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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 23, 1997
Medaphis Corporation
(Exact name of registrant as specified in its charter)
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DELAWARE 000-19480 58-1651222
(State or other jurisdiction of incorporation) Commission File Number (IRS Employer Identification Number)
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2700 CUMBERLAND PARKWAY
SUITE 300
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 444-5300
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index Located on Page: [4]
Total Number of Pages: [ ]
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Item 5. Other Events.
On December 23, 1997, the Registrant established a $210 million term
loan facility (the "Facility") from an affiliate of Donaldson, Lufkin &
Jenrette. This new facility refinanced the Registrant's then existing $168
million bank facility, which was paid off and terminated on December 24. The
balance of the Facility will be used to provide liquidity for near term working
capital needs and for general corporate purposes. A copy of each of the Note
Purchase Agreement, the Security Agreement and the Pledge Agreement with
respect to the Facility is filed as an exhibit to this Form 8-K.
In connection with the reaudit of the Registrant's fiscal years ended
December 31, 1995 and 1996 and the audit of the Registrant's nine months ended
September 30, 1997 by Price Waterhouse LLP, the Registrant's new independent
auditors, the Board of Directors of the Registrant determined, upon
recommendation of the Audit Committee of the Board, to restate the results of
such periods to account for the December 1995 acquisition of Medical Management
Sciences, Inc. ("MMS") on a purchase accounting basis. The MMS transaction had
been accounted for as a pooling of interests.
Price Waterhouse completed its reaudit of 1995 and 1996 and its audit
of the nine months ended September 30, 1997 and on December 23, 1997 issued its
audit opinion with respect to such periods. Such opinion is unqualified and not
subject to any modifying paragraphs. The Registrant's audited financial
statements as of and for the years ended December 31, 1995 and 1996 and as of
and for the nine months ended September 30, 1997, along with Price Waterhouse's
opinion are filed as Exhibit 99.1 this Form 8-K.
In addition, the Registrant issued a press release on December 24,
1997, a copy of which is filed as Exhibit 99.2 to this Form 8-K. The press
release relates to the Facility, the restatement of results reflecting the MMS
transaction as a purchase rather than a pooling of interests and the release of
Price Waterhouse's unqualified audit opinion.
Item 7. Financial Statements and Exhibits.
(c) Exhibits
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10.1 Note Purchase Agreement, dated December 23, 1997,
by and among Medaphis Corporation, certain of its
subsidiaries and [Medfunding, Inc.] with respect to
up to $210 million in aggregate principal amount of
Senior Secured Increasing Rate Notes
10.2 Security Agreement, dated December 23, 1997, by and
among Medaphis Corporation, certain of its
subsidiaries and [Medfunding, Inc.]
10.3 Pledge Agreement, dated December 23, 1997, by and
among Medaphis Corporation, certain of its
subsidiaries and [Medfunding, Inc.]
27.1 Financial Data Schedule (for the year ended December
31, 1995)
27.2 Financial Data Schedule (for the year ended December
31, 1996)
27.3 Financial Data Schedule (for the nine months ended
September 30, 1997)
99.1 Financial Statements of the Registrant as of and for
the years ended December 31, 1995 and 1996 and as of
and for the nine month period ended September 30,
1997 audited by Price Waterhouse LLP.
99.2 Press Release issued by the Registrant on December
24, 1997
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.
Date: December 31, 1997
MEDAPHIS CORPORATION
By: /s/ Jerome H. Baglien
----------------------------
Jerome H. Baglien
Senior Vice President,
Chief Financial Officer and
Assistant Secretary
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INDEX TO EXHIBITS
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EXHIBIT NUMBER DESCRIPTION PAGE NO.
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EX10.1 Note Purchase Agreement, dated December 23, 1997, by and
among Medaphis Corporation, certain of its subsidiaries and
[Med Funding, Inc.] with respect to up to $210 million in
aggregate principal amount of Senior Secured Increasing Rate
Notes..............................................................................5
EX10.2 Security Agreement, dated December 23, 1997, by and among
Medaphis Corporation, certain of its subsidiaries and
[Med Funding, Inc.]................................................................XX
EX10.3 Pledge Agreement, dated December 23, 1997, by and among
Medaphis Corporation, certain of its subsidiaries and
[Med Funding, Inc.]................................................................XX
EX27.1 Financial Data Schedule (for the year ended December 31, 1995).....................XX
EX27.2 Financial Data Schedule (for the year ended December 31, 1996).....................XX
EX27.3 Financial Data Schedule (for the nine months ended September 30, 1997).............XX
EX99.1 Financial Statements of the Registrant as of and for the years
ended December 31, 1995 and 1996 and as of and for the nine
month period ended September 30, 1997 audited by Price
Waterhouse LLP.....................................................................XX
EX99.2 Press Release issued by the Registrant on December 24, 1997........................XX
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EXHIBIT 10.1
NOTE PURCHASE AGREEMENT
dated as of
December 23, 1997
among
MEDAPHIS CORPORATION,
the SUBSIDIARY GUARANTORS party hereto
and
[MED FUNDING, INC.]
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TABLE OF CONTENTS
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ARTICLE 1
DEFINITIONS
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SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Accounting Terms and Determinations......................................................11
ARTICLE 2
PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES
SECTION 2.01. Commitment to Purchase...................................................................11
SECTION 2.02. Takedown Procedures......................................................................12
SECTION 2.03. Fees.....................................................................................12
SECTION 2.04. Mandatory Termination and Reduction of Commitment........................................13
SECTION 2.05. Optional Reduction of Commitment.........................................................13
SECTION 2.06. Interest.................................................................................13
SECTION 2.07. Maturity of Notes; Prepayment of Notes...................................................14
SECTION 2.08. Fee Due in Certain Circumstances.........................................................14
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Corporate Existence and Power............................................................15
SECTION 3.02. Authorization, Execution and Enforceability; Lien Perfection.............................15
SECTION 3.03. Governmental Authorization...............................................................16
SECTION 3.04. Contravention............................................................................16
SECTION 3.05. Financial Information....................................................................16
SECTION 3.06. Litigation...............................................................................17
SECTION 3.07. Environmental Matters....................................................................17
SECTION 3.08. Taxes....................................................................................18
SECTION 3.09. Subsidiaries.............................................................................18
SECTION 3.10. Not an Investment Company................................................................18
SECTION 3.11. Full Disclosure..........................................................................18
SECTION 3.12. Capitalization...........................................................................18
SECTION 3.13. Solicitation; Access to Information......................................................19
SECTION 3.14. Non-fungibility..........................................................................19
SECTION 3.15. Permits..................................................................................19
SECTION 3.16. Real Property Interests..................................................................19
SECTION 3.17. Representations in Other Financing Documents.............................................19
SECTION 3.18. Compliance with ERISA....................................................................20
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SECTION 3.19. Government Regulation....................................................................20
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
SECTION 4.01. Purchase for Investment; Authority; Binding Agreement....................................20
ARTICLE 5
CONDITIONS PRECEDENT TO PURCHASE
SECTION 5.01. Conditions to Purchaser's Obligation at Initial Takedown.................................21
SECTION 5.02. Conditions to Purchaser's Obligations on Each Takedown...................................22
ARTICLE 6
COVENANTS
SECTION 6.01. Information..............................................................................24
SECTION 6.02. Payment of Obligations...................................................................26
SECTION 6.03. Insurance................................................................................26
SECTION 6.04. Conduct of Business and Maintenance of Existence.........................................26
SECTION 6.05. Compliance with Laws.....................................................................27
SECTION 6.06. Inspection of Property, Books and Records................................................27
SECTION 6.07. Investment Company Act...................................................................27
SECTION 6.08. Minimum Consolidated EBITDA..............................................................28
SECTION 6.09. Limitation on Debt.......................................................................28
SECTION 6.10. Restricted Payments......................................................................29
SECTION 6.11. Cash Settlement Payments.................................................................30
SECTION 6.12. Investments..............................................................................30
SECTION 6.13. Limitation on Liens......................................................................31
SECTION 6.14. Transactions with Affiliates.............................................................31
SECTION 6.15. Consolidations, Mergers and Sales of Assets..............................................32
SECTION 6.16. Subsidiaries.............................................................................33
SECTION 6.17. Use of Proceeds..........................................................................33
SECTION 6.18. Permanent Financing......................................................................33
SECTION 6.19. Additional Guarantees and Collateral; Further Assurances.................................34
SECTION 6.20. Board of Directors.......................................................................35
SECTION 6.21. Leases...................................................................................36
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ARTICLE 7
EVENTS OF DEFAULT
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SECTION 7.01. Events of Default Defined; Acceleration of Maturity; Waiver of
Default........................................................................................36
ARTICLE 8
LIMITATION ON TRANSFERS
SECTION 8.01. Restrictions on Transfer.................................................................39
SECTION 8.02. Restrictive Legends......................................................................39
SECTION 8.03. Notice of Proposed Transfers.............................................................39
ARTICLE 9
GUARANTY
SECTION 9.01. The Guaranty.............................................................................40
SECTION 9.02. Guaranty Unconditional...................................................................41
SECTION 9.03. Discharge Only Upon Payment in Full; Reinstatement in Certain
Circumstances..................................................................................42
SECTION 9.04. Waiver by the Subsidiary Guarantors......................................................42
SECTION 9.05. Subrogation..............................................................................42
SECTION 9.06. Stay of Acceleration.....................................................................42
SECTION 9.07. Limit of Liability.......................................................................43
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices.................................................................................43
SECTION 10.02. No Waivers; Amendments..................................................................43
SECTION 10.03. Indemnification.........................................................................44
SECTION 10.04. Expenses................................................................................46
SECTION 10.05. Payment.................................................................................47
SECTION 10.06. Successors and Assigns..................................................................47
SECTION 10.07. Brokers.................................................................................47
SECTION 10.08. New York Law; Submission to Jurisdiction; Waiver of Jury Trial..........................47
SECTION 10.09. Severability............................................................................48
SECTION 10.10. Counterparts............................................................................48
SECTION 10.11. Confidentiality.........................................................................48
SECTION 10.12. Termination.............................................................................48
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SCHEDULES
Schedule 3.02 -- Lien Perfection
Schedule 3.07 -- Environmental Matters
Schedule 3.09 -- Subsidiaries
Schedule 3.12 -- Capitalization
Schedule 3.16 -- Real Property Interests
Schedule 6.13 -- Existing Liens
Schedule 6.15 -- Sale-Leaseback Transactions
Schedule 6.16 -- Subsidiaries that are Not Wholly Owned
EXHIBITS
Exhibit A -- Form of Note
Exhibit B -- Form of Security Agreement
Exhibit C -- Form of Pledge Agreement
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NOTE PURCHASE AGREEMENT
AGREEMENT dated as of December 23, 1997 among MEDAPHIS CORPORATION,
the SUBSIDIARY GUARANTORS party hereto or which hereafter become party hereto
and [MED FUNDING, INC.]
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. DEFINITIONS. The following terms, as used herein, have
the following meanings:
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Company (a "CONTROLLING PERSON") or
(ii) any Person (other than the Company or any of its Subsidiaries) which is
controlled by or is under common control with a Controlling Person. As used in
this definition, the term "CONTROL" means possession, directly or indirectly,
of the power either to (i) vote 25% or more of the securities having ordinary
voting power for the election of directors of such Person or (ii) direct or
cause the direction of the management or policies of a Person, whether by
contract or otherwise; provided that in no event shall Purchaser or any of its
affiliates be deemed to be an Affiliate.
"AGREEMENT" means this Agreement, as amended, restated, supplemented
or otherwise modified from time to time in accordance with its terms.
"ASSET SALE" means any sale, transfer or other disposition (including
any such transaction effected by way of merger or consolidation) by the Company
or any of its Subsidiaries of any ownership interest in any asset, including
without limitation any sale-leaseback transaction, but excluding (i) any sale,
transfer or other disposition of inventory and used, surplus, obsolete or worn
out equipment in the ordinary course of business, (ii) any sale, transfer or
other disposition to the Company or to a wholly-owned Subsidiary of the Company
and (iii) cash payments otherwise permitted under this Agreement; provided that
any disposition not excluded pursuant to clauses (i) through (iii) shall
constitute an Asset Sale only if, and solely to the extent that, the Net Cash
Proceeds therefrom, together with the Net Cash Proceeds from all other such
dispositions effected by the Company and its Subsidiaries after the date hereof
to the extent that such Net Cash
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Proceeds were not used to prepay the Notes pursuant to Section 2.07(b), exceed
$1,000,000.
"BENEFIT ARRANGEMENT" means at any time an employee benefit plan
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"BUSINESS ACQUISITION" means (i) an Investment by the Company or any
of its Subsidiaries in any other Person pursuant to which such Person shall
become a Subsidiary or shall be merged into or consolidated with the Company or
any of its Subsidiaries or (ii) an acquisition by the Company or any of its
Subsidiaries of the property and assets of any Person (other than the Company
or any of its Subsidiaries) that constitute a substantial part of the assets of
such Person or of any division or other business unit of such Person.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York or Atlanta, Georgia are
authorized or required by law to close.
"CAPITAL LEASE" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"CASH EQUIVALENTS" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any domestic commercial bank (including a domestic
branch of a foreign bank) whose outstanding senior long-term debt securities
are rated either A- or higher by Standard & Poor's Ratings Services or A3 or
higher by Moody's Investors Service, Inc., (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) entered into with any bank meeting the qualifications specified
in clause (ii) above, (iv) commercial paper rated at least A-1 or the
equivalent thereof by Standard & Poor's Ratings Services or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc., maturing within one year
after the date of acquisition, (v) obligations denominated in a currency other
than dollars which are of a credit quality and maturity comparable to those
referred to in clauses (i) through (iv) above that are customarily used for
short-term investment of excess cash in the markets in which the Company and
its Subsidiaries operate, and (vi) shares of a money market mutual fund
substantially all of whose investments are described in clauses (i) through
(iv) above.
"CASH MANAGEMENT AGREEMENTS" means any agreement entered into from time
to time between the Company and/or any of its Subsidiaries, on the one hand, and
[Wachovia Bank of Georgia, N.A.] and/or any of its affiliates or any other
banking or
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financial institution, on the other hand, in connection with cash management
services for operating, collection, payroll and trust accounts of the Company
and/or its Subsidiaries provided by such banking or financial institution,
including, without limitation, automatic clearing house services, control
disbursement services, electronic funds transfer services, information
reporting services, lockbox services, stop payment services, and wire transfer
services.
"CASH MANAGEMENT SERVICES OBLIGATIONS" means any and all obligations
of the Company and/or any of its Subsidiaries under any of the Cash Management
Agreements or otherwise relating to any cash management services.
"CHANGE OF CONTROL" means such time as (a) any "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act of 1934,
as amended) shall become the beneficial owner, by way of merger, consolidation
or otherwise, of 51% or more of the voting power of all classes of voting
securities of the Company; or (b) a sale or transfer of all or substantially
all of the assets of the Company to any Person or group has been consummated;
or (c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election was approved by a vote of a
majority of the directors then still in office, who either were directors at
the beginning of such period or whose election or nomination for the election
was previously so approved) cease for any reason to constitute a majority of
the directors of the Company then in office.
"CLOSING DATE" means the date of the Initial Takedown.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITMENT" means $210,000,000, or the obligation of Purchaser
pursuant to this Agreement, subject to the terms and conditions set forth
herein, to purchase Notes hereunder in an aggregate principal amount not to
exceed such amount, as such amount may be reduced from time to time pursuant to
Sections 2.04 and 2.05.
"COMMON STOCK" means the authorized common stock, par value $0.01 per
share, of the Company.
"COMPANY" means Medaphis Corporation, a Delaware corporation, and its
successors.
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"CONSOLIDATED EBITDA" means, for any period, consolidated net income
of the Company and its Consolidated Subsidiaries for such period plus, to the
extent deducted in determining such consolidated net income, the aggregate
amount of (i) consolidated interest expense, (ii) income tax expense, (iii)
depreciation, amortization and other charges having no cash impact in the
current or any future period and (iv) in the case of the quarter ending
December 31, 1997, and without duplication of any amount included in (i) to
(iii) above, charges in respect of (A) prior deferred financing costs ($1.4
million), (B) Price Waterhouse fees ($2.4 million), (C) FAS 112 adjustment
($2.0 million), (D) BSG severance ($1.0 million) and (E) E.I.T.F. Issue No.
97-13 ($5.0 to $8.0 million).
"CONSOLIDATED SUBSIDIARY" means, at any date with respect to any
Person, any Subsidiary or other entity, the accounts of which would be
consolidated with those of such Person in its consolidated financial statements
if such statements were prepared as of such date.
"CORPORATE DOCUMENTS" means the articles of incorporation and bylaws
of the Company and each Subsidiary Guarantor.
"DEBT" of any Person means, at any date, (a) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services (other than current trade liabilities incurred in the ordinary course
of business and operating leases for equipment and other assets) or which is
evidenced by a note, bond, debenture or similar instrument, (b) all obligations
of such Person under Capital Leases, (c) all obligations (contingent or
otherwise) of such Person to reimburse any bank or other Person in respect of
amounts paid under a letter of credit or similar instrument (other than
contingent obligations on performance bonds for customer contracts in the
ordinary course of business), (d) all Derivatives Obligations of such Person,
(e) all Guarantee Obligations of such Person in respect of Debt of any other
Person and (f) all liabilities of the types described in clauses (a) through
(e) above secured by any Lien on any property owned by such Person even though
such Person has not assumed or otherwise become liable for the payment thereof.
"DEBT INCURRENCE" means any incurrence by the Company or any of its
Subsidiaries of any Debt (including without limitation pursuant to the
Permanent Financing), other than Debt permitted under any of clauses (i)
through (viii) of Section 6.09(a).
"DEFAULT" means any Event of Default or any event or condition which,
with the giving of notice or lapse of time or both, would, unless cured or
waived, become an Event of Default.
"DERIVATIVES OBLIGATIONS" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity
4
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swap, commodity option, equity or equity index swap, equity or equity index
option, bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, currency swap transaction,
cross-currency rate swap transaction, currency option or any other similar
transaction (including any option with respect to any of the foregoing
transactions) or any combination of the foregoing transactions.
["DLJ BRIDGE"] means [DLJ Bridge Finance, Inc.,] a Delaware
corporation, and its successors.
["DLJSC"] means [Donaldson, Lufkin & Jenrette Securities Corporation],
a Delaware corporation, and its successors.
"DOLLARS" or "$" mean lawful currency of the United States of America.
"DOMESTIC SUBSIDIARY" means any Subsidiary of the Company other than a
Subsidiary that is organized under the laws of a jurisdiction outside the
United States and does not conduct a substantial amount of business in the
United States.
"ENGAGEMENT LETTER" means the letter agreement dated December 15, 1997
between the Company and [DLJSC.]
"ENVIRONMENTAL LAWS" means any and all statutes, laws, judicial
decisions, regulations, ordinances, rules, judgments, orders, decrees, codes,
plans, injunctions, permits, concessions, grants, franchises, licenses and
governmental restrictions, whether now or hereafter in effect, relating to
human health, the environment or to emissions, discharges or releases of
pollutants, contaminants, Hazardous Materials or wastes into the environment,
including ambient air, surface water, ground water or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, Hazardous
Materials or wastes or the clean-up or other remediation thereof.
"EQUITY ISSUANCE" means the issuance of any equity securities by the
Company or any of its Subsidiaries (including without limitation any equity
securities issued pursuant to the Permanent Financing), but excluding:
(i) any issuance of equity securities to the Company or
any of its Subsidiaries;
(ii) any issuance of equity securities pursuant to the
exercise of stock options or warrants in existence on the Closing Date
or authorized pursuant to any agreement with any employees to which
the Company or any Subsidiary is a party on the Closing Date;
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(iii) any issuance of equity securities pursuant to any
401(k), employee stock purchase plan or employee benefit plan in
existence on the Closing Date and as may be amended from time to time;
(iv) any issuance of equity securities pursuant to the
exercise of stock options hereinafter granted from time to time to any
executives of the Company or any Subsidiary pursuant to any
compensation plan or grant authorized by the Board of Directors of the
Company or any Subsidiary; or
(v) any issuance of equity securities in connection with
any settlement of litigation or claims disclosed in the September 30,
1997 10-Q.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means the Company, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"EVENT OF DEFAULT" has the meaning set forth in Section 7.01.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING CREDIT AGREEMENT" means the Second Amended and Restated
Credit Agreement dated as of February 4, 1997 among the Company, the lenders
named therein and [SunTrust Bank, Atlanta,] as agent, as amended, restated,
supplemented or otherwise modified.
"EXPIRATION DATE" has the meaning set forth in Section 2.01.
"FINANCING DOCUMENTS" means this Agreement, the Notes and the Security
Documents.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States of America.
