not generally contemplated to be necessary. The arbitrator
shall actively manage the arbitration with a view to achieving a just, speedy
and cost-effective resolution of the dispute, claim or controversy. The
arbitrator may, in his or her discretion, set time and other limits on the
presentation of each party's case, its memoranda or other submissions, and
refuse to receive any proffered evidence, which the arbitrator, in his or her
discretion, finds to be cumulative, unnecessary, irrelevant or of low probative
nature. Except as otherwise set forth herein, any arbitration hereunder will be
conducted in accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes then prevailing. The decision of the arbitrator will be final
and binding on the parties, and judgment thereon may be had and will be
enforceable in any court having jurisdiction over the parties. Arbitration
awards will bear interest at an annual rate of the Prime Rate plus 1% per
annum. To the extent that the provisions of this Agreement and the prevailing
rules of the CPR conflict, the provisions of this Agreement shall govern.
20.6 Discovery and Certain Other Matters.
(a) The arbitrator shall have full power and authority to set rules
for discovery and to determine issues of arbitrability but shall otherwise be
limited to interpreting or construing the applicable provisions of this
Agreement or any Ancillary Agreement, and will have no authority or power to
limit, expand, alter, amend, modify, revoke or suspend any condition or
provision of this Agreement or any Ancillary Agreement; it being understood,
however, that the arbitrator will have full authority to implement the
provisions of this Agreement or any Ancillary Agreement and to fashion
appropriate remedies for breaches of this Agreement (including interim or
permanent injunctive relief); provided that the arbitrator shall not have (i)
any authority in excess of the authority a court having jurisdiction over the
parties and the controversy or dispute would have absent these arbitration
provisions or (ii) any right or power to award punitive or treble damages. It
is the intention of the parties that in rendering a decision the arbitrator
give effect to the applicable provisions of this Agreement and the Ancillary
Agreements and follow applicable law (it being understood and agreed that this
sentence shall not give rise to a right of judicial review of the arbitrator's
award).
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<PAGE> 20
(b) If a party fails or refuses to appear at and participate in an
arbitration hearing after due notice, the arbitrator may hear and determine the
controversy upon evidence produced by the appearing party.
(c) Arbitration costs will be borne equally by each party involved in
the matter, except that each party will be responsible for its own attorney's
fees and other costs and expenses, including the costs of witnesses selected by
such party.
(d) Judgment upon any arbitration award may be entered in any court
having jurisdiction.
(e) Prior to the time at which an arbitrator is appointed, any party
may seek one or more temporary restraining orders in a court of competent
jurisdiction if necessary in order to preserve and protect the status quo.
Neither the request for, or grant or denial cf, any such temporary restraining
order shall be deemed a waiver of the obligation to arbitrate as set forth in
this Agreement and the arbitrator may dissolve, continue or modify any such
order. Any such temporary restraining order shall remain in effect until the
first to occur of the expiration of the order in accordance with its terms or
the dissolution of the order by the arbitrator.
20.7 Law Governing Arbitration Procedures. The interpretation of the
provisions of this Section, only insofar as they relate to the agreement to
arbitrate and any related procedures, shall be governed by the Arbitration Act
and other applicable federal law. In all other respects, the interpretation of
this Agreement shall be governed as set forth in Section 22.2.
Section 21. Further Assurances. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use its reasonable best efforts, prior to, on and after the
Closing Date, to take, or cause to be taken, all actions, and to do, or cause
to be done, all things, reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective
the transactions contemplated by this Agreement and the Ancillary Agreements.
Section 22. Miscellaneous.
22.1 Counterparts; Entire Agreement. (a) This Agreement and each
Ancillary Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party.
(b) This Agreement any Ancillary Agreements and the Schedules hereto
and thereto contain the entire agreement between the parties with respect to
the subject matter hereof, supersede all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter and there are no agreements or understandings
between the parties other than those set forth or referred to herein or
therein.
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22.2 Governing Law. Except as set forth in Section 20.7, this
Agreement and each Ancillary Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Georgia (other than as
to its laws of arbitration which shall be governed under the Arbitration Act or
other applicable federal law pursuant to Section 20.7), irrespective of the
choice of laws principles of the State of Georgia, as to all matters, including
matters of validity, construction, effect, enforceability, performance and
remedies.