"GUARANTEE OBLIGATION" means as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to induce
the creation of which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in
effect guaranteeing any Debt, leases, dividends or other
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obligations (the "primary obligations") of any other third Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of the guaranteeing person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (ii) to advance or supply
funds (1) for the purchase or payment of any such primary obligation or (2) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to purchase
property, securities or services primarily for the purpose of assuring the
owner of any such primary obligation of the ability of the primary obligor to
make payment of such primary obligation against loss in respect thereof;
provided, however, that the term Guarantee Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Guarantee Obligation is made and (b) the maximum amount for which such
guaranteeing person may be liable pursuant to the terms of the instrument
embodying such Guarantee Obligation, unless such primary obligation and the
maximum amount for which such guaranteeing person may be liable are not stated
or determinable, in which case the amount of such Guarantee Obligation shall be
such guaranteeing person's maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith.
"HAZARDOUS MATERIALS" means (i) asbestos; (ii) polychlorinated
biphenyls; (iii) petroleum, its derivatives, by-products and other
hydrocarbons; and (iv) any other toxic, radioactive, caustic or otherwise
hazardous substance regulated under Environmental Laws.
"HAZARDOUS MATERIALS CONTAMINATION" means contamination (whether now
existing or hereafter occurring) of the improvements, buildings, facilities,
personalty, soil, groundwater, air or other elements on or of the relevant
property by Hazardous Materials, or any derivatives thereof, or on or of any
other property as a result of Hazardous Materials, or any derivatives thereof,
generated on, emanating from or disposed of in connection with the relevant
property.
"HOLDER" means any Holder of any Note.
"INITIAL TAKEDOWN" means the first Takedown hereunder.
"INTEREST PAYMENT DATE" each March 23, June 23, September 23 and
December 23 (or, if any such date is not a Business Day, the next succeeding
Business Day).
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
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"INVESTMENT" means any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise. It is
understood that a guarantee by a Person of any obligations of another Person
constitutes an Investment by the guaranteeing Person in the other Person in the
amount of the Guarantee Obligation.
"LIEN" means, any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement) and any
other arrangement having substantially the same economic effect as any of the
foregoing.
"MAJORITY HOLDERS" means (i) at any time prior to the issuance of the
Notes, Purchaser and (ii) at any time thereafter, the holders of voting rights
with respect to waivers, amendments and other actions permitted or required to
be taken by Holders under the terms of the Notes constituting a majority of
such voting rights attributable to the aggregate outstanding amount of Notes at
such time.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, condition (financial or otherwise), operations, performance,
properties, Projections or prospects of the Company and its Subsidiaries, taken
as a whole.
"MATURITY DATE" means April 1, 1999.
"MULTIEMPLOYER PLAN" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA (i) to which any member
of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the
ERISA Group during such five year period and (ii) which is covered by Title IV
of ERISA.
"NET CASH PROCEEDS" means, with respect to any transaction, an amount
equal to the cash proceeds received by the Company or any of its Subsidiaries
from or in respect of such transaction, less (i) any expenses (including
commissions or fees) actually incurred by the Company or such Subsidiary in
respect of such transaction, (ii) the amount of any Debt secured by a Lien on a
related asset and discharged from the proceeds of such transaction and (iii)
any taxes paid or payable by the Company or such Subsidiary with respect to
such transaction (as reasonably estimated by the Company's chief financial
officer in good faith).
"1996 10-K" means the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
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"NOTES" means the Company's Senior Secured Increasing Rate Notes
substantially in the form set forth as Exhibit A hereto.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMANENT FINANCING" means any Debt Incurrence or Equity Issuance
following the date hereof for the purpose of refinancing the Notes.
"PERMITS" means domestic and foreign licenses, permits and approvals,
including provincial, state, federal, city and county permits and approvals.
"PERMITTED LIENS" means Liens expressly permitted to exist by the
terms of Section 6.13 hereof.
"PERMITTED TRANSFEREE" means any Person that acquires Notes other than
any Person who acquires such Notes (i) in a public offering or (ii) in the open
market, pursuant to sales under Rule 144 of the Securities Act or otherwise.
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"PLAN" means at any time an employee pension benefit plan (other than
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for employees of any Person
which was at such time a member of the ERISA Group.
"PLEDGE AGREEMENT" means the Pledge Agreement of even date herewith
among the Company, the Subsidiary Guarantors named therein and the Secured
Party, substantially in the form of Exhibit C, as amended from time to time.
"PRIME RATE" means, for any day, a rate per annum equal to the rate of
interest publicly announced by The Bank of New York (or its successor) from
time to time in The City of New York as its prime, reference or base rate, it
being understood that such rate is one of such bank's base rates and serves as
a basis upon which effective rates of interest are calculated for those loans
making reference thereto and may not be the lowest of such bank's base rates.
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"PROJECTIONS" means financial projections with respect to the Company
and its Subsidiaries, prepared by the Company or any of its Subsidiaries.
"PURCHASER" means [Med Funding, Inc.], a Delaware corporation, and its
successors.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution on
any shares of the capital stock of the Company (except dividends payable solely
in shares of its capital stock) or (ii) any payment on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the capital stock of
the Company or (b) any option, warrant or other right to acquire shares of the
capital stock of the Company.
"SECURED PARTY" means Purchaser, as secured party under the Security
Documents.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENT" means the Security Agreement of even date
herewith among the Company, the Subsidiary Guarantors and the Secured Party,
substantially in the form of Exhibit B, as amended from time to time.
"SECURITY DOCUMENTS" means the Pledge Agreement, the Security
Agreement and any other agreements pursuant to which the Company or any of its
Subsidiaries provides a Lien on assets to secure any obligations in respect of
the Notes or this Agreement, and all supplementary assignments, security
agreements, pledge agreements, acknowledgments or other documents delivered or
to be delivered pursuant to the terms hereof or any other Security Document.
"SEPTEMBER 30, 1997 10-Q" means the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"SUBSIDIARY GUARANTOR" means each Subsidiary of the Company listed on
the signature pages hereof, and each other Person that hereafter enters into a
guaranty of the obligations of the Company.
"SYNTHETIC LEASE" means the loan and lease transactions arising under
the Participation Agreement dated as of April 21, 1995 among the Company, [TBC
Realty VI]
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Corporation, [Trust Company Bank] (now known as SunTrust Bank, Atlanta) and
[Creditanstalt Corporate Finance, Inc.] and the other documents described
therein.
"TAKEDOWN" has the meaning set forth in Section 2.02(a).
"TRANSFER" means any disposition of Notes that would constitute a sale
thereof under the Securities Act.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time,
the amount (if any) by which (i) the value of all benefit liabilities (within
the meaning of Section 4001(a)(16) of ERISA) under such Plan, determined on a
plan termination basis using the assumptions prescribed by the PBGC for
purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all
Plan assets allocable to such liabilities under Title IV of ERISA (excluding
any accrued but unpaid contributions), all determined as of the then most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the ERISA Group to the PBGC or
any other Person under Title IV of ERISA.
SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP
applied on a consistent basis (except for changes concurred in by the Company's
independent public accountants).
ARTICLE 2
PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES
SECTION 2.01. COMMITMENT TO PURCHASE. (a) Subject to the terms and
conditions set forth herein and in reliance on the representations and
warranties of the Company contained herein and in the other Financing
Documents, the Company may at its option issue and sell, and Purchaser agrees
to purchase, Notes in an aggregate outstanding principal amount not to exceed
$210,000,000. The purchase price for the Notes shall be 100% of the principal
amount thereof.
(b) The Commitment will terminate on the earliest of (i) the date when
the Company shall have repaid all loans outstanding under the Existing Credit
Agreement (if such date occurs prior to the Closing Date), (ii) the date on
which the Company or any of its Subsidiaries commences the marketing of any
proposed Permanent Financing with respect to which [DLJSC] or any of its
Affiliates is not the exclusive agent, sole initial purchaser or sole
underwriter, as the case may be, if such marketing breaches the terms of this
Agreement or the Engagement Letter; (iii) the date of consummation of the
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Permanent Financing, (iv) December 31, 1997 (if such date occurs prior to the
Closing Date) and (v) March 31, 1998 (such earliest date, the "EXPIRATION
DATE"); provided that if at any time on or after the date hereof an Event of
Default shall have occurred and be continuing, Purchaser may at its option
terminate the Commitment by notice to the Company, such termination to be
effective upon the giving of such notice; and provided further that the
Commitment shall automatically terminate, without notice to the Company or any
other action on the part of Purchaser, upon the occurrence of any of the events
specified in Sections 7.01(e) and 7.01(f) with respect to the Company.
(c) The Commitment is not revolving in nature, and principal amounts
of Notes prepaid in accordance with Section 2.07 may not be resold to Purchaser
hereunder.
SECTION 2.02. TAKEDOWN PROCEDURES. (a) The Company shall give
Purchaser notice not later than 11:00 A.M. (New York City time) two Business
Days prior to each proposed purchase and sale of Notes hereunder (a
"TAKEDOWN"), other than the Initial Takedown if it occurs on December 23 or 24,
1997 and is in the amount of $185,000,000 which notice shall specify the
principal amount of Notes to be purchased and sold at such Takedown (which
amount shall be $5,000,000 or a larger multiple of $1,000,000, except that any
Takedown may be in an amount equal to either (x) the amount of interest payable
on the Notes on the date of Takedown or (y) the remaining unused amount of the
Commitment) and the date of such Takedown (which shall be a Business Day).
There shall not be more than three Takedowns subsequent to the Initial Takedown
hereunder.
(b) No later than 12:00 noon (New York City time) on the date of each
Takedown, Purchaser shall deliver by wire transfer, to the account number of
the Company specified by the Company in writing no later than 2:00 P.M. (New
York City time) two Business Days prior to the date of such Takedown,
immediately available funds in an amount equal to the aggregate purchase price
of the Notes to be purchased by Purchaser hereunder on such date, less the
aggregate amount of fees payable by the Company to Purchaser on such date
pursuant to Section 2.03.
(c) At each Takedown, against payment as set forth in subsection (b)
of this Section 2.02, the Company shall deliver to Purchaser a single Note
representing the aggregate principal amount of Notes to be purchased at such
Takedown registered in the name of Purchaser, or, if requested by Purchaser,
separate Notes in such other denominations and registered in such name or names
as shall be designated by Purchaser by notice to the Company at least two
Business Days prior to the date of such Takedown.
SECTION 2.03. FEES. (a) The Company shall pay Purchaser a commitment
fee in the amount of $4,200,000, which fee shall be fully earned upon the
execution and delivery of this Agreement by the parties hereto and shall be
payable in full in cash on the earlier of (i) the Closing Date and (ii)
December 31, 1997; provided that such fee shall not be payable (and shall be
waived) if Purchaser declines to purchase Notes hereunder because a
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condition in Section 5.01 is not satisfied notwithstanding that the Company
shall have used its best efforts to cause such condition to be satisfied.
(b) On the date of each Takedown hereunder, the Issuer shall pay to
Purchaser a takedown fee in an amount equal to 2.00% of the aggregate
outstanding principal amount of the Notes being purchased at such Takedown.
SECTION 2.04. MANDATORY TERMINATION AND REDUCTION OF COMMITMENT.
(a) The Commitment shall terminate on the Expiration Date.
(b) In addition, the Commitment shall be reduced by an amount equal
to the Net Cash Proceeds received by the Company or any of its Subsidiaries in
respect of any Asset Sale, Debt Incurrence or Equity Issuance minus the amount
of such Net Cash Proceeds required to prepay outstanding Notes in accordance
with Section 2.07(c). Each such reduction shall be effective on the date of the
related prepayment of the Notes, or if no Notes are at the time outstanding, on
the date of receipt of such Net Cash Proceeds.
SECTION 2.05. OPTIONAL REDUCTION OF COMMITMENT. The Company may, by
notice to Purchaser on or before the effective date of termination or
reduction, terminate the unused Commitment at any time or reduce the unused
Commitment from time to time in amounts equal to $5,000,000 or any larger
multiple of $1,000,000.
SECTION 2.06. INTEREST. (a) Interest on each Note shall be payable
quarterly in arrears, on each Interest Payment Date of each year in which such
Note remains outstanding, commencing with the first Interest Payment Date after
the date of issuance thereof, on the principal sum of such Note outstanding.
Interest on each Note shall be calculated at the rates per annum set forth
below, and shall accrue from and including the most recent Interest Payment
Date to which interest has been paid on such Note (or if no interest has been
paid on such Note, from the date of issuance thereof) to but excluding the date
on which payment in full of the principal sum of such Note has been made.
(b) The interest rate applicable to each Note shall be a floating
rate per annum equal to the sum of (i) the Prime Rate in effect from time to
time plus (ii) 2.50% plus (iii) an additional percentage amount, equal to 1.00%
from and including the Interest Payment Date falling on June 23, 1998 and
increasing by 0.50% effective on each Interest Payment Date thereafter until
the principal amount of such Note is paid in full or, in any case, if less, the
maximum rate permitted by applicable law. Interest on each Note will be
calculated on the basis of a 365-day year and paid for the actual number of
days elapsed.
SECTION 2.07. MATURITY OF NOTES; PREPAYMENT OF NOTES. (a) The Notes
shall mature on the Maturity Date.
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(b) The Company at its option may, upon ten days' written notice to
the Holders, at any time, prepay all or any part of the principal amount of the
Notes at a redemption price equal to 100.00% of the principal amount of the
Notes so prepaid together with accrued interest to the date of prepayment;
provided that if after giving effect to any such prepayment any Notes remain
outstanding, the aggregate outstanding principal amount thereof shall be not
less than $1,000,000.
(c) The Company shall, within five days of receipt by the Company or
any of its Subsidiaries of the Net Cash Proceeds of any Asset Sale, Debt
Incurrence or Equity Issuance, prepay a principal amount of the Notes equal to
the amount of such Net Cash Proceeds (less any amounts not required to be paid
as a result of the requirement in subsection (d) of this Section 2.07 that all
such prepayments be made in multiples of $1,000), at a redemption price equal
to 100.00% of the principal amount of the Notes so prepaid together with
accrued interest to the date of prepayment.
(d) Any prepayment of the Notes pursuant to Section 2.07(b) shall be
in a minimum amount of at least $1,000,000, unless less than $1,000,000 of the
Notes remain outstanding, in which case all of the Notes must be prepaid. Any
prepayment of the Notes pursuant to Section 2.07(c) shall be in a minimum
amount which is a multiple of $1,000 times the number of Holders at the time of
such prepayment.
(e) Any partial prepayment shall be made so that the Notes then held
by each Holder shall be prepaid in a principal amount which shall bear the same
ratio, as nearly as may be, to the total principal amount being prepaid as the
principal amount of such Notes held by such Holder shall bear to the aggregate
principal amount of all Notes then outstanding. In the event of a partial
prepayment, upon presentation of any Note the Company shall execute and deliver
to or on the order of the Holder, at the expense of the Company, a new Note in
principal amount equal to the remaining outstanding portion of such Note.
SECTION 2.08. FEE DUE IN CERTAIN CIRCUMSTANCES. If the Company at any
time or from time to time repays, prepays or otherwise redeems any Notes in
whole or in part, whether at its option or as required by the terms of the
Financing Documents and whether before, on or after the Maturity Date, with or
in anticipation of funds raised directly or indirectly by any means other than a
transaction in which [DLJSC] has acted as the exclusive agent, sole initial
purchaser or sole underwriter, the Company shall pay to the Purchaser a fee
equal to 3.00% of par plus accrued interest of the Notes so repaid, prepaid or
redeemed; provided that (i) if such transaction is a "Bank Financing" (as
defined in the Engagement Letter) as to which the Company shall have complied
with its obligations hereunder and under the Engagement Letter but [DLJSDF] (as
defined in the Engagement Letter) declined to match the terms and conditions of
the commitment letter received by the Company from the other lender, such fee
shall be, at the Company's option: (a) 3.00%, all of which shall be credited
against any or all fees payable by the Company at any
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time pursuant to the Engagement Letter, or (b) 1.00%, none of which shall be
creditable against Engagement Letter fees; (ii) no such fee shall be payable
with respect to any Transaction (as defined in the Engagement Letter) if [DLJSC]
has refused to act as exclusive agent, sole initial purchaser or sole
underwriter therein, (iii) any such fee not covered by clause (i) will be
credited against any fee payable pursuant to the Engagement Letter in respect of
any transaction from which the Company has or will raise such funds; and (iv)
the maximum fee payable hereunder shall be calculated based upon the principal
amount of the Notes outstanding at the time of payment with any and all net
proceeds raised through the date of payment from Transactions executed by DLJSC
under the Engagement Agreement first credited against such principal amount
outstanding.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
The Company and each Guarantor, jointly and severally, represent and
warrant to Purchaser as set forth below:
SECTION 3.01. CORPORATE EXISTENCE AND POWER. The Company and each
Subsidiary Guarantor (i) is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, and
(ii) has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted and as proposed to be conducted, except where the failure to have
such powers, licenses, authorizations, consents and approvals would not
reasonably be expected to have a Material Adverse Effect.
SECTION 3.02. AUTHORIZATION, EXECUTION AND ENFORCEABILITY; LIEN
PERFECTION.
(a) The execution, delivery and performance by the Company and each
Subsidiary Guarantor of the Financing Documents to which it is a party and the
issuance of the Notes by the Company have been duly and validly authorized and
are within its corporate powers. Each of the Financing Documents (other than
the Notes) has been duly executed and delivered by the Company and each
Subsidiary Guarantor party thereto and constitutes its valid and binding
agreement, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting creditors' rights generally and equitable principles of general
applicability. When executed and delivered by the Company against payment
therefor in accordance with the terms hereof, the Notes will constitute valid
and binding obligations of the Company, enforceable in accordance with their
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting creditors' rights generally and equitable
principles of general applicability.
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(b) The Security Agreement and Pledge Agreement each create valid and
binding Liens in the Collateral purported to be covered thereby. Upon
completion of the actions and filings described in Schedule 3.02, (i) the Liens
created by the Security Agreement will constitute perfected Liens on all of the
Collateral purported to be covered thereby, subject to no prior or equal Lien
other than Permitted Liens and (ii) the Liens created by the Pledge Agreement
will constitute perfected Liens on all of the Collateral purported to be
covered thereby, subject to no prior or equal Lien.
SECTION 3.03. GOVERNMENTAL AUTHORIZATION. The execution and delivery
by the Company and each Subsidiary Guarantor of each of the Financing Documents
to which it is a party did not and will not, the issuance and sale of the Notes
by the Company will not, and the consummation of the transactions contemplated
hereby and thereby will not, require any action by or in respect of, or filing
with, any governmental body, agency or governmental official except (i) the
actions and filings described in Schedule 3.02 and (ii) other actions and
filings which, if not taken or made, will not affect in any material respect
the validity or enforceability of the Financing Documents or the perfection or
priority of the Lien created under the Security Documents.
SECTION 3.04. CONTRAVENTION. The execution and delivery by the Company
and each Subsidiary Guarantor of the Financing Documents to which it is a party
did not and will not, the issuance and sale of the Notes by the Company will
not, and the consummation of the transactions contemplated hereby and thereby
will not, contravene or constitute a default under or violation of any
provision of applicable law or regulation, the Corporate Documents or any
material agreement, judgment, injunction, order, decree or other instrument
binding upon it or any of its assets, or result in the creation or imposition
of any Lien on any asset of the Company or any of its Subsidiaries (other than
the Liens created by the Security Documents and Permitted Liens).
SECTION 3.05. FINANCIAL INFORMATION.
(a) The consolidated balance sheets of the Company as of December 31,
1995, December 31, 1996 and September 30, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each fiscal
year then ended (or for the nine months ended September 30, 1997, as the case
may be), each reported on by Price Waterhouse LLP and delivered to Purchaser on
or before the Closing Date, fairly present, in conformity with GAAP, the
consolidated financial position of the Company and its Consolidated
Subsidiaries as of each such date and their consolidated results of operations,
changes in stockholders' equity and cash flows for each such period.
(b) On the Closing Date, the Company and its Subsidiaries will not
have any liabilities, contingent or otherwise, including liabilities for taxes,
unusual or forward or long-term commitments or unrealized or anticipated losses
from any unfavorable commitments, except (i) as referred to or reflected or
provided for in said balance sheet,
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(ii) as disclosed to DLJ Bridge or DLJSC in writing prior to December 15, 1997
or in the 1996 10-K or September 30, 1997 10-Q or (iii) as could not reasonably
be expected to have a Material Adverse Effect.
(c) No development has occurred since September 30, 1997 that has
resulted, or could reasonably be expected to result, in a Material Adverse
Effect, except as disclosed to DLJ Bridge or DLJSC in writing prior to December
15, 1997 or in the 1996 10-K or September 30, 1997 10-Q,
SECTION 3.06. LITIGATION. There is no action, suit or proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries before any court or arbitrator or any governmental
body, agency or official (i) for which there is a reasonable possibility of an
adverse decision that would have a Material Adverse Effect, as reasonably
determined by the Company in accordance with its usual and customary audit and
disclosure practices, except as disclosed in the September 30, 1997 10-Q, or
(ii) which challenges the validity of any Financing Document.
SECTION 3.07. ENVIRONMENTAL MATTERS. The Company and each of its
Subsidiaries (a) have obtained all material Permits which are required under
Environmental Laws, and (b) are in compliance in all material respects with all
terms and conditions of such Permits and all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Environmental Laws. Neither the Company
nor any of its Subsidiaries is aware of, or has received notice of, any past
present or future events, conditions circumstances, activities, practices,
incidents, actions or plans which, with respect to the Company or any
Subsidiary, may interfere with or prevent compliance or continued compliance in
all material respects with Environmental Laws, or may give rise to any material
common law or legal liability or otherwise form the basis of any material
claim, action, demand, suit, proceeding, hearing, study or investigation, based
on or related to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling or the emission, discharge, release
or, threatened release into the environment, of any pollutant, contaminant,
chemical, or industrial, toxic or hazardous substance or waste. Except as set
forth on Schedule 3.07, there is no civil, criminal or administrative action,
suit, demand, claim, hearing notice or demand proceeding pending or, to the
knowledge of the Company, threatened against Company or any Subsidiary relating
in any way to Environmental Laws that has had, and that could reasonably by
expected to have, a Material Adverse Effect.
SECTION 3.08. TAXES. The Company's federal tax identification number is
58-1651222. All income tax returns and all other material tax returns which are
required to be filed by or on behalf of the Company and its Subsidiaries have
been filed. All taxes shown as due on such returns have been paid or adequate
reserves have been established on the books of the Company, except to the extent
that (i) the Company's failure to pay
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any such taxes would not have a Material Adverse Effect or (ii) any such taxes
are being contested in good faith, and for which adequate reserves are
maintained on the books of the Company. The charges, accruals and reserves on
the books of the Company and its Consolidated Subsidiaries in respect of taxes
or other governmental charges have been established in accordance with GAAP.
SECTION 3.09. SUBSIDIARIES. Schedule 3.09 contains a complete list of
all of the Company's Subsidiaries on the Closing Date and the federal tax
identification number for each such Subsidiary. The Subsidiaries listed on
Schedule 3.09 with an asterisk or asterisks appearing after its name do not own
any material amount of assets.
SECTION 3.10. NOT AN INVESTMENT COMPANY. The Company is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 3.11. FULL DISCLOSURE. The information (other than any
Projections) heretofore furnished by the Company to [DLJSC], [DLJ Bridge] or
Purchaser for purposes of or in connection with the Financing Documents or any
transaction contemplated hereby does not, and all such information hereafter
furnished by the Company to Purchaser will not (in each case taken together and
on the date as of which such information is furnished), contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements contained therein, in the light of the
circumstances under which they are made, not misleading. All Projections
heretofore furnished by the Company to [DLJSC], [DLJ Bridge] or Purchaser for
purposes of or in connection with the Financing Documents or any transaction
contemplated hereby have been, and all Projections hereafter furnished by the
Company to Purchaser will be, prepared in good faith and based upon reasonable
assumptions believed to be reasonable at the time such Projections were
prepared. The Company has disclosed to Purchaser any and all facts which
materially and adversely affect or may affect (to the extent the Company can
now reasonably foresee), the business, operations or financial condition of the
Company and its Subsidiaries, taken as a whole, or the ability of the Company
to perform its obligations under the Financing Documents or to complete the
Permanent Financing.
SECTION 3.12. CAPITALIZATION. The capitalization of the Company on
November 30, 1997 is set forth on Schedule 3.12. The capitalization of the
Company did not change between November 30, 1997 and the Closing Date, except
shares of Common Stock have been issued upon exercise of stock options and
stock awards issued pursuant to employee benefit arrangements.
SECTION 3.13. SOLICITATION; ACCESS TO INFORMATION. No form of general
solicitation or general advertising was used by the Company or, to the best of
its knowledge, any other Person acting on behalf of the Company, in connection
with the
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offer and sale of the Notes. Neither the Company nor any Person acting on
behalf of the Company has, either directly or indirectly, sold or offered for
sale to any Person any of the Notes or any other similar security of the
Company except as contemplated by this Agreement, and the Company represents
that neither the Company nor any person acting on its behalf other than
Purchaser and its Affiliates will sell or offer for sale to any Person any such
security to, or solicit any offers to buy any such security from, or otherwise
approach or negotiate in respect thereof with, any Person or Persons so as
thereby to bring the issuance or sale of any of the Notes within the provisions
of Section 5 of the Securities Act.
SECTION 3.14. NON-FUNGIBILITY. When the Notes are issued and delivered
pursuant to this Agreement, the Notes will not be of the same class (within the
meaning of Rule 144A under the Securities Act) as securities which are (i)
listed on a national securities exchange registered under Section 6 of the
Exchange Act or (ii) quoted in a U.S. automated inter-dealer quotation system.
SECTION 3.15. PERMITS. Except to the extent any of the following would
not result in a Material Adverse Effect: (a) the Company and its Subsidiaries
have all Permits as are necessary for the conduct of their respective
businesses as it has been carried on; (b) all such Permits are in full force
and effect, and each of the Company and its Subsidiaries has fulfilled and
performed all material obligations with respect to such Permits; (c) no event
has occurred which allows, or after notice or lapse of time would allow,
revocation or termination by the issuer thereof or which results in any other
impairment of the rights of the holder of any such Permit; and (d) each of the
Company and its Subsidiaries has no reason to believe that any governmental
body or agency is considering limiting, suspending or revoking any such Permit.
SECTION 3.16. REAL PROPERTY INTERESTS. Other than the ownership
interests in real property disclosed on Schedule 3.16 hereto, neither the
Company nor any Subsidiary has any ownership interest in any real property.
SECTION 3.17. REPRESENTATIONS IN OTHER FINANCING DOCUMENTS. Each of
the representations and warranties of the Company and each Subsidiary Guarantor
in the other Financing Documents is true and correct in all material respects.
SECTION 3.18. COMPLIANCE WITH ERISA. Each member of the ERISA Group
has fulfilled its obligations under the minimum funding standards of ERISA and
the Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of
the Internal Revenue Code in respect of
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<PAGE> 25
any Plan, (ii) failed to make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement, or made any
amendment to any Plan or Benefit Arrangement, which has resulted or could
result in the imposition of a Lien or the posting of a bond or other security
under ERISA or the Internal Revenue Code or (iii) incurred any liability under
Title IV of ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA except, in each case, as would not individually or in the
aggregate have a Material Adverse Effect.
SECTION 3.19. GOVERNMENT REGULATION. Neither the Company nor any of
its Subsidiaries is, or will be upon the issuance and sale of the Notes and the
use of the proceeds as described herein, subject to regulation under the Public
Utility Holding Company Act of 1935, as amended, the Federal Power Act, the
Interstate Commerce Act or to any federal or state statute or regulation
limiting its ability to issue and perform its obligations hereunder or under
any Financing Document to which it will be a party.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
SECTION 4.01. PURCHASE FOR INVESTMENT; AUTHORITY; BINDING AGREEMENT.
Purchaser represents and warrants to the Company that:
(a) Purchaser is an Accredited Investor within the meaning of Rule
501(a) under the Securities Act and the Notes to be acquired by it pursuant to
this Agreement are being acquired for its own account and Purchaser will not
offer, sell, transfer, pledge, hypothecate or otherwise dispose of the Notes
unless pursuant to a transaction either registered under, or exempt from
registration under, the Securities Act;
(b) the execution, delivery and performance of this Agreement and the
purchase of the Notes pursuant hereto are within Purchaser's corporate powers
and have been duly and validly authorized by all requisite corporate action;
(c) this Agreement has been duly executed and delivered by Purchaser;
(d) this Agreement constitutes a valid and binding agreement of
Purchaser enforceable in accordance with its terms;
(e) Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Notes and Purchaser is capable of bearing the economic risks
of such investment;
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<PAGE> 26
(f) Purchaser is an affiliate of and under the control of [DLJSC]
and/or [DLJ Bridge]; and
(g) no form of general solicitation or general advertising was used
by Purchaser or, to the best of its knowledge, any other Person acting on its
behalf, in respect of the Notes or in connection with the purchase of the
Notes.
ARTICLE 5
CONDITIONS PRECEDENT TO PURCHASE
SECTION 5.01. CONDITIONS TO PURCHASER'S OBLIGATION AT INITIAL
TAKEDOWN. The obligation of Purchaser to purchase the Notes to be issued and
sold by the Company at the Initial Takedown hereunder is subject to the
satisfaction of the following conditions contemporaneously with such Takedown:
(a) Each of the Financing Documents shall be in full force and effect
and no term or condition thereof shall have been amended, waived or otherwise
modified without the prior written consent of Purchaser.
(b) Purchaser shall have received evidence satisfactory to it that on
the Closing Date: (i) after giving effect to the application of the proceeds of
the Initial Takedown, there shall be no outstanding Debt of the Company or any
of its Subsidiaries other than (v) contingent obligations owed to [SunTrust
Bank], Atlanta with respect to the letter of credit issued in the face amount of
approximately $2,500,000 in respect of workers' compensation, (w) Cash
Management Services Obligations, (x) Debt of the Company and its Subsidiaries
under the Financing Documents, (y) obligations under Capital Leases for which
not more than $16,200,000 is required in accordance with GAAP to be capitalized
on the balance sheet of the lessee and (z) other Debt in an aggregate principal
amount not to exceed $2,000,000; and (ii) satisfactory arrangements shall have
been made for the termination of each existing Lien on any asset of the Company
or any of its Subsidiaries, other than the Liens permitted by subsections (b)
and (d) through (i) of Section 6.13.
(c) No information heretofore furnished by the Company to Purchaser
or [DLJ Bridge] for purposes of or in connection with the Financing Documents or
any transaction contemplated hereby shall be inaccurate, incomplete or
misleading in any respect reasonably determined by Purchaser to be materially
adverse, and there shall not have occurred any change, nor shall any
information be disclosed to or discovered by Purchaser or [DLJ Bridge], which
Purchaser reasonably determines is materially adverse in respect of
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<PAGE> 27
the condition (financial or otherwise), business, assets, liabilities,
properties, results of operations, Projections or prospects of the Company and
its Subsidiaries, taken as a whole.
(d) Purchaser shall have received the financial statements referred
to in Section 3.05, all of which shall in all respects be in form and substance
satisfactory to Purchaser in its sole discretion.
(e) The Security Agreement and Pledge Agreement shall have been
executed by each of the parties thereto and delivered to Purchaser.
(f) Purchaser shall be reasonably satisfied that all governmental,
shareholder and third party consents and approvals necessary in connection with
the Financing Documents and the transactions contemplated hereby and thereby
have been received and all applicable waiting periods shall have expired,
without any action being taken by any competent authority that could restrain,
prevent or impose any materially adverse conditions on such transactions or
that could seek or threaten any of the foregoing, and no law or regulation
shall be applicable which in the judgment of Purchaser could reasonably be
expected to have any such effect.
(g) Purchaser shall have received opinions, dated on or prior to the
Closing Date and in each case in form and substance reasonably satisfactory to
Purchaser, of (i) Randolph L.M. Hutto, Executive Vice President and General
Counsel of the Company, (ii) Skadden, Arps, Slate, Meagher & Flom LLP, special
counsel for the Company and (iii) Paul Hastings, Janofsky & Walker LLP.
(h) There shall not have occurred any disruption or adverse change in
the financial or capital markets generally which could reasonably be expected
to materially adversely affect the purchase of the Notes or the refinancing
thereof.
SECTION 5.02. CONDITIONS TO PURCHASER'S OBLIGATIONS ON EACH TAKEDOWN.
The obligation of Purchaser to purchase the Notes to be issued and sold by the
Company hereunder is subject to the satisfaction of the following conditions
contemporaneously with each Takedown:
(a) No development has occurred since September 30, 1997 that has
resulted in or could reasonably be expected to result in a Material Adverse
Effect, except as disclosed to [DLJSC] or [DLJ Bridge] in writing prior to
December 15, 1997 or in the 1996 10-K or September 30, 1997 10-Q.
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<PAGE> 28
(b) Except as disclosed in the September 30, 1997 10-Q, there shall
exist no action, suit, investigation, litigation or proceeding pending or
threatened in any court or before any arbitrator or any governmental
instrumentality that purports to affect the Commitment or any Financing
Document or any of the transactions contemplated hereby or thereby, or that
could reasonably be expected to have a material adverse effect on the
Commitment or any Financing Document or any of the transactions contemplated
hereby or thereby.
(c) There shall not exist any Default.
(d) The representations and warranties of the Company and the
Subsidiary Guarantors contained in the Financing Documents shall be true and
correct in all material respects on and as of the time of such Takedown as if
made on and as of such time (except for the representations and warranties
contained in Sections 3.09 and 3.12, which must be true and correct in all
material respects on and as of the Closing Date) and each of the Company and
the Subsidiary Guarantors shall have performed and complied with all covenants
and agreements required by the Financing Documents to be performed by it or
complied with by it at or prior to such Takedown.
(e) All fees and expenses payable to or for the account of Purchaser or
[DLJSC] hereunder, under the Engagement Letter or otherwise in connection with
the transactions contemplated hereby, shall have been paid in full.
(f) Purchaser shall have received the Notes to be issued at such
Takedown, duly executed by the Company in the denominations and registered in
the names specified in or pursuant to Section 2.02.
(g) Unless the Synthetic Lease shall have theretofore been refinanced
or is to be refinanced with the proceeds of such Takedown, the unused amount of
the Commitment immediately after such Takedown shall equal or exceed the lesser
of (i) $10,000,000 and (ii) the aggregate amount required to satisfy in full
all remaining obligations of the Company and its Subsidiaries under, and to
cause the termination of, the Synthetic Lease.
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<PAGE> 29
ARTICLE 6
COVENANTS
The Company agrees that, from and after the Closing Date and so long
as the Commitment remains in effect or any Notes remain outstanding and unpaid
or any other amount is owing to Purchaser or the Holders, and for the benefit
of Purchaser and the Holders:
SECTION 6.01. INFORMATION. The Company will deliver to Purchaser:
(a) as soon as available and in any event within 120 days after the
end of each fiscal year of the Company, a consolidated balance sheet of the
Company and its Consolidated Subsidiaries as of the end of such fiscal year and
the related consolidated statements of income and cash flows and stockholders'
equity (deficit) for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, all reported on
without material qualification by Price Waterhouse LLP or other independent
public accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Company, a
consolidated balance sheet of the Company and its Consolidated Subsidiaries as
of the end of such quarter and the related consolidated statements of income
and cash flows and stockholders' equity (deficit) for such quarter and for the
portion of the Company's fiscal year ended at the end of such quarter, setting
forth in each case in comparative form the figures for the corresponding
quarter and the corresponding portion of the Company's previous fiscal year,
all certified (subject to footnote presentation and normal year-end
adjustments, and excepting changes concurred in by the Company's independent
public accountants) as to fairness of presentation, GAAP and consistency by the
chief financial officer or the chief accounting officer of the Company;
(c) as soon as available and in any event within 30 days after the
end of each month of each fiscal year of the Company, a consolidated balance
sheet of the Company and its Consolidated Subsidiaries and the related
consolidated statements of income for such month and for the portion of the
fiscal year ended at the end of such month and of cash flows for the portion of
the fiscal year ended at the end of such month;
(d) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the chief
financial officer or the chief accounting officer of the Company (i) setting
forth in reasonable detail the calculations required to establish whether the
Company was in compliance with the requirements of Section 6.08 on the date of
such financial statements and (ii) stating whether any Default
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<PAGE> 30
exists on the date of such certificate and, if any Default then exists, setting
forth the details thereof and the action which the Company is taking or
proposes to take with respect thereto;
(e) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements confirming the
calculations set forth in the officer's certificate delivered simultaneously
therewith pursuant to clause (d) above, provided that such confirmation shall
be limited to such calculations which can be derived solely by the use of the
financial statements referred to in clause (a) above;
(f) within five Business Days after any officer of the Company
obtains knowledge of a Default, a certificate of the chief financial officer or
the chief accounting officer of the Company setting forth the details thereof
and the action which the Company is taking or proposes to take with respect
thereto;
(g) promptly upon the filing thereof, copies of all applications,
registration statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent), proxy statements and reports which
the Company or any of its Subsidiaries shall have filed with the Commission or
any national stock exchange;
(h) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which the
Company or any of its Subsidiaries is a party in which the amount involved is
$1,000,000 or more;
(i) promptly following the occurrence thereof, notice and a
description in reasonable detail of any development that would reasonably be
expected to have a Material Adverse Effect.
(j) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an
intent to terminate, impose liability (other than for premiums under Section
4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a
copy of such notice; (iv) applies for a waiver of the minimum funding standard
under Section 412 of the Internal Revenue
25
<PAGE> 31
Code, a copy of such application; (v) gives notice of intent to terminate any
Plan under Section 4041(c) of ERISA, a copy of such notice and other
information filed with the PBGC; (vi) gives notice of withdrawal from any Plan
pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to
make any required payment or contribution to any Plan or Multiemployer Plan or
makes any amendment to any Plan which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security, a certificate
of the Company's chief financial officer or chief accounting officer setting
forth details as to such occurrence and the action, if any, which the Company
or applicable member of the ERISA Group is required or proposes to take;
(k) promptly, and in any event no later than 30 days, after any
Domestic Subsidiary shall be formed or any Person shall become a Domestic
Subsidiary, notice thereof and a Perfection Certificate (as defined in the
Security Agreement) for such Domestic Subsidiary; and
(l) from time to time such additional information regarding the
financial position or business of the Company and its Subsidiaries as Purchaser
may reasonably request.
SECTION 6.02. PAYMENT OF OBLIGATIONS. The Company will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective obligations and liabilities, including, without
limitation, tax liabilities, except where the failure to do so would not
reasonably be expected to have a Material Adverse Effect, and will maintain,
and will cause each Subsidiary to maintain, in accordance with generally
accepted accounting principles, appropriate reserves for the accrual of any of
the same.
SECTION 6.03. INSURANCE. The Company shall, and shall cause each of
its Subsidiaries to maintain such insurance, to such extent and against such
risks, including fire and other risks insured against by extended coverage, as
is customary with companies in the same or similar businesses operating in the
same or similar locations, including (i) public liability insurance against
claims for personal injury or death or property damage occurring upon, in,
about in connection with the use of any properties owned, occupied or
controlled by it and (ii) business interruption insurance; and maintain such
other insurance as may be required by law.
SECTION 6.04. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The
Company will continue, and will cause each Subsidiary to continue, to: (i)
preserve, renew and keep in full force and effect their respective corporate
existence, (ii) preserve, renew and keep in full force and effect their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business, except where the failure to do so would not
reasonably be expected to have a Material Adverse Effect and (iii) engage in
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<PAGE> 32
business of the same general type as now conducted by the Company and its
Subsidiaries, except the Company or any Subsidiary may discontinue any
immaterial line of business of the Company and its Subsidiaries if the Board of
Directors of the Company determines that such discontinuation is in the best
interests of the Company and not disadvantageous to any Holder; provided that
nothing in this Section 6.04 shall prohibit a merger or consolidation that is
permitted under Section 6.15.
SECTION 6.05. COMPLIANCE WITH LAWS. The Company will comply, and cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws and the rules and
regulations thereunder), except where compliance therewith is contested in good
faith by appropriate proceedings or where the failure to comply would not
reasonably be expected to have a Material Adverse Effect.
SECTION 6.06. INSPECTION OF PROPERTY, BOOKS AND RECORDS. The Company
will keep, and will cause each Subsidiary to keep, proper books of record and
account in which full, true and correct entries shall be made of all dealings
and transactions in relation to its business and activities; and upon
reasonable advance notice will permit, and will cause each Subsidiary to
permit, representatives of Purchaser under the Company's supervision to visit
and inspect any of their respective properties, to examine and make abstracts
from any of their respective books and records and to discuss their respective
affairs, finances and accounts with their respective executive officers and,
subject to the right of the Company's representative to participate in any such
discussions, independent public accountants at such reasonable times and as
often as may reasonably be desired.
SECTION 6.07. INVESTMENT COMPANY ACT. The Company will not be or
become an open-end investment trust, unit investment trust or face-amount
certificate company that is or is required to be registered under Section 8 of
the Investment Company Act of 1940, as amended.