22.3 Assignability. This Agreement and each Ancillary Agreement shall
be binding upon and inure to the benefit of the parties to such agreements,
respectively, and their respective successors and assigns; provided, however,
that no party may assign its respective rights or delegate its respective
obligations under this Agreement or any Ancillary Agreement without the express
prior written consent of the other parties.
22.4 Third Party Beneficiaries. Except for the indemnification rights
under this Agreement of any Medaphis Indemnitee or HRI Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any Person except the parties any rights or remedies
under this Agreement, and (b) there are no third party beneficiaries of this
Agreement or any Ancillary Agreement and neither this Agreement nor any
Ancillary Agreement shall provide any third person with any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those
existing without reference to this Agreement or any Ancillary Agreement.
22.5 Notices. All notices or other communications under this Agreement
or any Ancillary Agreement shall be in writing and shall be deemed to be duly
given when (a) delivered in person or (b) deposited in the United States mail
or private express mail, postage prepaid, addressed as follows:
If to Medaphis, to: Secretary
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339
If to HRI, to: Secretary
Healthcare Recoveries, Inc.
1400 Watterson Tower
Louisville, Kentucky 40218
Any party may, by notice to the other party, change the address to which such
notices are to be given.
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22.6 Severability. If any provision of this Agreement or any Ancillary
Agreement or its application to any Person or circumstance is determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions of such agreement, or the application of such provision to
Persons or circumstances or in jurisdictions other than those as to which it
has been held invalid or unenforceable, shall remain in full force and effect
and shall in no way be affected, impaired or invalidated, so long as the
economic or legal substance of the transactions contemplated by such agreement,
as the case may be, is not affected in any manner adverse to any party. Upon
such determination, the parties shall negotiate in good faith in an effort to
agree upon such a suitable and equitable provision to effect the original
intent of the parties.
22.7 Force Majeure. No party shall be deemed in default of this
Agreement or any Ancillary Agreement to the extent that any delay or failure in
the performance of its obligations under this Agreement or any Ancillary
Agreement results from any cause beyond its reasonable control and without its
fault or negligence, such as acts of God, acts of civil or military authority,
embargoes, epidemics, war, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions, labor problems or
unavailability of parts, or, in the case of computer systems, any failure in
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the
time lost by reason of the delay.
22.8 Publicity; Expenses. Prior to the Closing Date, each of HRI and
Medaphis shall consult with each other prior to issuing any press releases or
otherwise making public statements with respect to the IPO, the Separation or
any of the other transactions contemplated hereby. Certain expenses incurred in
connection with the implementation of the IPO and the Separation, as set forth
on Schedule 22.8, shall be for the account of HRI. Except as otherwise
expressly provided for in this Agreement, all other expenses incurred in
connection with the IPO and the Separation shall be for the account of
Medaphis.
22.9 Waivers of Default. Waiver by any party of any default by the
other party of any provision of this Agreement or any Ancillary Agreement shall
not be deemed a waiver by the waiving party of any subsequent or other default,
nor shall it prejudice the rights of the other party.
22.10 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
aggrieved shall have the right to specific performance and injunctive or other
equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including
monetary damages, are inadequate compensation for any loss and that any defense
in any action for specific performance that a remedy at law would be
- 21 -
<PAGE> 23
adequate is waived. Any requirements for the securing or posting of any bond
with such remedy are waived.
22.11 Amendments. No provision of this Agreement or any Ancillary
Agreement shall be deemed waived, amended, supplemented or modified by any
party, unless such waiver, amendment, supplement or modification is in writing
and signed by the authorized representative of the party against whom it is
sought to enforce such waiver, amendment, supplement or modification.
IN WITNESS WHEREOF, the parties have caused this Separation Agreement
to be executed by their duly authorized representatives.
MEDAPHIS CORPORATION
By:/s/ David E. McDowell
----------------------------
Name: David E. McDowell
-----------------------
Title:Chairman and Chief
----------------------
Executive Officer
- 22 -
<PAGE> 24
HEALTHCARE RECOVERIES, INC.
By:/s/ Patrick B. McGinnis
----------------------------
Name: Patrick B. McGinnis
-----------------------
Title:Chairman and Chief
----------------------
Executive Officer
- 23 -
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