SECTION 6.08. MINIMUM CONSOLIDATED EBITDA. Consolidated EBITDA will
not for any measurement period set forth below be less than the applicable
amount set forth below, adjusted in accordance with the proviso below (if
applicable):
<TABLE>
<CAPTION>
Measurement Period Amount
------------------ ------
<S> <C>
1/1/98 - 3/31/98 $10,500,000
1/1/98 - 6/30/98 25,000,000
1/1/98 - 9/30/98 44,200,000
1/1/98 - 12/31/98 64,900,000
</TABLE>
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<PAGE> 33
provided that if Consolidated EBITDA for the fiscal quarter ended December 31,
1997 is less than $14,000,000 (the amount of any such shortfall being called
the "SHORTFALL"), each amount set forth above shall be increased by the product
of the Shortfall times the number of fiscal quarters in the applicable
measurement period. Compliance with this Section 6.08 shall be determined from
and after the date when unaudited management financial statements are prepared
in the ordinary course of business following the conclusion of the applicable
measurement period.
SECTION 6.09. LIMITATION ON DEBT.
(a) Neither the Company nor any Subsidiary will create, incur, assume
or suffer to exist any Debt, except:
(i) Debt of the Company and the Subsidiary Guarantors under the
Financing Documents;
(ii) Debt of the Company or any of its Subsidiaries outstanding
on the date of this Agreement as set forth in clause (i) of Section
5.01(b);
(iii) Debt of the Company or any of its Subsidiaries to a
wholly-owned Subsidiary of the Company, or of any Subsidiary of the
Company to the Company;
(iv) Debt of the Company or any of its Subsidiaries incurred or
assumed for the purpose of financing all or any part of the cost of
acquiring any fixed asset (including through Capital Leases) after the
Closing Date, in an aggregate principal amount not to exceed
$10,000,000;
(v) Debt of the Company or any Subsidiary as an account party
for any letter of credit issued by any financial institution if such
letter of credit is issued solely as security for performance or
payment by the Company or such Subsidiary under any contract which is
not otherwise prohibited by this Agreement and which has been entered
into in the ordinary course of business of the Company or such
Subsidiary;
(vi) Cash Management Services Obligations;
(vii) Debt of the Company or any Subsidiary incurred on account
of financed insurance premiums for insurance required under Section
6.03 and as otherwise maintained by the Company or any Subsidiary in
the ordinary course of business;
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<PAGE> 34
(viii) Renewals or extensions of any Debt described in clause
(ii) or (iv) above; and
(ix) Other Debt the terms and conditions of which shall have
been approved by the Majority Holders and the Net Cash Proceeds of
which are applied in accordance with Sections 2.04 and 2.07.
(b) Notwithstanding the restrictions on Debt contained in Section
6.09(a), the Company or any of Subsidiary of the Company may guarantee (i) any
Debt of the Company or any Subsidiary Guarantor permitted under Section 6.09(a)
and (ii) any contractual obligations of the Company or any Subsidiary Guarantor
incurred in the ordinary course of business, except to the extent such
contractual obligations constitute Debt that would be prohibited by Section
6.09(a).
(c) Neither the Company nor any Subsidiary of the Company will have
any Guarantee Obligations for which the primary obligor is a Person other than
the Company or a Consolidated Subsidiary.
SECTION 6.10. RESTRICTED PAYMENTS. Neither the Company nor any
Subsidiary of the Company will declare or make any Restricted Payment, except
that the Company or any of its Subsidiaries may purchase shares of capital
stock of the Company, or options or warrants to purchase any such shares, in
connection with ordinary course employee compensation arrangements if (i)
before and after giving effect to any such purchase, no Default shall have
occurred and be continuing and (ii) the aggregate amount of all such purchases
does not exceed $1,000,000 during any period of twelve months.
SECTION 6.11. CASH SETTLEMENT PAYMENTS. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly make or agree to
make any cash payments to settle any actual or threatened action, suit or
proceeding constituting an actual or potential class action securities
litigation, other than settlement payments that are payable in cash but will be
fully funded by one or more insurance carriers, without any payment by the
Company or any of its Subsidiaries or in connection with settlements disclosed
in the September 30, 1997 10-Q.
SECTION 6.12. INVESTMENTS. The Company will not, and will not permit
any of its Subsidiaries to, make or acquire any Investment in any Person, other
than:
(a) Investments in existence on the date hereof and renewals thereof;
(b) Investments in Cash Equivalents;
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<PAGE> 35
(c) Investments in the form of loans and advances to Subsidiaries on
the date hereof or to any Person that hereafter is a Subsidiary Guarantor or
becomes a Subsidiary Guarantor in accordance with Section 6.19;
(d) Investments in the form of the acquisition of stock, obligations
or securities received in settlement of debt obligations created in the
ordinary course of business which is owing to the Company or any Subsidiary;
(e) Investments in the form of an endorsement of a negotiable
instrument for collection or deposit in the ordinary course of business;
(f) Investments in the form of advances in the ordinary course of the
Company's or any Subsidiary's business to its officers and employees to cover
travel, entertainment or moving expenses to be incurred by them in connection
with the business of the Company or such Subsidiary;
(g) Investments in the form of usual and customary trade terms
extended by the Company or any Subsidiary to any customer in the ordinary
course of business;
(h) Investments in the form of advances of money in the ordinary
course of business of the Company or any of its Subsidiaries to its customers
which at no time exceed in the aggregate $10,000,000 (net of any accounts owed
by such customers to the Company and any of its Subsidiaries).; and
(i) Guarantee Obligations permitted under Section 6.09.
SECTION 6.13. LIMITATION ON LIENS. The Company will not create, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except:
(a) the existing Liens to be terminated pursuant to Section 5.01(b);
(b) the Liens created by the Security Documents (including without
limitation any Liens thereunder securing the Cash Management Services
Obligations, subject to the limitations contained therein);
(c) Liens securing Debt permitted by clause (ii), (iv), (v), (vii) or
(ix) of Section 6.09(a);
(d) Liens for taxes, assessments or other governmental charges or
levies not yet due or which are being actively contested in good faith by
appropriate proceedings, if
30
<PAGE> 36
adequate reserves with respect thereto are maintained on the books of the
Company or its Subsidiaries, as the case may be, in accordance with GAAP;
(e) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law created in the ordinary
course of business for amounts not yet due or which are being contested in good
faith by appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company or its Subsidiaries, as the case may be,
in accordance with GAAP;
(f) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security benefits or obligations or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, performance and return-of-money and other similar
obligations;
(g) zoning ordinances, easements, licenses, restrictions on the use
of real property and minor irregularities in title thereto which do not
materially impair the use of such property in the operation of the business of
the Company or any Subsidiary or the value of such property;
(h) inchoate Liens arising under ERISA to secure current service
pension liabilities as they are incurred under the provisions of Plans from
time to time; and
(i) Liens identified on Schedule 6.13.
SECTION 6.14. TRANSACTIONS WITH AFFILIATES. The Company will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate, except on terms to the Company or such Subsidiary no less favorable
than terms that could be obtained by the Company or such Subsidiary from a
Person that is not an Affiliate, as determined, in the case of any transaction
with a value of $1,000,000 or more, in good faith by the Board of Directors of
the Company; provided that no determination of the Board of Directors shall be
required with respect to any such transactions entered into in the ordinary
course of business or in connection with the execution or performance of the
Company's obligations under the Engagement Letter.
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SECTION 6.15. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS.
(a) Neither the Company nor any of its Subsidiaries will consolidate
or merge with or into any other Person, except that if before and after giving
effect to any such consolidation or merger no Default shall have occurred and
be continuing: (i) any Subsidiary of the Company may merge or consolidate with
or into the Company if the Company is the surviving entity, (ii) any Subsidiary
of the Company may merge or consolidate with or into any Subsidiary Guarantor
if a Subsidiary Guarantor is the surviving entity or the surviving entity
becomes a Subsidiary Guarantor and (iii) any Subsidiary of the Company that is
not a Domestic Subsidiary may merge or consolidate with or into any other
Subsidiary of the Company that is not a Domestic Subsidiary.
(b) The Company will not, and will not permit any of its Subsidiaries
to, sell, lease, license or otherwise transfer, directly or indirectly, in the
aggregate more than 10% of its or their assets (measured as of the date of this
Agreement) or issue any equity securities of any Subsidiary, other than: (i)
sale-leaseback transactions listed on Schedule 6.15 if the terms and conditions
are reasonably acceptable to Purchaser, (ii) sales of assets where the
consideration therefor consists solely of cash payable at closing (or
assumption of indebtedness or, in the case of sales of assets in the ordinary
course of business, cash payable upon normal trade terms) in an aggregate
amount at least equal to the fair market value of such assets; provided that,
in the case of abandoned assets, the consideration may be payable upon
acceptance and (iii) licenses (as licensor or licensee) of trademarks and
copyrights to customers in the ordinary course of business.
SECTION 6.16. SUBSIDIARIES.
(a) The Company will at all times continue to own, directly or
indirectly, 100% of the capital stock of each Person which is a wholly-owned
Subsidiary of the Company on the date hereof.
(b) Except as set forth on Schedule 6.16, the Company shall have no
Subsidiaries other than Subsidiaries of which the Company owns 100% of the
equity and voting interests.
SECTION 6.17. USE OF PROCEEDS. The proceeds from the issuance and sale
of the Notes by the Company pursuant to this Agreement shall be used solely (a)
to pay all principal, interest and other amounts payable under the Existing
Credit Agreement, (b) to pay fees and expenses relating to this Agreement and
the issuance and sale of the Notes at the Initial Takedown, (c) to pay interest
on Notes then outstanding, and (d) to prepay its obligations under the
Synthetic Lease and (e) for working capital needs and other general corporate
purposes of the Company.
SECTION 6.18. PERMANENT FINANCING. (a) The Company will, and will
cause its Subsidiaries to, take all actions which, in the reasonable judgment
of the Board of
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Directors of the Company, acting after consideration of advice from [DLJSC]
pursuant to the Engagement Letter, are necessary or desirable to obtain
Permanent Financing as soon as practicable through (x) bank financing on terms
usual and customary for similar financings and/or (y) through issuance of
securities at such interest rates and other terms as are prevailing for new
issues of securities of comparable size and credit rating in the capital markets
at the time such Permanent Financing is consummated and obtained in comparable
transactions made on an arm's-length basis between unaffiliated parties;
provided that if in the reasonable judgment of the Board of Directors of the
Company, acting after consideration of advice from [DLJSC] pursuant to the
Engagement Letter, common equity securities of the Company need to be provided
for the consummation of Permanent Financing on the terms set forth above, the
terms of the Permanent Financing shall provide for the issuance of such equity
securities (which may include warrants to purchase such equity securities). The
respective amounts to be financed through bank financing or through the issuance
of securities shall be as determined by the Company (after consultation with
[DLJSC]), but shall be in an amount at least sufficient to repay or redeem the
Notes in full in accordance with their terms. The Company hereby covenants and
agrees that the proceeds from the Permanent Financing shall be used to the
extent required to redeem in full the Notes in accordance with their terms.
(b) The Company covenants that it will, and will cause its Subsidiaries
to, (i) enter into such agreements reasonably requested by [DLJSC] as are
customary in connection with the Permanent Financing, (ii) make such filings
under the Securities Act, the Exchange Act, the Trust Indenture Act of 1939, as
amended, and state securities laws as shall be required to permit consummation
of the Permanent Financing and (iii) take such steps are necessary or desirable
to cause such filings to become effective or as are otherwise required to
consummate the Permanent Financing (including the delivery of all audited and
unaudited financial information that may be required in connection therewith).
(c) The Company covenants that it will, and will cause its
Subsidiaries to, use its best efforts to undertake the activities on the
schedule for the Permanent Financing which has been mutually agreed in
accordance with such schedule.
(d) The Company agrees that if and to the extent the Permanent
Financing is a bank financing not arranged by [DLJSC] or an affiliate, the
Company will not authorize the commencement of syndication of such bank
financing unless the arranger or arrangers thereof have provided an underwritten
commitment for the full amount of such bank financing, subject only to customary
closing conditions which to the reasonable satisfaction of Purchaser shall not
include any "market out" or similar condition.
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SECTION 6.19. ADDITIONAL GUARANTEES AND COLLATERAL; FURTHER ASSURANCES.
(a) Promptly, and in any event no later than 30 days, after any
Domestic Subsidiary shall be formed or any Person shall become a Domestic
Subsidiary, the Company shall cause such Domestic Subsidiary to become a party
to this Agreement by executing a supplement hereto, in form and substance
reasonably satisfactory to Purchaser, to cause such Domestic Subsidiary to
guarantee payment of the Notes in accordance with Article 9 and thereby to
become a Subsidiary Guarantor hereunder. Purchaser shall have the right, from
time to time to require the Company, pursuant to a written request from
Purchaser, to provide Liens and to cause any Subsidiary Guarantor to provide
Liens upon such assets as may be specified in such request to secure their
respective obligations in respect of the Notes and this Agreement. Any such
request may be made by Purchaser in its reasonable discretion. Within 45 days
after any such request, the Company will, and will cause the appropriate
Subsidiaries to, (i) execute and deliver to Purchaser such number of copies as
Purchaser may specify of such supplement and documents creating such Liens and
(ii) do all other things which may be necessary or which Purchaser may
reasonably request in order to confer upon and confirm to the holders of the
Notes the benefits of the guaranty of such Subsidiary and such Liens. Within 60
days after a request for Liens pursuant hereto, the Company will and will cause
the appropriate Subsidiaries to, deliver such legal opinions, certificates,
evidences of corporate action or other documents as Purchaser may reasonably
request, all in form and substance reasonably satisfactory to Purchaser,
relating to the satisfaction of the Company's obligations under this Section.
(b) The Company will, and will cause each of its Subsidiaries to, at
its sole cost and expense, do, execute, acknowledge and deliver all such
further acts, deeds, conveyances, mortgages, assignments, notices of
assignment, transfers and assurances as Purchaser shall from time to time
reasonably request, which may be necessary in the reasonable judgment of
Purchaser from time to time to assure, perfect, convey, assign, transfer and
confirm unto Purchaser the property and rights conveyed or assigned pursuant to
the Security Documents, or which the Company or such Subsidiary may be or may
hereafter become bound to convey or assign to Purchaser or which may facilitate
the performance of the terms of the Security Documents, or the filing,
registering or recording of the Security Documents.
(c) Promptly, and in any event no later than 30 days after any
acquisition of a direct Investment in any Domestic Subsidiary, the Company
shall cause any direct Investment held by it in any Domestic Subsidiary at any
time (whether in the form of equity or Debt) to be subject to a valid and
perfected first priority Lien in favor of Purchaser and the Holders.
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(d) All costs and expenses in connection with the granting,
perfecting and enforcement of any security interests hereunder (including
without limitation legal fees and other costs and expenses in connection with
the preparation, execution, delivery, recordation or filing of documents and
any other acts in connection therewith as Purchaser may request) shall be paid
by the Company promptly when due.
(e) The Company will not, and will not permit any of its Subsidiaries
to, enter into any agreement that would impair its ability to comply, or which
would purport to prohibit it from complying, with the provisions of this
Section 6.19.
SECTION 6.20. BOARD OF DIRECTORS. If an Event of Default shall have
occurred and be continuing:
(a) the Company will notify Purchaser of all meetings and
actions by written consent of the Board of Directors of the Company at
the same time and in the same manner as notice of any meetings of the
Board of Directors is required to be given to its directors who do not
waive such notice (or, if such action requires no notice, the Company
will give Purchaser notice thereof describing the matters upon which
action is to be taken); and
(b) Purchaser shall have the right to send one representative
selected by it to attend each meeting of the Board of Directors of the
Company; provided that the representative's right to attend any such
meeting shall be limited to the extent necessary to protect the
Company's attorney-client privilege unless Purchaser's representative
is willing and able to become a member of the Board of Directors of
the Company, in which case the Company shall cause Purchaser's
representative to be appointed as an additional director to its Board
of Directors;
and provided further that the Company's obligations and the Purchaser's rights
under (a) and (b) above shall terminate at such time as Purchaser is no longer
the holder of at least 50% of the aggregate outstanding principal amount of the
Notes.
SECTION 6.21. LEASES. Not later than March 31, 1998, the Company will
deliver to Purchaser a complete list of each lease to which the Company or any
of its Subsidiaries is a party for which the aggregate remaining amount of
rental payments under such lease exceeds $1,000,000.
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ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.01. EVENTS OF DEFAULT DEFINED; ACCELERATION OF MATURITY;
WAIVER OF DEFAULT. In case one or more of the following (each, an "EVENT OF
DEFAULT"), whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body, shall have occurred and be continuing:
(a) default in the payment of all or any part of the principal or
premium, if any, on any of the Notes as and when the same shall become due and
payable either at maturity, upon any redemption, by declaration or otherwise;
or
(b) default in the payment of any installment of interest upon any of
the Notes or any fees payable under this Agreement as and when the same shall
become due and payable, and continuance of such default for a period of five
Business Days; or
(c) failure on the part of the Company duly to observe or perform any
of the covenants contained in (i) Sections 6.07 through 6.17, or Section
6.19(a), 6.19(c) or 6.21 of this Agreement, (ii) Sections 3(b) or 4 of the
Pledge Agreement or (iii) Section 4(a) of the Security Agreement; or
(d) failure on the part of the Company duly to observe or perform any
other of the covenants or agreements contained in the Financing Documents, if
such failure shall continue for a period of 30 days after the date on which
written notice thereof shall have been given to the Company at the option of
any Holder; or
(e) the Company or any of its Subsidiaries shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect in any jurisdiction or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall make
a general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action to
authorize any of the foregoing; or
(f) an involuntary case or other proceeding shall be commenced
against the Company or any of its Subsidiaries seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or
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hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief shall
be entered against the Company or any of its Subsidiaries under the bankruptcy
laws as now or hereafter in effect in any jurisdiction; or
(g) there shall be a default in respect of any Debt of the Company or
any of its Subsidiaries in an aggregate principal amount in excess of
$5,000,000 whether such Debt now exists or shall hereafter be created
(excluding the Notes and any Debt owed by the Company or any of its
Subsidiaries to the Company or any of its Subsidiaries) if such default results
in acceleration of the maturity of such Debt or if the holder of such Debt is
entitled to accelerate the maturity thereof; or the Company or any of its
Subsidiaries shall fail to pay at maturity any such Debt whether such Debt now
exists or shall hereafter be created; or
(h) final judgments for the payment of money (to the extent not
covered by insurance) which in the aggregate at any one time exceed $1,000,000
shall be rendered against the Company or any of its Subsidiaries by a court of
competent jurisdiction and shall remain undischarged or not stayed for a period
(during which execution shall not be effectively stayed) of 60 days after such
judgment becomes final, other than judgments implementing settlements that are
either disclosed in the 1996 10-K or the September 30, 1997 10-Q or that are
entered into after the date hereof in compliance with Section 6.11; or
(i) any representation or warranty made or deemed made by the Company
or any of its Subsidiaries in any Financing Document or which is contained in
any certificate furnished at any time under or in connection with any Financing
Document shall prove to have been untrue in any material respect when made or
deemed made; or
(j) a Change of Control has occurred; or
(k) the Liens created by any of the Security Documents shall at any
time fail to constitute valid and perfected Liens on substantially all of the
collateral purported to be secured thereby, subject to no prior or equal Lien
other than Permitted Liens, or the Company or any Subsidiary Guarantor shall so
assert in writing; or any of the Financing Documents shall for any reason fail
to constitute the valid and binding agreement of the Company or any Subsidiary
Guarantor party thereto, as the case may be, or the Company or any Subsidiary
Guarantor shall so assert in writing; or
(l) if any such event would reasonably be expected to have a Material
Adverse Effect: (i) any member of the ERISA Group shall fail to pay when due an
amount or amounts which it shall have become liable to pay under Title IV of
ERISA; or (ii) notice
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of intent to terminate a material plan other than a standard termination shall
be filed under Title IV of ERISA by any member of the ERISA Group, any plan
administrator or any combination of the foregoing; or (iii) the PBGC shall
institute proceedings under Title IV of ERISA, which proceedings are not
terminated within 30 days after commencement, to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to
cause a trustee to be appointed to administer any material plan; or (iv) there
shall occur a complete or partial withdrawal from, or a default, within the
meaning of Section 4219(c)(5) of ERISA, with respect to, one or more
Multiemployer Plans which could cause one or more members of the ERISA Group to
incur a current payment obligation; or
then, and in each and every such case (other than under clauses (e) and (f)
with respect to the Company), unless the principal of all the Notes shall have
already become due and payable, the Majority Holders, by notice in writing to
the Company, may declare the entire principal amount of the Notes together with
accrued interest thereon to be, and upon the Company's receipt of such notice
the entire principal amount of the Notes together with accrued interest thereon
shall become, immediately due and payable. If an Event of Default specified in
clauses (e) or (f) with respect to the Company occurs, the principal of and
accrued interest on the Notes will be immediately due and payable without any
declaration or other act on the part of the Holders. An acceleration notice may
be annulled and past Defaults (other than an Event of Default set forth in
Section 7.01(a) or (b) that has not been cured) may be waived by the Majority
Holders.
ARTICLE 8
LIMITATION ON TRANSFERS
SECTION 8.01. RESTRICTIONS ON TRANSFER. From and after the Closing
Date and their respective dates of issuance, as the case may be, none of the
Notes shall be transferable except upon the conditions specified in Sections
8.02 and 8.03, which conditions are intended to ensure compliance with the
provisions of the Securities Act in respect of the Transfer of any of such
Notes or any interest therein. Purchaser will cause any proposed transferee of
any Notes (or any interest therein) held by it to agree to take and hold such
Notes (or any interest therein) subject to the provisions and upon the
conditions specified in this Section 8.01 and in Sections 8.02 and 8.03.
SECTION 8.02. RESTRICTIVE LEGENDS. (a) Each Note issued to Purchaser
or to a subsequent transferee shall (unless otherwise permitted by the
provisions of Section 8.02(b) or Section 8.03) include a legend in
substantially the following form:
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THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED
OR SOLD, UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE AND THEN ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON
TRANSFER SET FORTH IN THE NOTE PURCHASE AGREEMENT DATED AS OF DECEMBER
23, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER OF THIS
SECURITY AT ITS PRINCIPAL EXECUTIVE OFFICE.
(b) Any Holders of Notes registered pursuant to the Securities Act and
qualified under applicable state securities laws may exchange such Notes on
transfer for new securities that shall not bear the legend set forth in
paragraph (a) of this Section 8.02.
SECTION 8.03. NOTICE OF PROPOSED TRANSFERS. (a) Five Business Days
prior to any proposed Transfer (other than Transfers of Notes (i) registered
under the Securities Act, (ii) to an Affiliate of [DLJSC] or a general
partnership in which [DLJSC] or an Affiliate of [DLJSC] is one of the general
partners or (iii) to be made in reliance on Rule 144A under the Securities Act)
of any Notes, the holder thereof shall give written notice to the Company of
such holder's intention to effect such Transfer, setting forth the manner and
circumstances of the proposed Transfer, and shall be accompanied by (i) an
opinion of counsel reasonably satisfactory to the Company addressed to the
Company to the effect that the proposed Transfer of such Notes may be effected
without registration under the Securities Act, (ii) such representation letters
in form and substance reasonably satisfactory to the Company to ensure
compliance with the provisions of the Securities Act and (iii) such letters in
form and substance reasonably satisfactory to the Company from each such
transferee stating such transferee's agreement to be bound by the terms of this
Agreement. Such proposed Transfer may be effected only if the Company shall have
received such notice of transfer, opinion of counsel, representation letters and
other letters referred to in the immediately preceding sentence, whereupon the
holder of such Notes shall be entitled to Transfer such Notes in accordance with
the terms of the notice delivered by the holder to the Company. Each Note
transferred as above provided shall bear the legend set forth in Section 8.02(a)
except that such Note shall not bear such legend if the opinion of counsel
referred to above is to the further effect that neither such legend nor the
restrictions on Transfer in Sections 8.01 through 8.03 are required in order to
ensure compliance with the provisions of the Securities Act.
(b) Five Business Days prior to any proposed Transfer of any Notes to
be made in reliance on Rule 144A under the Securities Act ("RULE 144A"), the
holder thereof shall give written notice to the Company of such holder's
intention to effect such Transfer, setting forth the manner and circumstances
of the proposed Transfer and certifying that
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such Transfer will be made (i) in full compliance with Rule 144A and (ii) to a
transferee that (A) such holder reasonably believes to be a "qualified
institutional buyer" within the meaning of Rule 144A and (B) is aware that such
Transfer will be made in reliance on Rule 144A. Such proposed Transfer may be
effected only if the Company shall have received such notice of transfer,
whereupon the holder of such Notes shall be entitled to Transfer such Notes in
accordance with the terms of the notice delivered by the holder to the Company.
Each Note transferred as above provided shall bear the legend set forth in
Section 8.02(a).
ARTICLE 9
GUARANTY
SECTION 9.01. THE GUARANTY. Each Subsidiary Guarantor hereby
unconditionally guarantees the full and punctual payment (whether at stated
maturity, upon acceleration or otherwise) of the principal of and interest on
each Note issued by the Company pursuant to this Agreement, and the full and
punctual payment of all other amounts payable by the Company under this
Agreement or any other Financing Document. Upon failure by the Company to pay
punctually any such amount, each Subsidiary Guarantor shall forthwith on demand
pay the amount not so paid at the place and in the manner specified in this
Agreement or the applicable Financing Document.
SECTION 9.02. GUARANTY UNCONDITIONAL. The obligations of each
Subsidiary Guarantor hereunder shall be unconditional and absolute and, without
limiting the generality of the foregoing, shall not be released, discharged or
otherwise affected by:
(a) any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of the Company or any other Subsidiary
Guarantor under this Agreement or any other Financing Document, by operation of
law or otherwise;
(b) any modification or amendment of or supplement to this Agreement
or any other Financing Document (except to the extent that by its terms it
expressly provides for a modification or amendment of or supplement to this
Article 9);
(c) any release, impairment, non-perfection or invalidity of any
direct or indirect security for any obligation of the Company or any other
Subsidiary Guarantor under this Agreement or any other Financing Document;
(d) any change in the corporate existence, structure or ownership of
the Company or any Subsidiary Guarantor, or any insolvency, bankruptcy,
reorganization or
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other similar proceeding affecting the Company or any Subsidiary Guarantor or
their respective assets or any resulting release or discharge of any obligation
of the Company or any other Subsidiary Guarantor contained in this Agreement or
any other Financing Document;
(e) the existence of any claim, set-off or other rights which the
Subsidiary Guarantor may have at any time against the Company, any other
Subsidiary Guarantor, Purchaser or any other Person, whether in connection with
this Agreement or any unrelated transactions, provided that nothing herein
shall prevent the assertion of any such claim by separate suit or compulsory
counterclaim;
(f) any invalidity or unenforceability relating to or against the
Company or any other Subsidiary Guarantor for any reason of this Agreement or
any Financing Document, or any provision of applicable law or regulation
purporting to prohibit the payment by the Company of the principal of or
interest on any Note or any other amount payable by the Company or any other
Subsidiary Guarantor under this Agreement or any other Financing Document; or
(g) any other act or omission to act or delay of any kind by the
Company, any other Subsidiary Guarantor, Purchaser or any other Person or any
other circumstance whatsoever which might, but for the provisions of this
paragraph, constitute a legal or equitable discharge of or defense to the
Subsidiary Guarantor's obligations hereunder.
SECTION 9.03. DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN
CERTAIN CIRCUMSTANCES. Unless specifically released in accordance with Section
10.02(b), each Subsidiary Guarantor's obligations hereunder shall remain in
full force and effect until the Commitment shall have terminated and the
principal of and interest on the Notes and all other amounts then due and
payable by the Company under this Agreement and the other Financing Documents
shall have been paid in full. If at any time any payment of the principal of or
interest on any Note or any other amount payable by the Company under this
Agreement or any other Financing Document is rescinded or must be otherwise
restored or returned upon the insolvency, bankruptcy or reorganization of the
Company or otherwise, each Subsidiary Guarantor's obligations hereunder with
respect to such payment shall be reinstated as though such payment had been due
but not made at such time. In the event that any Subsidiary Guarantor shall
cease to be a Subsidiary of the Company, if permitted by the terms of this
Agreement and if at such time and after such event no Default shall have
occurred and be continuing, the obligations of such Subsidiary Guarantor shall
be deemed terminated at such time.
SECTION 9.04. WAIVER BY THE SUBSIDIARY GUARANTORS. Each Subsidiary
Guarantor irrevocably waives acceptance hereof, presentment, demand, protest
and any
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notice not provided for herein, as well as any requirement that at any time any
action be taken by any Person against the Company, any Subsidiary Guarantor or
any other Person.
SECTION 9.05. SUBROGATION. Upon making full payment with respect to
any obligation of the Company hereunder, the Subsidiary Guarantors shall be
subrogated to the rights of the payee against the Company with respect to such
obligation; provided that such Subsidiary Guarantor shall not enforce either
(a) any right to receive payment by way of subrogation against the Company or
against any direct or indirect security for such obligation, or any other right
to be reimbursed, indemnified or exonerated by or for the account of the
Company in respect thereof or (b) the right to receive payment, in the nature
of contribution or for any other reason, from any other Subsidiary Guarantors
with respect to such payment, in each case so long as (i) Purchaser has any
Commitment hereunder or (ii) any amount payable under this Agreement or any
other Financing Document remains unpaid.
SECTION 9.06. STAY OF ACCELERATION. If acceleration of the time for
payment of any amount payable under this Agreement or any other Financing
Document is stayed upon the insolvency, bankruptcy or reorganization of the
Company or any other Person, all such amounts otherwise subject to acceleration
under the terms of this Agreement shall nonetheless be payable by the
Subsidiary Guarantors forthwith on demand by Purchaser at the request of the
Majority Holders.
SECTION 9.07. LIMIT OF LIABILITY. The obligations of each Subsidiary
Guarantor hereunder shall be limited to an aggregate amount equal to the
largest amount that would not render its obligations hereunder subject to
avoidance under Section 548 of the United States Bankruptcy Code or any
comparable provisions of any applicable state law.
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. NOTICES. All notices, demands and other communications
to any party hereunder shall be in writing (including telecopier or similar
writing) and shall be given to such party at its address set forth on the
signature pages hereof, or such other address as such party may hereinafter
specify for the purpose. Each such notice, demand or other communication shall
be effective (i) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified on the signature page hereof, or (ii) if given by
overnight courier, addressed as aforesaid or by any other means, when delivered
at the address specified in this Section. A copy of all notices sent to the
Company or any Subsidiary Guarantor shall be contemporaneously sent by
overnight courier and facsimile
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transmission to: John Wm. Butler, Jr., Skadden, Arps, Slate, Meagher & Flom
(Illinois), 333 West Wacker Drive, Suite 2100, Chicago, Illinois 60606;
telephone: (312) 407-0730; facsimile: (312) 407-0411.
SECTION 10.02. NO WAIVERS; AMENDMENTS. (a) No failure or delay on the
part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to any party at law or in equity or otherwise.
(b) Any provision of this Agreement may be amended, supplemented or
waived if, but only if, such amendment, supplement or waiver is in writing and
is signed by the Company and the Majority Holders; provided, that without the
consent of each Holder of any Note affected thereby, an amendment, supplement
or waiver may not (a) reduce the aggregate principal amount of Notes whose
Holders must consent to an amendment, supplement or waiver, (b) reduce the rate
or extend the time for payment of interest on any Note of such Holder, (c)
reduce the principal amount of or extend the stated maturity of any Note of
such Holder or alter the redemption provisions with respect thereto, (d) make
any Note of such Holder payable in money or property other than as stated in
the Notes or (e) release all or substantially all of the collateral in pledge
under the Security Documents. In determining whether the Holders of the
requisite principal amount of Notes have concurred in any direction, consent,
or waiver as provided in this Agreement or in the Notes, Notes which are owned
by the Company or any other obligor on or guarantor of the Notes, or by any
Person (other than [DLJSC] or any of its Subsidiaries) controlling, controlled
by, or under common control with any of the foregoing, shall be disregarded and
deemed not to be outstanding for the purpose of any such determination; and
provided further that no such amendment, supplement or waiver which affects the
rights of Purchaser and its Affiliates otherwise than solely in their
capacities as Holders of Notes shall be effective with respect to them without
their prior written consent.
SECTION 10.03. INDEMNIFICATION. The Company (the "INDEMNIFYING PARTY")
agrees to indemnify and hold harmless Purchaser, its Affiliates, and each
Person, if any, who controls Purchaser, or any of its affiliates, within the
meaning of the Securities Act or the Exchange Act (a "CONTROLLING PERSON"), and
the respective partners, agents, employees, officers and directors of
Purchaser, its Affiliates and any such Controlling Person (each an "INDEMNIFIED
PARTY" and collectively, the "INDEMNIFIED PARTIES"), from and against any and
all losses, claims, damages, liabilities and expenses (including, without
limitation and as incurred, reasonable costs of investigating, preparing or
defending any such claim or action, whether or not such Indemnified Party is a
party thereto, arising out of, or in connection with any activities
contemplated by this Agreement or any other services rendered in connection
herewith, including, but not limited to, losses, claims,
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damages, liabilities or expenses arising out of or based upon any untrue
statement or any alleged untrue statement of a material fact or any omission or
any alleged omission to state a material fact in any of the disclosure or
offering or confidential information documents (the "DISCLOSURE DOCUMENTS")
pertaining to any of the transactions or proposed transactions contemplated
herein, including any eventual refinancing or resale of the Notes, provided
that the Indemnifying Party will not be responsible for any claims,
liabilities, losses, damages or expenses that are determined by final judgment
of a court of competent jurisdiction to result from such Indemnified Party's
gross negligence, willful misconduct or bad faith. The Indemnifying Party also
agrees that Purchaser shall have no liability (except for breach of provisions
of this Agreement) for claims, liabilities, damages, losses or expenses,
including legal fees, incurred by the Indemnifying Party in connection with
this Agreement except to the extent they are determined by final judgment of a
court of competent jurisdiction to result from Purchaser's gross negligence,
willful misconduct or bad faith.
If any action shall be brought against an Indemnified Party with
respect to which indemnity may be sought against the Indemnifying Party under
this Agreement, such Indemnified Party shall promptly notify the Indemnifying
Party in writing and the Indemnifying Party shall, if requested by such
Indemnified Party or if the Indemnifying Party desires to do so, assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Party and payment of all reasonable fees and expenses. The
failure to so notify the Indemnifying Party shall not affect any obligations
the Indemnifying Party may have to such Indemnified Party under this Agreement
or otherwise unless the Indemnifying Party is materially adversely affected by
such failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party,
unless: (i) the Indemnifying Party has failed to assume the defense and employ
counsel reasonably satisfactory to Purchaser or (ii) the named parties to any
such action (including any impleaded parties) include such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Indemnifying Party,
in which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense of such action or proceeding on behalf of such Indemnified Party,
provided, however, that the Indemnifying Party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be responsible hereunder for the
reasonable fees and expenses of more than one such firm of separate counsel, in
addition to any local counsel, which counsel shall be designated by Purchaser.
The Indemnifying Party shall not be liable for any settlement of any such
action effected without the written consent of the Indemnifying Party (which
shall not be
44
<PAGE> 50
unreasonably withheld) and the Indemnifying Party agrees to indemnify and hold
harmless each Indemnified Party from and against any loss or liability by
reasons of settlement of any action effected with the consent of the
Indemnifying Party. In addition, the Indemnifying Party will not, without the
prior written consent of Purchaser, settle or compromise or consent to the
entry of any judgment in or otherwise seek to terminate any pending or
threatened action, claim, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not any
Indemnified Party is a party thereto) unless such settlement, compromise,
consent or termination includes an express unconditional release of Purchaser
and the other Indemnified Parties, reasonably satisfactory in form and
substance to Purchaser, from all liability arising out of such action, claim,
suit or proceeding.
If for any reason the foregoing indemnity is unavailable (otherwise
than pursuant to the express terms of such indemnity) to an Indemnified Party
or insufficient to hold an Indemnified Party harmless, then in lieu of
indemnifying the Indemnified Party, the Indemnifying Party shall contribute to
the amount paid or payable by such Indemnified Party as a result of such
claims, liabilities, losses, damages, or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Indemnifying Party
on the one hand and by Purchaser on the other from the transactions
contemplated by this Agreement or (ii) if the allocation provided by clause (i)
is not permitted under applicable law, in such proportion as is appropriate to
reflect not only the relative benefits received by the Indemnifying Party on
the one hand and Purchaser on the other, but also the relative fault of the
Indemnifying Party and Purchaser as well as any other relevant equitable
considerations. Notwithstanding the provisions of this Section 10.03, the
aggregate contribution of all Indemnified Parties shall not exceed the amount
of fees actually received by Purchaser pursuant to this Agreement. It is hereby
further agreed that the relative benefits to the Indemnifying Party on the one
hand and Purchaser on the other with respect to the transactions contemplated
hereby shall be determined by reference to, among other things, whether any
untrue or alleged untrue statement of material fact or the omission or alleged
omission to state a material fact related to information supplied by the
Indemnifying Party or by Purchaser and the party's relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnification, contribution and expense reimbursement
obligations set forth in this Section 10.03: (i) shall be in addition to any
liability the Indemnifying Party may have to any Indemnified Party at common
law or otherwise, (ii) shall survive the termination of this Agreement and the
payment in full of the Notes and (iii) shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of Purchaser or
any other Indemnified Party.
45
<PAGE> 51
SECTION 10.04. EXPENSES. The Company agrees to pay all reasonable
out-of-pocket costs, expenses and other payments in connection with the
purchase by Purchaser from the Company of the Notes as contemplated by this
Agreement including without limitation (i) fees and disbursements of special
counsel and any local counsel for Purchaser incurred in connection with the
preparation of this Agreement, not to exceed $350,000 in the aggregate, (ii)
all reasonable out-of-pocket expenses of Purchaser, including reasonable fees
and disbursements of counsel, in connection with any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder
and (iii) if an Event of Default occurs, all reasonable out-of-pocket expenses
incurred by Purchaser and each holder of Notes, including reasonable fees and
disbursements of a single counsel (which counsel shall be selected by Purchaser
if Purchaser is a holder of Notes when such Event of Default occurs), in
connection with such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom. The obligations set
forth in this Section 10.04 shall survive the termination of this Agreement and
the payment in full of the Notes.
SECTION 10.05. PAYMENT. The Company agrees that, so long as Purchaser
shall own any Notes purchased by it from the Company hereunder, the Company
will make payments to Purchaser of all amounts due thereon by wire transfer by
1:00 P.M. (New York City time) on the date of payment to such account as is
specified beneath Purchaser's name on the signature page hereof or to such
other account or in such other similar manner as Purchaser may designate to the
Company in writing.
SECTION 10.06. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the Company and Purchaser and their
respective successors and assigns; provided that the Company may not assign or
otherwise transfer its rights or obligations under this Agreement to any other
Person without the prior written consent of the Majority Holders. All
provisions hereunder purporting to give rights to [DLJMB], [DLJSC] and its
Affiliates or to Holders are for the express benefit of such Persons.
SECTION 10.07. BROKERS. The Company represents and warrants that,
except for [DLJSC], it has not employed any broker, finder, financial advisor or
investment banker who might be entitled to any brokerage, finder's or other fee
or commission in connection with this Agreement or the sale of the Notes.
SECTION 10.08. NEW YORK LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE
46
<PAGE> 52
COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF
ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH
PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 10.09. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
SECTION 10.10. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original with the same effect
as if the signatures thereto and hereto were upon the same instrument.
SECTION 10.11. CONFIDENTIALITY. Except as required by law, the
Agreement and all information given to Purchaser by the Company, unless
publicly available or otherwise available to Purchaser without restriction or
breach of any confidentiality agreement, will be held by Purchaser in
confidence and will not be disclosed to anyone other than Purchaser's agents
and advisors without the Company's prior approval or used for any purpose other
than those referred to in this Agreement. The obligations set forth in this
Section 10.11 shall survive for a period of two years from the date of the
termination of this Agreement and the payment in full of the Notes.
SECTION 10.12. TERMINATION. The Company's and each Subsidiary
Guarantor's obligations hereunder and under the other Financing Documents
(other than the obligations set forth in Sections 10.03 and 10.04 hereof,
Section 12 of the Security Agreement and Section 11 of the Pledge Agreement and
similar provisions of any other Security Documents) shall terminate upon the
termination of the Commitment and payment in full of the principal of and
interest on the Notes and all other amounts payable by the Company under this
Agreement and the other Financing Documents.
47
<PAGE> 53
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers, as of the date first
above written.
MEDAPHIS CORPORATION
By:/s/ Jerome H. Baglien
---------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
Address:
2700 Cumberland Parkway
Suite 300
Atlanta, Georgia
Tel: (770) 444-5300
Fax: (770) 444-4503
SUBSIDIARY GUARANTORS
ASSETCARE, INC.
By:/s/ Jerome H. Baglien
---------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
AUTOMATION ATWORK
By:/s/ Jerome H. Baglien
---------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
48
<PAGE> 54
BSG ALLIANCE/IT, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG CORPORATION
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG GOVERNMENT SOLUTIONS, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
By:/s/ Randolph L. M. Hutto
----------------------------------
Name: Randolph L. M. Hutto
Title: Secretary
CONSORT TECHNOLOGIES, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
GOTTLIEB'S FINANCIAL SERVICES, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
49
<PAGE> 55
HEALTH DATA SCIENCES CORPORATION
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS HEALTHCARE INFORMATION
TECHNOLOGY COMPANY (F/K/A MEDAPHIS
SYSTEMS CORPORATION)
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS PHYSICIAN SERVICES
CORPORATION
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS SERVICES CORPORATION (F/K/A
MEDAPHIS HOSPITAL SERVICES CORPORATION)
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
50
<PAGE> 56
MEDICAL MANAGEMENT SCIENCES, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
NATIONAL HEALTHCARE
TECHNOLOGIES, INC.
By:/s/ Jerome H. Baglien
----------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
ADDRESS FOR ALL SUBSIDIARY GUARANTORS:
2700 Cumberland Parkway
Suite 300
Atlanta, Georgia
Tel: (770) 444-5300
Fax: (770) 444-4503
51
<PAGE> 57
PURCHASER
[MED FUNDING, INC.]
By:
---------------------------------------
Name:
Title:
ADDRESS:
c/o Donaldson, Lufkin & Jenrette Securities
Corporation
277 Park Avenue
New York, New York 10172
Tel: (212) 892-2000
Fax: (212) 892-7539
52
<PAGE> 58
EXHIBIT A
FORM OF NOTE
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD, UNLESS
IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE
WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE NOTE PURCHASE AGREEMENT
DATED AS OF DECEMBER 23, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER
OF THIS SECURITY AT ITS PRINCIPAL EXECUTIVE OFFICE.
No. $
MEDAPHIS CORPORATION
SENIOR SECURED INCREASING RATE NOTE
MEDAPHIS CORPORATION, a Delaware corporation (together with its
successors, the "COMPANY"), for value received hereby promises to pay to [MED
FUNDING, INC.] and registered assigns the principal sum of
___________________________________________ by wire transfer of immediately
available funds to the Holder's account at such bank in the United States as
may be specified in writing by the Holder to the Company, on April 1, 1999 in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts, and to pay
interest on the unpaid principal amount hereof on the dates and at the rate or
rates provided for in the Note Purchase Agreement. Reference is made to the
Note Purchase Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof and the basis upon which this Note is
secured.
This Note is one of a duly authorized issue of Senior Secured
Increasing Rate Notes of the Company (the "NOTES") referred to in the Note
Purchase Agreement dated as of December 23, 1997 among the Company, the
Subsidiary Guarantors party thereto and [Med Funding,]
53
<PAGE> 59
Inc. (as the same may be amended from time to time in accordance with its
terms, the "NOTE PURCHASE AGREEMENT"). The Notes are transferable and
assignable to one or more purchasers (in minimum denominations of $5,000,000 or
larger multiples of $1,000,000), in accordance with the limitations set forth
in the Note Purchase Agreement. The Company agrees to issue from time to time
replacement Notes in the form hereof to facilitate such transfers and
assignments.
Pursuant to the provisions of the Note Purchase Agreement, payment of
principal and interest on this Note has been unconditionally guaranteed by the
Subsidiary Guarantors thereunder.
The Company shall keep at its principal office a register (the
"REGISTER") in which shall be entered the names and addresses of the registered
holders of the Notes and particulars of the respective Notes held by them and
of all transfers of such Notes. References to the "Holder" or "Holders" shall
mean the Person listed in the Register as the payee of any Note.
The ownership of the Notes shall be proven by the Register.
This Note shall be deemed to be a contract under the laws of the State
of New York, and for all purposes shall be construed in accordance with the
laws of said State. The parties hereto, including all guarantors or endorsers,
hereby waive presentment, demand, notice, protest and all other demands and
notices in connection with the delivery, acceptance, performance and
enforcement of this Note, except as specifically provided herein, and assent to
extensions of the time of payment, or forbearance or other indulgence without
notice.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated:
----------------
MEDAPHIS CORPORATION
By:
-----------------------------------
Name:
Title:
54
<PAGE> 1
EXHIBIT 10.2
SECURITY AGREEMENT
AGREEMENT dated as of December 23, 1997 among MEDAPHIS CORPORATION
(with its successors, the "COMPANY"), each SUBSIDIARY GUARANTOR party hereto or
which hereafter becomes a party hereto (with its successors, a "GRANTOR" and
together with the Company, collectively, the "GRANTORS"), [MED FUNDING, INC.]
(with its successors, "PURCHASER") on behalf of itself and as Collateral Agent
(with its successors in such capacity, the "COLLATERAL AGENT") for the Secured
Parties referred to below and, if it shall become a party hereto pursuant to
Section 21, [WACHOVIA BANK, N.A.] (with its successors, ["WACHOVIA"]).
W I T N E S S E T H :
WHEREAS, the Company, the Subsidiary Guarantors and Purchaser are parties
to a Note Purchase Agreement of even date herewith (as the same may be amended
from time to time, the "NOTE PURCHASE AGREEMENT");
WHEREAS, in order to induce Purchaser to enter into the Note Purchase
Agreement and to purchase the Notes issued pursuant to the Note Purchase
Agreement, each of the Subsidiary Guarantors has guaranteed, pursuant to the
Note Purchase Agreement and subject to the limitations contained therein, all of
the obligations of the Company under the Notes and the other Financing Documents
(as defined in the Note Purchase Agreement); and
WHEREAS, in order to induce Purchaser to enter into the Note Purchase
Agreement and to purchase the Notes issued pursuant to the Note Purchase
Agreement, each Grantor has agreed to grant a continuing security interest in
and to all of its right, title and interest in and to the Collateral (as
hereafter defined) to secure its obligations under the Financing Documents; and
WHEREAS, [Wachovia] and its affiliates provide cash management services
for the Company and its Subsidiaries, and each Grantor has agreed to grant a
continuing security interest in and to all of its right, title and interest in
and to the Collateral to secure its Cash Management Services Obligations (as
defined in the Note Purchase Agreement), subject to the limitations contained
herein, if Wachovia executes and delivers to the Collateral Agent a [Wachovia]
Addendum (as defined herein);
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Terms defined in the Note Purchase Agreement and
not otherwise defined herein have, as used herein, the respective meanings
provided for therein. The following additional terms, as used herein, have the
following respective meanings:
"ACCOUNTS" means all "ACCOUNTS" (as defined in the UCC) now owned or
hereafter acquired by any Grantor, and shall also mean and include all accounts
receivable, contract rights, book debts, notes, drafts and other obligations or
indebtedness owing to any Grantor arising from the sale, lease or exchange of
goods or other property by it and/or the performance of services by it
(including, without limitation, any such obligation which might be characterized
as an account or contract right under the Uniform Commercial Code in effect in
any jurisdiction) and all rights of any Grantor in, to and under all purchase
orders for goods, services or other property, and all rights of any Grantor to
any goods, services or other property represented by any of the foregoing
(including returned or repossessed goods and unpaid sellers' rights of
rescission, replevin, reclamation and rights to stoppage in transit) and all
monies due to or to become due to any Grantor under all contracts for the sale,
lease or exchange of goods or other property and/or the performance of services
by it (whether or not yet earned by performance on the part of the Grantor), in
each case whether now in existence or hereafter arising or acquired including,
without limitation, the right to receive the proceeds of said purchase orders
and contracts and all collateral security and guarantees of any kind given by
any Person with respect to any of the foregoing.
"COLLATERAL" has the meaning set forth in Section 3.
"COPYRIGHT LICENSE" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use, copy, reproduce, distribute, prepare derivative
works based upon, display or publish any records or other materials on which a
Copyright is in existence or may come into existence.
"COPYRIGHTS" means all of the following: (i) all copyrights under the
laws of the United States or any other country (whether or not the underlying
works of authorship have been published), all registrations and recordings
thereof, all intellectual property rights to works of authorship (whether or not
published), and all applications for copyrights under the laws of the United
States or any other country, including, without limitation, registrations,
recordings and applications in the United States Copyright Office or in any
similar office or agency of the United States, or of any State thereof that
maintains any similar office or agency or of any other country or any political
subdivision
2
<PAGE> 3
thereof, including, without limitation, those listed on Schedule 5 to the
Perfection Certificate for the Company or on Schedule 1 to any Copyright
Security Agreement, (ii) all reissues, renewals and extensions thereof, (iii)
all claims for, and rights to sue for, past or future infringements of any of
the foregoing, and (iv) all income, royalties, damages and payments now or
hereafter due or payable with respect to any of the foregoing, including,
without limitation, damages and payments for past or future infringements
thereof.
"COPYRIGHT SECURITY AGREEMENT" means a Copyright Security Agreement
executed and delivered by a Grantor in favor of the Collateral Agent, for the
benefit of the Secured Parties substantially in the form of Exhibit D hereto, as
the same may be amended from time to time.
"DOCUMENTS" means all "DOCUMENTS" (as defined in the UCC) or other
receipts covering, evidencing or representing goods, now owned or hereafter
acquired by any Grantor.
"EQUIPMENT" means all "EQUIPMENT" (as defined in the UCC) now owned or
hereafter acquired by any Grantor wherever located, including without limitation
all machinery, apparatus, equipment, fittings, furniture, fixtures, motor
vehicles and other tangible personal Property (other than Inventory).
"GENERAL INTANGIBLES" means all "general intangibles" (as defined in the
UCC) now owned or hereafter acquired by any Grantor, including, without
limitation, (i) all obligations or indebtedness owing to any Grantor (other than
Accounts) from whatever source arising, (ii) all Patents, Patent Licenses,
Trademarks, Trademark Licenses, rights in intellectual property, goodwill, trade
names, service marks, trade secrets, Copyrights, Copyright Licenses, permits and
licenses, (iii) all rights or claims in respect of refunds for taxes paid and
(iv) all rights in respect of any pension plan or similar arrangement maintained
for employees or any member of the ERISA Group.
"INSTRUMENTS" means all "INSTRUMENTS", "CHATTEL PAPER" or "LETTERS OF
CREDIT" (each as defined in the UCC), including those evidencing, representing,
arising from or existing in respect of, relating to, securing or otherwise
supporting the payment of, any of the Accounts, including (but not limited to)
promissory notes, drafts, bills of exchange and trade acceptances, now owned or
hereafter acquired by any Grantor.
"INVENTORY" means all "INVENTORY" (as defined in the UCC), now owned or
hereafter acquired by any Grantor, wherever located, and shall also mean and
include, without limitation, all raw materials and other materials and supplies,
work-in-process and finished goods and any products made or processed therefrom
and all substances, if any, commingled therewith or added thereto.
3
<PAGE> 4
"PATENT LICENSE" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right with respect to any Patent or any invention now or
hereafter in existence, whether patentable or not, whether a patent or
application for patent is in existence on such invention or not, and whether a
patent or application for patent on such invention may come into existence.
"PATENTS" means all of the following: (i) all letters patent and design
letters patent of the United States or any other country and all applications
for letters patent and design letters patent of the United States or any other
country, including, without limitation, applications in the United States Patent
and Trademark Office or in any similar office or agency of the United States, of
any State thereof that maintains any similar office or agency or of any other
country or any political subdivision thereof, including, without limitation,
those listed on Schedule 5 to the Perfection Certificate for the Company or on
Schedule 1 to any Patent Security Agreement, (ii) all reissues, divisions,
continuations, continuations-in-part, renewals and extensions thereof, (iii) all
claims for, and rights to sue for, past or future infringements of any of the
foregoing and (iv) all income, royalties, damages and payments now or hereafter
due or payable with respect to any of the foregoing, including, without
limitation, damages and payments for past or future infringements thereof.
"PATENT SECURITY AGREEMENT" means a Patent Security Agreement executed
and delivered by a Grantor in favor of the Collateral Agent, for the benefit of
the Secured Parties, substantially in the form of Exhibit B hereto, as the same
may be amended from time to time.
"PERFECTION CERTIFICATE" means a certificate substantially in the form of
Exhibit A, completed and supplemented with the schedules and attachments
contemplated thereby to the satisfaction of the Collateral Agent, and duly
executed by an executive or senior vice president and the chief legal officer of
the applicable Grantor.
"PLEDGED ACCOUNT" has the meaning set forth in Section 5(a).
"PLEDGED DEPOSIT AGREEMENT" means a Pledged Deposit Agreement among a
bank with one or more Pledged Accounts, a Grantor as the depositor for such
Pledged Accounts and the Collateral Agent, substantially in the form of Exhibit
E.
"PROCEEDS" means all proceeds of, and all other profits, products, rents
or receipts, in whatever form, arising from the collection, sale, lease,
exchange, assignment, licensing or other disposition of, or other realization
upon, collateral, including without limitation all claims of any Grantor against
third parties for loss of, damage to or destruction of, or for proceeds payable
under, or unearned premiums with respect to, policies of insurance in
4
<PAGE> 5
respect of, any collateral, and any condemnation or requisition payments with
respect to any collateral, in each case whether now existing or hereafter
arising.
"SECURED OBLIGATIONS" means the obligations secured under this Agreement
which include (a) all obligations in respect of principal of and interest
(including, without limitation, any interest which accrues after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Company or any Subsidiary Guarantor) on any
Note issued pursuant to the Note Purchase Agreement, (b) all other amounts
payable under the Note Purchase Agreement or any other Financing Documents, (c)
only if [Wachovia] shall become a party hereto pursuant to Section 21, all Cash
Management Services Obligations, limited, however, as to this clause (c) to a
maximum aggregate amount of $3,000,000 and excluding from this clause (c) any
amounts arising from any failure of [Wachovia] and/or any of its affiliates to
comply in any material respect with the Guide to the Federal Reserve's Payments
System Risk Policy as in effect from time to time and (d) any amendments,
restatements, renewals, extensions or modifications of any of the foregoing.
"SECURED PARTIES" means (i) Purchaser, all other Holders and the
Collateral Agent and (ii) only if it shall become a party hereto pursuant to
Section 21, [Wachovia].
"SECURITY INTERESTS" means the security interests in the Collateral
granted hereunder securing the Secured Obligations.
"SUNTRUST CASH COLLATERAL ACCOUNT" means that account established or to
be established with [SunTrust Bank, Atlanta], for the purpose of cash
collateralizing a certain letter of credit in the amount of $2,500,000 securing
a workers' compensation policy.
"TRADEMARK LICENSE" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use any Trademark.
"TRADEMARKS" means all of the following: (i) all trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, service marks, logos, brand names, trade dress, package and other
designs, and any other source or business identifiers, and general intangibles
of like nature, and the rights in any of the foregoing which arise under
applicable law, including, without limitation, those listed on Schedule 5 to the
Perfection Certificate for the Company or on Schedule 1 to any Trademark
Security Agreement, (ii) the goodwill of the business symbolized thereby or
associated with each of them, (iii) all trademark registrations and applications
in the United States Patent and Trademark Office or in any similar office or
agency of the United States, any State thereof or any other country or any
political subdivision thereof, (iv) all extensions and renewals thereof, (v) all
claims for, and rights to sue for, past, present or future infringements of any
of the foregoing and (vi) all income, royalties, damages and
5
<PAGE> 6
payments now or hereafter due or payable with respect to any of the foregoing,
including, without limitation, damages and payments for past or future
infringements thereof.
"TRADEMARK SECURITY AGREEMENT" means a Trademark Security Agreement
executed and delivered by a Grantor in favor of the Collateral Agent, for the
benefit of the Secured Parties substantially in the form of Exhibit C hereto, as
the same may be amended from time to time.
"UCC" means the Uniform Commercial Code as in effect on the date hereof
in the State of New York; provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
Security Interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection.
["WACHOVIA"] means [Wachovia Bank, N.A.] and its successors.
["WACHOVIA] ADDENDUM" means an addendum to this Agreement duly executed
by [Wachovia] and the Collateral Agent, substantially in the form of Exhibit F
hereto.
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Grantors, jointly and
severally, represent and warrant as follows:
(a) Each Grantor owns each item of its Collateral, free and clear
of any Liens other than the Permitted Liens.
(b) To the best of each Grantor's knowledge, no Grantor has
performed any acts which might prevent the Collateral Agent from
enforcing any of the terms of this Agreement or which would limit the
Collateral Agent in any such enforcement. Other than financing statements
or other similar or equivalent documents or instruments with respect to
the Security Interests and Permitted Liens, no financing statement,
mortgage, security agreement or similar or equivalent document or
instrument covering all or any part of the Collateral is on file or of
record in any jurisdiction in which such filing or recording would be
effective to perfect a Lien on such Collateral. No Collateral is in the
possession of any Person (other than a Grantor) asserting any claim
thereto or security interest therein, except that the Collateral Agent or
its designee may have possession of Collateral as contemplated hereby.
(c) The information set forth in the Perfection Certificate of
each Grantor delivered to the Collateral Agent prior to the date of the
Initial Takedown is correct and complete in all material respects and, as
amended prior to January 15,
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1998, is correct and complete in all respects. Not later than 30 days
following the date of the Initial Takedown, the Company shall furnish to
the Collateral Agent file search reports from each UCC filing office set
forth in Schedule ? to the Perfection Certificate of each Grantor
confirming the filing information set forth in such Schedule.
(d) The Security Interests constitute valid security interests
under the UCC securing the Secured Obligations. Upon completion of the
actions and filings described in Schedule 3.02 to the Note Purchase
Agreement, the Security Interests shall constitute perfected security
interests in the Collateral (except Inventory in transit) to the extent
that a security interest therein may be perfected by filing pursuant to
the UCC, prior to all other Liens and rights of others therein except for
the Permitted Liens. To the extent that the Federal laws of the United
States apply to the perfection of security interests in Patents and
Trademarks, when a Patent Security Agreement or a Trademark Security
Agreement has been recorded with the United States Patent and Trademark
Office on a date within three months after the date of such Patent
Security Agreement or Trademark Security Agreement, as the case may be,
the Security Interests shall constitute perfected Security Interests in
all right, title and interest of the applicable Grantor in the Patents
listed on Schedule 1 to such Patent Security Agreement or Trademarks
listed on Schedule 1 to such Trademark Security Agreement, as the case
may be, prior to all other Liens and rights of others therein except for
Permitted Liens. To the extent that the Federal laws of the United States
apply to the perfection of security interests in Copyrights, when a
Copyright Security Agreement has been filed with the United States
Copyright Office on a date within one month after the date of such
Copyright Security Agreement, the Security Interests shall constitute
perfected security interests in all right, title and interest of the
applicable Grantor in the Copyrights listed on Schedule 1 to such
Copyright Security Agreement, prior to all other Liens and rights of
others therein except for Permitted Liens.
(e) The Inventory and Equipment are insured in accordance with the
requirements of the Note Purchase Agreement.
SECTION 3. THE SECURITY INTERESTS. (a) In order to secure the full and
punctual payment of the Secured Obligations in accordance with the terms
thereof, and to secure the performance of all of the obligations of any Grantor
hereunder and under the Note Purchase Agreement, each Grantor hereby grants to
the Collateral Agent, for the benefit of the Secured Parties, a continuing
security interest in and to all of such Grantor's right, title and interest in
and to the following property of such Grantor, whether now owned or existing or
hereafter acquired or arising and regardless of where located (all being
collectively referred to as the "COLLATERAL"):
(i) Accounts;
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(ii) Inventory;
(iii) General Intangibles;
(iv) Documents;
(v) Instruments;
(vi) Equipment;
(vii) The Pledged Accounts, all cash deposited therein from time
to time, the investments made pursuant to Section 5(d) and other monies
and property of any kind of such Grantor in the possession or under the
control of the Collateral Agent;
(viii) All books and records (including, without limitation,
customer lists, credit files, computer programs, printouts and other
computer materials and records) of such Grantor pertaining to any of the
Collateral;
(ix) All proceeds, revenues, rights and benefits described in
clause (iii) of any Copyright Security Agreement, Patent Security
Agreement or Trademark Security Agreement; and
(x) All Proceeds of all or any of the Collateral described in
Clauses 3(a)(i) through 3(a)(ix) hereof;
provided that Collateral shall not include any such property to the extent, and
solely to the extent, that (i) the grant of a security interest therein is
prohibited by law or (ii) such property is a contract right and the grant of a
security interest therein is expressly and validly prohibited by such contract.
(b) The Security Interests are granted as security only and shall not
subject the Collateral Agent or any other Secured Party to, or transfer or in
any way affect or modify, any obligation or liability of any Grantor with
respect to any of the Collateral or any transaction in connection therewith.
SECTION 4. FURTHER ASSURANCES; COVENANTS. (a) No Grantor will change its
name, identity or corporate structure in any manner unless it shall have given
the Collateral Agent not less than 10 Business Days' prior notice thereof. No
Grantor will change (i) the location of its chief executive office or principal
place of business or (ii) the locations where it keeps or holds any Collateral
or any records relating thereto from the applicable location described in the
Perfection Certificate unless it shall have given the
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Collateral Agent not less than 30 days' prior notice thereof. No Grantor shall
in any event change the location of any Collateral if such change would cause
the Security Interests in such Collateral to lapse or cease to be perfected
notwithstanding the filing of a financing statement or similar document.
(b) Each Grantor will, from time to time, at its expense, execute,
deliver, file and record any statement, assignment, instrument, document,
agreement or other paper and take any other action (including, without
limitation, any filings of financing or continuation statements under the UCC)
that from time to time may be necessary or desirable, or that the Collateral
Agent may request, in order to create, preserve, perfect, confirm or validate
the Security Interests or to enable the Secured Parties to obtain the full
benefits of this Agreement, or to enable the Collateral Agent to exercise and
enforce any of its rights, powers and remedies hereunder with respect to any of
the Collateral. To the extent permitted by applicable law, each Grantor hereby
authorizes the Collateral Agent, and appoints the Collateral Agent as its true
and lawful attorney (with full power of substitution, in the name of such
Grantor or otherwise, for the sole use and benefit of the Secured Parties) to
execute and file financing statements or continuation statements without such
Grantor's signature appearing thereon. Each Grantor agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. The Company shall
pay the costs of, or incidental to, any recording or filing of any financing or
continuation statements concerning the Collateral.
(c) If any Collateral is at any time in the possession or control of
any warehouseman, bailee or any of the agents or processors of any Grantor, such
Grantor shall notify such warehouseman, bailee, agent or processor of the
Security Interests created hereby and to hold all such Collateral for the
Collateral Agent's account subject to the Collateral Agent's instructions.
(d) Each Grantor shall keep full and accurate books and records
relating to its Collateral.
(e) Each Grantor will immediately deliver and pledge each Instrument
having a principal amount in excess of $1,000,000 to the Collateral Agent,
appropriately endorsed to the Collateral Agent, provided that so long as no
Event of Default shall have occurred and be continuing, such Grantor may retain
for collection in the ordinary course any Instruments received by it in the
ordinary course of business and the Collateral Agent shall, promptly upon
request of such Grantor, make appropriate arrangements for making any other
Instrument pledged by such Grantor available to it for purposes of presentation,
collection or renewal (any such arrangement to be effected, to the extent deemed
appropriate to the Collateral Agent, against trust receipt or like document).
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(f) Each Grantor shall use its commercially reasonable best efforts to
cause to be collected from its account debtors, as and when due, any and all
amounts owing under or on account of each of its Account (including, without
limitation, Accounts which are delinquent, such Accounts to be collected in
accordance with lawful collection procedures) and shall apply forthwith upon
receipt thereof all such amounts as are so collected to the outstanding balance
of such Account. Subject to the rights of the Collateral Agent and the other
Secured Parties hereunder upon the occurrence and during the continuance of an
Event of Default, a Grantor may allow in the ordinary course of business as
adjustments to amounts owing under its Accounts (i) an extension or renewal of
the time or times of payment, or settlement for less than the total unpaid
balance, which such Grantor finds appropriate in accordance with sound business
judgment and (ii) a refund or credit due as a result of returned or damaged
merchandise, all in accordance with such Grantor's ordinary course of business
consistent with its historical collection practices. The costs and expenses
(including, without limitation, attorney's fees) of collection, whether incurred
by a Grantor or any Secured Party, shall be borne by the Company.
(g) Upon the occurrence and during the continuance of any Event of
Default, upon request of the Collateral Agent, each Grantor will promptly notify
(and each Grantor hereby authorizes the Collateral Agent so to notify) each of
its account debtors in respect of any Account or Instrument that such Collateral
has been assigned to the Collateral Agent hereunder, and that any payments due
or to become due in respect of such Collateral are to be made directly to the
Collateral Agent or its designee.
(h) Except as permitted under the Note Purchase Agreement, without the
prior written consent of the Collateral Agent, no Grantor will sell, lease,
exchange, assign or otherwise dispose of, or grant any option with respect to,
any Collateral.
(i) Promptly upon the request of the Collateral Agent, each Grantor
will cause the Collateral Agent to be named as an insured party and loss payee
on each insurance policy covering risks relating to any of its Inventory and
Equipment. Each Grantor will deliver to the Collateral Agent, upon request of
the Collateral Agent, the insurance policies for such insurance or certificates
of insurance evidencing such coverage. Each such insurance policy shall include
effective waivers by the insurer of all claims for insurance premiums against
the Collateral Agent, and provide that no cancellation, termination or material
modification thereof shall be effective until at least 30 days after receipt by
the Collateral Agent of notice thereof.
(j) Promptly upon the request of the Collateral Agent, each Grantor
will provide to any Secured Party all information and evidence it may reasonably
request concerning the Collateral to enable the Collateral Agent or any other
Secured Party to enforce the provisions of this Agreement.
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(k) Each Grantor shall notify the Collateral Agent promptly if it
knows, or has reason to know, that any application or registration relating to
any Copyright, Patent or Trademark that is material to the business and
operations of the Grantors, taken as a whole, may become abandoned. In the event
that any Grantor receives notice of or becomes aware that any right to a
Copyright, Copyright License, Patent, Patent License, Trademark or Trademark
License that is material to the business and operations of the Grantors, taken
as a whole, has been breached, infringed, misappropriated or diluted in any
material respect by a third party, such Grantor shall notify the Collateral
Agent promptly after it learns thereof and shall, unless such Grantor shall
reasonably determine that any such action would be economically disadvantageous,
promptly sue for breach, infringement, misappropriation or dilution and to
recover any and all damages for such breach, infringement, misappropriation or
dilution, and take such other actions as such Grantor shall reasonably deem
appropriate under the circumstances to protect such Copyright, Copyright
License, Patent, Patent License, Trademark or Trademark License. In no event
shall any Grantor, either itself or through any agent, employee or licensee,
file an application for the registration of any material Copyright with the
United States Copyright Office or any material Patent or Trademark with the
United States Patent and Trademark Office, or with any similar office or agency
in any other country or any political subdivision thereof, as soon as reasonably
practicable but in no event later than 90 days after such filing it informs the
Collateral Agent, and, upon request of the Collateral Agent, executes and
delivers any and all agreements, instruments, documents and papers the
Collateral Agent may request to evidence the Security Interests in such
Copyright, Patent or Trademark and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby. Each Grantor hereby constitutes
the Collateral Agent its attorney-in-fact to execute and file all such writings
for the foregoing purposes, all acts of such attorney being hereby ratified and
confirmed; such power, being coupled with an interest, shall be irrevocable
until the Secured Obligations are paid in full.
(l) Each Grantor agrees that if any Subsidiary of the Company owes any
Debt to such Grantor that is not pledged to the Collateral Agent under the
Pledge Agreement, such Debt shall not be evidenced by a note or other instrument
and shall constitute Collateral hereunder.
(m) Each Grantor agrees that if will not enter into any contract that
prohibits the granting of a security interest therein, except in the ordinary
course of business, consistent with past practices.
SECTION 5. PLEDGED ACCOUNTS. (a) By February 28, 1998, each Grantor shall
cause the Collateral Agent to receive a duly executed Pledged Deposit Agreement
from each of its banks covering all of its bank accounts (other than payroll,
trust or similar accounts or the SunTrust Cash Collateral Account) on such date.
If any Grantor hereafter establishes any bank accounts (other than payroll,
trust or similar accounts or the SunTrust Cash Collateral Account), the Grantor
shall enter into a Pledged Deposit
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Agreement with such bank (all bank accounts now existing or hereafter acquired
(other than payroll, trust or similar accounts or the SunTrust Cash Collateral
Account), collectively, the "PLEDGED ACCOUNTS"). At all times after February 28,
1998, all cash Proceeds of such Grantor's Collateral shall be deposited into
such Grantor's Pledged Accounts. No Grantor shall amend or terminate any of its
Pledged Deposit Agreements without the prior written approval of the Collateral
Agent. Any income received with respect to the balance from time to time
standing to the credit of any Pledged Account, including any interest or capital
gains on any investments thereof, shall remain, or be deposited, in such Pledged
Account. All right, title and interest in and to the cash amounts on deposit
from time to time in each Pledged Account, together with any investments thereof
from time to time, shall constitute part of the Collateral hereunder and shall
not constitute payment of the Secured Obligations until applied thereto as
hereinafter provided.
(b) Upon the occurrence and during the continuation of an Event of
Default, each Grantor shall, upon the request of the Collateral Agent, instruct
all account debtors and other Persons obligated in respect of any of its
Accounts to make all payments in respect of such Accounts and shall use its best
efforts to cause such account debtors and other Persons to remit all such
payments, to the extent permitted by applicable law, directly to its Pledged
Account (if paid by wire transfer), or to a post office box that is subject to a
lockbox agreement for deposit into such Pledged Account. In addition to the
foregoing, each Grantor agrees that if the proceeds of any Collateral hereunder
(including any payments made in respect of Accounts) shall be received by it,
such Grantor shall as promptly as possible deposit such proceeds into one or
more of its Pledged Accounts. Until so deposited, all such proceeds shall be
held in trust by such Grantor for and as the property of the Secured Parties and
shall not be commingled with any other funds or property of such Grantor.
(c) The balance from time to time standing to the credit of each
Pledged Account shall, except upon the occurrence and during the continuation of
an Event of Default, be distributed to the applicable Grantor in accordance with
the provisions of its Pledged Deposit Agreement. Upon the occurrence and during
the continuation of an Event of Default, the Collateral Agent shall, in its
discretion, apply or cause to be applied (subject to collection) any or all of
the balance from time to time standing to the credit of each Pledged Account in
the manner specified in Section 9.
(d) Amounts on deposit in each Pledged Account may be invested and
reinvested from time to time in accordance with Section 6.12 of the Note
Purchase Agreement; provided that if an Event of Default shall have occurred and
be continuing, upon the request of the Collateral Agent in its discretion, each
Grantor shall invest amounts on deposit in its Pledged Accounts only in
investments for which all steps necessary or appropriate, in the reasonable
judgment of the Collateral Agent, shall have
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been taken to provide the Agent, for the benefit of the Secured Parties, a
perfected security interest therein.
SECTION 6. GENERAL AUTHORITY. Each Grantor hereby irrevocably appoints
the Collateral Agent its true and lawful attorney, with full power of
substitution, in the name of any Grantor, the Collateral Agent or otherwise, for
the sole use and benefit of the Collateral Agent and the other Secured Parties,
but at the Company's expense, to the extent permitted by law to exercise, at any
time and from time to time, in each case while an Event of Default has occurred
and is continuing, all or any of the following powers with respect to all or any
of the Collateral:
(a) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due thereon or by virtue thereof,
(b) to settle, compromise, compound, prosecute or defend any
action or proceeding with respect thereto,
(c) to sell, transfer, assign or otherwise deal in or with the
same or the proceeds or avails thereof, including without limitation for
the implementation of any lease, assignment, license, sublicense, grant
of option, sale or other disposition of any Copyright, Patent or
Trademark or any action related thereto, as fully and effectually as if
the Collateral Agent were the absolute owner thereof, and
(d) to extend the time of payment of any or all thereof and to
make any allowance and other adjustments with reference thereto;
provided that the Collateral Agent shall give each Grantor not less than ten
days' prior notice of the time and place of any sale or other intended
disposition of any of the Collateral, except any Collateral which is perishable
or threatens to decline speedily in value or is of a type customarily sold on a
recognized market. The Collateral Agent and each Grantor agree that such notice
constitutes "reasonable notification" within the meaning of Section 9-504(3) of
the UCC.
SECTION 7. REMEDIES UPON EVENT OF DEFAULT. (a) If any Event of Default
has occurred and is continuing, the Collateral Agent may exercise on behalf of
the Secured Parties all rights of a secured party under the UCC (whether or not
in effect in the jurisdiction where such rights are exercised) and, in addition,
the Collateral Agent may, without being required to give any notice, except as
herein provided or as may be required by mandatory provisions of law, (i)
withdraw all cash in the Pledged Accounts and liquidate any investments thereof
and apply such cash and the proceeds of such liquidation and any other cash held
by it as Collateral in accordance with Section 9 and (ii) if there shall be no
such cash or investments or if such cash and investments shall be insufficient
to pay all the Secured Obligations in full, sell the Collateral or any part
thereof at public or
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private sale, for cash, upon credit or for future delivery, and at such price or
prices as the Collateral Agent may deem satisfactory. The Collateral Agent may
be the purchaser of any or all of the Collateral so sold at any public sale (or,
if the Collateral is of a type customarily sold in a recognized market or is of
a type which is the subject of widely distributed standard price quotations, at
any private sale). Each Grantor will execute and deliver such documents and take
such other action as the Collateral Agent deems necessary or advisable in order
that any such sale may be made in compliance with law. Upon any such sale the
Collateral Agent shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold. Each purchaser at any such sale shall
hold the Collateral so sold to it absolutely and free from any claim or right of
whatsoever kind, including any equity or right of redemption of any Grantor
which may be waived, and each Grantor, to the extent permitted by law, hereby
specifically waives all rights of redemption, stay or appraisal which it has or
may have under any law now existing or hereafter adopted. The notice (if any) of
such sale required by Section 6 shall (A) in the case of a public sale, state
the time and place fixed for such sale, and (B) in the case of a private sale,
state the day after which such sale may be consummated. Any such public sale
shall be held at such time or times within ordinary business hours and at such
place or places as the Collateral Agent may fix in the notice of such sale. At
any such sale the Collateral may be sold in one lot as an entirety or in
separate parcels, as the Collateral Agent may determine. The Collateral Agent
shall not be obligated to make any such sale pursuant to any such notice. The
Collateral Agent may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the same may be so adjourned. In the case of any sale of all
or any part of the Collateral on credit or for future delivery, the Collateral
so sold may be retained by the Collateral Agent until the selling price is paid
by the purchaser thereof, but the Collateral Agent shall not incur any liability
in the case of the failure of such purchaser to take up and pay for the
Collateral so sold and, in the case of any such failure, such Collateral may
again be sold upon like notice. The Collateral Agent, instead of exercising the
power of sale herein conferred upon it, may proceed by a suit or suits at law or
in equity to foreclose the Security Interests and sell the Collateral, or any
portion thereof, under a judgment or decree of a court or courts of competent
jurisdiction.
(b) For the purpose of enforcing any and all rights and remedies under
this Agreement the Collateral Agent may (i) require any Grantor to, and each
agrees that it will, at its expense and upon the request of the Collateral
Agent, forthwith assemble all or any part of the Collateral as directed by the
Collateral Agent and make it available at a place designated by the Collateral
Agent which is, in its opinion, reasonably convenient to the Collateral Agent
and such Grantor, whether at the premises of such Grantor or otherwise, (ii) to
the extent permitted by applicable law, enter, with or without process of law
and without breach of the peace, any premise where any of the Collateral is or
may be located, and without charge or liability to it seize and remove such
Collateral from such premises, (iii) have access to and use the Grantor's books
and records relating to the
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Collateral and (iv) prior to the disposition of the Collateral, store or
transfer it without charge in or by means of any storage or transportation
facility owned or leased by any Grantor, process, repair or recondition it or
otherwise prepare it for disposition in any manner and to the extent the
Collateral Agent deems appropriate and, in connection with such preparation and
disposition, use without charge any trademark, trade name, copyright, patent or
technical process used by any Grantor. The Collateral Agent may also render any
or all of the Collateral unusable at any Grantor's premises and may dispose of
such Collateral on such premises without liability for rent or costs.
(c) Without limiting the generality of the foregoing, if any Event of
Default has occurred and is continuing,
(i) The Collateral Agent may license or sublicense, on an
exclusive or non-exclusive basis, any Copyrights, Patents or Trademarks
included in the Collateral throughout the world for such term or terms,
on such conditions and in such manner as the Collateral Agent shall in
its sole discretion determine; provided that such terms and conditions do
not result in a breach or default under any Copyright License, Patent
License or Trademark License to which Grantor is a Party;
(ii) The Collateral Agent may (without assuming any obligations
or liability thereunder), at any time and from time to time, enforce (and
shall have the exclusive right to enforce) against any licensor, licensee
or sublicensee all rights and remedies of any Grantor in, to and under
any Copyright Licenses, Patent Licenses or Trademark Licenses and take or
refrain from taking any action under any thereof, and such Grantor hereby
releases the Collateral Agent from, and agrees to hold the Collateral
Agent free and harmless from and against any claims arising out of, any
lawful action so taken or omitted to be taken with respect thereto,
except any such claim to the extent that it arises as the result of the
gross negligence or willful misconduct of the Collateral Agent; and
(iii) upon request by the Collateral Agent, each Grantor will
execute and deliver to the Collateral Agent a further power of attorney,
in form and substance satisfactory to the Collateral Agent, for the
implementation of any lease, assignment, license, sublicense, grant of
option, sale or other disposition of a Copyright, Patent, Trademark,
Copyright License, Patent License or Trademark License. In the event of
any such disposition pursuant to this Section, each Grantor shall supply
to the Collateral Agent its know-how and expertise relating to the
manufacture and sale of the products bearing Trademarks or the products
or services made or rendered in connection with the Patents, and copies
of its customer lists and other records relating to such Patents or
Trademarks and to the distribution of said products.
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SECTION 8. LIMITATION ON DUTY OF COLLATERAL AGENT IN RESPECT OF
COLLATERAL. Beyond the exercise of reasonable care in the custody thereof, the
Collateral Agent shall have no duty as to any Collateral in its possession or
control or in the possession or control of any agent or bailee or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto. The Collateral Agent shall be deemed to have
exercised reasonable care in the custody of the Collateral in its possession if
the Collateral is accorded treatment substantially equal to that which it
accords its own property, and shall not be liable or responsible for any loss or
damage to any of the Collateral, or for any diminution in the value thereof, by
reason of the act or omission of any warehouseman, carrier, forwarding agency,
consignee or other agent or bailee selected by the Collateral Agent in good
faith.
SECTION 9. APPLICATION OF PROCEEDS. Upon the occurrence and during the
continuance of an Event of Default, the proceeds of any sale of, or other
realization upon, all or any part of any Grantor's Collateral any cash in the
Pledged Accounts shall be applied by the Collateral Agent in the following order
of priorities:
FIRST, to payment of the expenses of such sale or other
realization, including reasonable compensation to agents and counsel for
the Collateral Agent, and all expenses, liabilities and advances incurred
or made by the Collateral Agent in connection therewith, and any other
unreimbursed expenses for which the Collateral Agent is to be reimbursed
pursuant to Section 10.04 of the Note Purchase Agreement or Section 12
hereof and unpaid fees owing to the Collateral Agent under the Note
Purchase Agreement;
SECOND, to the ratable payment of all other Secured Obligations,
until all Secured Obligations shall have been paid in full; and
FINALLY, to payment to such Grantor or its successors or assigns,
or as a court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds.
The Collateral Agent may make distributions hereunder in cash or in kind or, on
a ratable basis, in any combination thereof.
SECTION 10. CONCERNING THE COLLATERAL AGENT. (a) Each Secured Party
irrevocably appoints and authorizes the Collateral Agent to enter into the
Security Documents on its behalf, including any Security Documents that the
Collateral Agent may hereafter enter into from time to time at the request of
any Secured Party, and to take all such action as is provided to be taken by it
as Collateral Agent hereunder and thereunder and all other action reasonably
incidental thereto. As to any matters not expressly provided for herein or
therein (including the timing and methods of
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realization upon the Collateral) the Collateral Agent shall act or refrain from
acting in accordance with written instructions from the Secured Parties or, in
the absence of such instructions, in accordance with its discretion. Without
limiting the effect of the foregoing, each Secured Party agrees that (i) the
Collateral Agent may exercise or refrain from exercising any right, remedy or
power granted by or in connection with any Security Document without notice to
or assent by any Secured Party and (ii) no Secured Party shall have any right of
action whatsoever against the Collateral Agent in connection with the Collateral
Agent's acting or refraining from acting hereunder or under any other Security
Documents in accordance with written instructions of the Secured Parties.
(b) Purchaser shall have the same rights and powers under the Security
Documents as any other Secured Party and may exercise or refrain from exercising
the same as though it were not the Collateral Agent.
(c) The Collateral Agent may consult with legal counsel, independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel, accountants or experts.
(d) Neither the Collateral Agent nor any of its directors, officers,
agents, or employees shall be liable for any action taken or not taken by it in
connection with the Security Documents in the absence of its own gross
negligence or willful misconduct. Neither the Collateral Agent nor any of its
directors, officers, agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify (i) the existence, genuineness or
value of any of the Collateral or the validity, perfection, priority or
enforceability of the Security Interests in any of the collateral, whether
impaired by operation of law or by reason of any action or omission to act on
its part hereunder or under any other Security Document; (ii) any statement,
warranty or representation made in connection with the Note Purchase Agreement
or any Security Document; (iii) the performance or observance of any of the
covenants or agreements of any Grantor hereunder; or (iv) the validity,
effectiveness, sufficiency or genuineness of any Security Document or any other
instrument or writing furnished in connection therewith. The Collateral Agent
shall not incur any liability by acting in reliance upon any notice, consent,
certificate, statement, or other writing (which may be a bank wire, telex,
facsimile transmission or similar writing) believed by it to be genuine or to be
signed by the proper party or parties.
(e) Each Secured Party shall, ratably in accordance with the aggregate
amount of Secured Obligations it holds, indemnify the Collateral Agent (to the
extent not reimbursed by the Company) against any cost, expense (including
counsel fees and disbursements), claim, demand, action, loss or liability
(except such as result from the Collateral Agent's gross negligence or willful
misconduct) that the Collateral Agent
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<PAGE> 18
may suffer or incur in connection with any Security Documents or any action
taken or omitted by the Collateral Agent hereunder or thereunder.
SECTION 11. APPOINTMENT OF CO-AGENTS. At any time or times, in order to
comply with any legal requirement in any jurisdiction, the Collateral Agent may
appoint a bank or trust company or one or more other persons, either to act as
co-agent or co-agents, jointly with the Collateral Agent, or to act as separate
agent or agents on behalf of the Collateral Agent with such power and authority
as may be necessary for the effectual operation of the provisions hereof and may
be specified in the instrument of appointment (which may, in the discretion of
the Collateral Agent, include provisions for the protection of such co-agent or
separate agent similar to the provisions of Section 9).
SECTION 12. EXPENSES. In the event that any Grantor fails to comply with
the provisions of the Note Purchase Agreement or this Agreement, such that the
value of any Collateral or the validity, perfection, rank or value of any
Security Interest is thereby diminished in any material respect or put at risk,
the Collateral Agent may, but shall not be required to, effect such compliance
on behalf of such Grantor, and the Company shall reimburse the Collateral Agent
for the costs thereof on demand. All insurance expenses and all expenses of
protecting, storing, warehousing, appraising, insuring, handling, maintaining,
and shipping the Collateral, any and all excise, property, sales, and use taxes
imposed by any state, federal, or local authority on any of the Collateral, or
in respect of periodic appraisals and inspections of the Collateral, or in
respect of the sale or other disposition thereof shall be borne and paid by the
Company; and if any Grantor fails to promptly pay any portion thereof when due,
the Collateral Agent or any other Secured Party may, at its option, but shall
not be required to, pay the same and charge the Company's account therefor, and
the Company agrees to reimburse the Collateral Agent therefor on demand. All
sums so paid or incurred by the Collateral Agent or any other Secured Party for
any of the foregoing and any and all other sums for which any Grantor may become
liable hereunder and all costs and expenses (including attorneys' fees, legal
expenses and court costs and a reasonable allocation of the compensation, costs
and expenses of in-house counsel, based upon time spent) reasonably incurred by
the Collateral Agent or any other Secured Party in enforcing or protecting the
Security Interests or any of their rights or remedies under this Agreement,
shall, together with interest thereon until paid at an annual rate equal to 3%
plus the rate announced from time to time by The Bank of New York as its prime
rate, be Secured Obligations hereunder.
SECTION 13. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL.
Upon the repayment in full of all Secured Obligations and the termination of the
Commitment under the Note Purchase Agreement, the Security Interests shall
terminate and all rights of each Grantor to the Collateral shall revert to such
Grantor. At any time and from time to time prior to such termination of the
Security Interests, the Collateral Agent may release any of the Collateral only
with the prior written consent of the Majority Holders; provided
18
<PAGE> 19
that if any Grantor ceases to be a Subsidiary of the Company as may be permitted
by the Note Purchase Agreement at such time and if at such time and after giving
effect to such event no Default shall have occurred and be continuing, the
Security Interests granted by such Grantor shall terminate; and provided further
that if any Grantor sells or otherwise disposes of any Collateral as permitted
by Section 6.15(b) of the Note Purchase Agreement at such time and if at such
time and after giving effect to such event no Default shall have occurred and be
continuing, the Security Interests in such Collateral granted by such Grantor
shall terminate. Upon any such termination of the Security Interests or release
of Collateral, the Collateral Agent will, at the expense of the Company,
execute, deliver and return to the Grantors such documents and instruments as
the Grantors shall reasonably request to evidence the termination of the
Security Interests or the release of such Collateral, as the case may be.
SECTION 14. NOTICES. All notices, communications and distributions
hereunder shall be given in accordance with Section 10.01 of the Note Purchase
Agreement. In the case of Wachovia, its address shall be as set forth on the
Wachovia Addendum, or such other address as Wachovia may hereafter specify to
the Company and the Collateral Agent for such purpose.
SECTION 15. WAIVERS, NON-EXCLUSIVE REMEDIES. No failure on the part of
the Collateral Agent or any other Secured Party to exercise, and no delay in
exercising and no course of dealing with respect to, any right under this
Agreement shall operate as a waiver thereof; nor shall any single or partial
exercise by the Collateral Agent or any other Secured Party of any right under
the Note Purchase Agreement or any other Financing Document preclude any other
or further exercise thereof or the exercise of any other right. The rights in
this Agreement and the Note Purchase Agreement are cumulative and are not
exclusive of any other remedies provided by law.
SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement is for the benefit of
the Secured Parties and their successors and assigns, and in the event of an
assignment of all or any of the Secured Obligations, the rights hereunder, to
the extent applicable to the indebtedness so assigned, may be transferred with
such indebtedness. This Agreement shall be binding on the Grantors and their
successors and assigns.
SECTION 17. CHANGES IN WRITING. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only in
writing signed by each Grantor affected thereby and the Collateral Agent.
SECTION 18. NEW YORK LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York, except as otherwise
required by mandatory provisions of law and except to the extent that remedies
provided by the laws of any jurisdiction other than New York are governed by the
laws of such jurisdiction.
19
<PAGE> 20
SECTION 19. SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Secured Parties in
order to carry out the intentions of the parties hereto as nearly as may be
possible; and (ii) the invalidity or unenforceability of any provision hereof in
any jurisdiction shall not affect the validity or enforceability of such
provision in any other jurisdiction.
SECTION 20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 21. [WACHOVIA] ADDENDUM. From and after the date when the
Collateral Agent shall receive a duly executed [Wachovia] Addendum, (i) the Cash
Management Obligations will become Secured Obligations hereunder, subject to the
limitations contained herein, and (ii) Wachovia shall become a Secured Party
hereunder, and shall thereupon become entitled to the benefits, and be bound by
the obligations, under this Agreement as a Secured Party, including without
limitation Section 10 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
MEDAPHIS CORPORATION
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
SUBSIDIARY GUARANTORS
ASSETCARE, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
20
<PAGE> 21
AUTOMATION ATWORK
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG ALLIANCE/IT, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG CORPORATION
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG GOVERNMENT SOLUTIONS, INC.
(FORMERLY KNOWN AS RAPID SYSTEMS
SOLUTIONS, INC.)
By: /s/ Randolph L. M. Hutto
------------------------------------
Name: Randolph L. M. Hutto
Title: Secretary
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
CONSORT TECHNOLOGIES, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
21
<PAGE> 22
GOTTLIEB'S FINANCIAL SERVICES, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
HEALTH DATA SCIENCES CORPORATION
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS HEALTHCARE INFORMATION
TECHNOLOGY COMPANY (F/K/A MEDAPHIS
SYSTEMS CORPORATION)
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS PHYSICIAN SERVICES CORPORATION
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS SERVICES CORPORATION (F/K/A
MEDAPHIS HOSPITAL SERVICES CORPORATION)
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
22
<PAGE> 23
MEDICAL MANAGEMENT SCIENCES, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
NATIONAL HEALTHCARE
TECHNOLOGIES, INC.
By: /s/ Jerome H. Baglien
------------------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
23
<PAGE> 24
COLLATERAL AGENT
[MED FUNDING, INC.], AS
COLLATERAL AGENT
By:
----------------------------------
Name:
Title:
24
<PAGE> 25
EXHIBIT A TO
SECURITY AGREEMENT
PERFECTION CERTIFICATE FOR [NAME OF GRANTOR]
The undersigned, [chief legal officer] and [executive] [senior] vice
president, of [Name of Grantor], a [ ] corporation (the "COMPANY"), hereby
certify as follows to [Med Funding, Inc.] ("PURCHASER"), with reference to the
Security Agreement dated as of December ___, 1997 among the Company, the
Subsidiary Guarantors party thereto (the Company and each Subsidiary Guarantor,
a "GRANTOR") and Purchaser, as Collateral Agent (terms defined therein being
used herein as therein defined):
1. Names. (a) The exact corporate name of the Grantor, as it appears in
its certificate of incorporation is as follows:
[Name of Grantor]
(b) Set forth below is each other corporate name the Grantor has had
since its organization, together with the date of the relevant change:
(c) The Grantor has not changed its identity or corporate structure in
any way within the past five years except as described below:
(d) The following is a list of all other names (including trade names or
similar appellations) used by the Grantor or any of its divisions or other
business units at any time during the past five years:
[Name of Grantor]
25
<PAGE> 26
2. Current Locations. (a) The chief executive office of the Grantor is
located at the following address:
Mailing Address County State
(b) The following are all the locations where the Grantor maintains any
books or records relating to any Accounts:
Mailing Address County State
(c) The following are all the places of business of the Grantor not
identified above:
Name Mailing Address County State
(d) The following are all the locations where the Grantor maintains any
Inventory not identified above:
Name Mailing Address County State
(e) The following are the names and addresses of all Persons other than
the Grantor which have possession of any of the Grantor's Inventory:
Name Mailing Address County State
3. Prior Locations. (a) Set forth below is the information required by
subparagraphs (a), (b) and (c) of paragraph 2 with respect to each location or
place of business maintained by the Grantor at any time during the past five
years:
26
<PAGE> 27
(b) Set forth below is the information required by subparagraphs (d) and
(e) of paragraph 2 with respect to each location or bailee where or with whom
Inventory has been lodged at any time during the past four months:
4. Unusual Transactions. All Accounts have been originated by the Grantor
and all Inventory and Equipment has been acquired by the Grantor in the ordinary
course of its business.
5. Patents, Trademarks, Copyrights. All patents, trademarks and
copyrights owned by the Grantor as of the date hereof are listed on Schedule 5
to the Medaphis Corporation Perfection Certificate delivered to Purchaser
concurrently herewith.
IN WITNESS WHEREOF, we have hereunto set our hands this ____ day of
December, 1997.
---------------------------------
Title:
---------------------------------
Title:
27
<PAGE> 28
EXHIBIT B TO
SECURITY AGREEMENT
PATENT SECURITY AGREEMENT
(PATENTS, PATENT APPLICATIONS AND PATENT LICENSES)
WHEREAS, _______________, a [Delaware] corporation (herein referred to as
"GRANTOR") owns the Patents (as defined in the Security Agreement referred to
below) listed on Schedule 1 annexed hereto, and is a party to the Patent
Licenses (as defined in the Security Agreement referred to below) identified in
Schedule 1 annexed hereto;
WHEREAS, Grantor, the Subsidiary Guarantors party thereto and [Med
Funding, Inc.] are parties to a Note Purchase Agreement of even date herewith
(as the same may be amended and in effect from time to time among said parties
as may from time to time be parties thereto, the "NOTE PURCHASE AGREEMENT");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"SECURITY AGREEMENT") among Grantor, [Med Funding, Inc.], as Collateral Agent
for the secured parties referred to therein (in such capacity, together with its
successors in such capacity, "GRANTEE") and certain other parties, Grantor has
granted to Grantee for the benefit of such secured parties a continuing security
interest in substantially all the assets of Grantor, including all right, title
and interest of Grantor in, to and under the Patent Collateral (as defined
herein) whether now owned or existing or hereafter acquired or arising, to
secure the Secured Obligations (as defined in the Security Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor hereby grants to Grantee,
for the benefit of the Secured Parties (as defined in the Security Agreement), a
continuing security interest in and to all of Grantor's right, title and
interest in and to all of the following property, whether now owned or existing
or hereafter acquired or arising and regardless of where located (all being
collectively referred to as the "PATENT COLLATERAL"):
(i) each Patent (as defined in the Security Agreement) owned by
Grantor (including each design patent and patent application), including,
without limitation, each Patent (including each design patent and patent
application) referred to in Schedule 1 annexed hereto;
(ii) each Patent License (as defined in the Security Agreement)
owned by Grantor, including, without limitation, each Patent License
identified in Schedule 1 annexed hereto; and
28
<PAGE> 29
(iii) all proceeds of and revenues from the foregoing, including,
without limitation, all proceeds of and revenues from any claim by
Grantor against third parties for past, present or future infringement of
any Patent (including any design patent), including, without limitation,
any Patent referred to in Schedule 1 annexed hereto (including, without
limitation, any such Patent issuing from any application referred to in
Schedule 1 annexed hereto), and all rights and benefits of Grantor under
any Patent License, including, without limitation, any Patent License
identified in Schedule 1 annexed hereto.
Grantor hereby irrevocably constitutes and appoints Grantee and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full power and authority in the name of Grantor or
in its name, from time to time, in Grantee's discretion, so long as any Event of
Default (as defined in the Note Purchase Agreement) has occurred and is
continuing, to take with respect to the Patent Collateral any and all
appropriate action which Grantor might take with respect to the Patent
Collateral and to execute any and all documents and instruments which may be
necessary or desirable to carry out the terms of this Patent Security Agreement
and to accomplish the purposes hereof.
This security interest is granted in conjunction with the security
interests granted to Grantee pursuant to the Security Agreement. Grantor does
hereby further acknowledge and affirm that the rights and remedies of Grantee
with respect to the security interest in the Patent Collateral made and granted
hereby are more fully set forth in the Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
29
<PAGE> 30
IN WITNESS WHEREOF, Grantor has caused this Patent Security Agreement to
be duly executed by its officer thereunto duly authorized as of the ____ day of
____________, 19__.
[COMPANY]
By:
--------------------------
Name:
Title:
Acknowledged:
[MED FUNDING, INC.], as Collateral Agent
By:
--------------------------
Name:
Title:
30
<PAGE> 31
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
I, ______________________, a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that _________________________,
_______________ of [NAME OF COMPANY], personally known to me to be the same
person whose name is subscribed to the foregoing instrument as such
_________________, appeared before me this day in person and acknowledged that
(s)he signed, executed and delivered the said instrument as her/his own free and
voluntary act and as the free and voluntary act of said Company, for the uses
and purposes therein set forth being duly authorized so to do.
GIVEN under my hand and Notarial Seal this ___ day of _______________,
19__.
[Seal]
- ---------------------------------
Signature of notary public
My Commission expires
-----------
31
<PAGE> 32
SCHEDULE 1
TO PATENT
SECURITY AGREEMENT
PATENTS
A. U.S. Patents and Design Patents
Patent No. Patent No. Issue Date Title
B. U.S. Patent Applications
Serial No. Date Filed Title
C. Foreign Patents
Patent No. Patent No. Issue Date Title
32
<PAGE> 33
PATENT LICENSES
Name of Parties Date of
Agreement Licensor/Licensee Agreement
--------- ----------------- ---------
33
<PAGE> 34
EXHIBIT C TO
SECURITY AGREEMENT
TRADEMARK SECURITY AGREEMENT
(TRADEMARKS, TRADEMARK REGISTRATIONS, TRADEMARK
APPLICATIONS AND TRADEMARK LICENSES)
WHEREAS, _______________, a [Delaware] corporation (herein referred to as
"GRANTOR"), owns the Trademarks (as defined in the Security Agreement referred
to below) listed on Schedule 1 annexed hereto, and is a party to the Trademark
Licenses (as defined in the Security Agreement referred to below) identified in
Schedule 1 annexed hereto;
WHEREAS, Grantor, the Subsidiary Guarantors party thereto and [Med
Funding, Inc.] are parties to a Note Purchase Agreement of even date herewith
(as the same may be amended and in effect from time to time among said parties,
the "NOTE PURCHASE AGREEMENT");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"SECURITY AGREEMENT") among Grantor, [Med Funding, Inc.], as Collateral Agent
for the secured parties referred to therein (in such capacity, together with its
successors in such capacity, "GRANTEE") and certain other parties, Grantor has
granted to Grantee for the benefit of such secured parties a security interest
in substantially all the assets of Grantor, including all right, title and
interest of Grantor in, to and under the Trademark Collateral (as defined
herein), whether now owned or existing or hereafter acquired or arising, to
secure the Secured Obligations (as defined in the Security Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor hereby grants to Grantee,
for the benefit of the Secured Parties (as defined in the Security Agreement), a
continuing security interest in and to all of Grantor's right, title and
interest in and to all of the following property, whether now owned or existing
or hereafter acquired or arising and regardless of where located (all being
collectively referred to as the "TRADEMARK COLLATERAL"):
(i) each Trademark (as defined in the Security Agreement),
including, without limitation, each Trademark registration and
application referred to in Schedule 1 annexed hereto, and all of the
goodwill of the business symbolized thereby or associated with each of
them:
34
<PAGE> 35
(ii) each Trademark License (as defined in the Security
Agreement), including, without limitation, each Trademark License
identified in Schedule 1 annexed hereto; and
(iii) all proceeds of and revenues from the foregoing, including,
without limitation, all proceeds of and revenues from any claim by
Grantor against third parties for past, present or future unfair
competition with, or violation of intellectual property rights in
connection with or injury to, or infringement or dilution of, any
Trademark, including, without limitation, any Trademark referred to in
Schedule 1 hereto, and all rights and benefits of Grantor under any
Trademark License, including, without limitation, any Trademark License
identified in Schedule 1 hereto, or for injury to the goodwill associated
with any of the foregoing.
Grantor hereby irrevocably constitutes and appoints Grantee and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full power and authority in the name of Grantor or
in its name, from time to time, in Grantee's discretion, so long as any Event of
Default (as defined in the Note Purchase Agreement) has occurred and is
continuing, to take with respect to the Trademark Collateral any and all
appropriate action which Grantor might take with respect to the Trademark
Collateral and to execute any and all documents and instruments which may be
necessary or desirable to carry out the terms of this Trademark Security
Agreement and to accomplish the purposes hereof.
This security interest is granted in conjunction with the security
interests granted to Grantee pursuant to the Security Agreement. Grantor does
hereby further acknowledge and affirm that the rights and remedies of Grantee
with respect to the security interest in the Trademark Collateral made and
granted hereby are more fully set forth in the Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
35
<PAGE> 36
IN WITNESS WHEREOF, Grantor has caused this Trademark Security Agreement
to be duly executed by its officer thereunto duly authorized as of the ____ day
of __________, 19__.
[COMPANY]
By:
---------------------------
Name:
Title:
Acknowledged:
[MED FUNDING, INC.], as Collateral Agent
By:
----------------------------
Name:
Title:
36
<PAGE> 37
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
I, ______________________, a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that _________________________,
_______________ of [NAME OF COMPANY], personally known to me to be the same
person whose name is subscribed to the foregoing instrument as such
_________________, appeared before me this day in person and acknowledged that
(s)he signed, executed and delivered the said instrument as her/his own free and
voluntary act and as the free and voluntary act of said Company, for the uses
and purposes therein set forth being duly authorized so to do.
GIVEN under my hand and Notarial Seal this ___ day of _______________,
19__.
[Seal]
- ------------------------------------
Signature of notary public
My Commission expires
--------------
37
<PAGE> 38
SCHEDULE 1
TO TRADEMARK
SECURITY AGREEMENT
U.S. TRADEMARKS AND TRADEMARK REGISTRATIONS
A. U.S. Trademarks and Trademark Registrations
Reg. No. Reg. Date Mark
B. U.S. Trademark Applications
Serial No. Date Filed Mark
TRADEMARK LICENSES
Name of Parties Date of
Agreement Licensor/Licensee Agreement
--------- ----------------- ---------
38
<PAGE> 39
EXHIBIT D TO
SECURITY AGREEMENT
COPYRIGHT SECURITY AGREEMENT
(COPYRIGHTS, COPYRIGHT REGISTRATIONS, COPYRIGHT
APPLICATIONS AND COPYRIGHT LICENSES)
WHEREAS, _______________, a [Delaware] corporation (herein referred to as
"GRANTOR") owns the Copyrights (as defined in the Security Agreement referred to
below) listed on Schedule 1 annexed hereto, and is a party to the Copyright
Licenses (as defined in the Security Agreement referred to below) identified in
Schedule 1 annexed hereto;
WHEREAS, Grantor, the Subsidiary Guarantors party thereto and [Med
Funding, Inc.] are parties to a Note Purchase Agreement of even date herewith
(as the same may be amended and in effect from time to time among said parties,
the "NOTE PURCHASE AGREEMENT");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"SECURITY AGREEMENT") among Grantor, [Med Funding, Inc.], as collateral agent
for the secured parties referred to therein (in such capacity, together with its
successors in such capacity, the "GRANTEE") and certain other parties, Grantor
has granted to Grantee for the benefit of such secured parties a security
interest in substantially all the assets of the Grantor, including all right,
title and interest of Grantor in, to and under the Copyright Collateral (as
defined herein), whether now owned or existing or hereafter acquired or arising,
to secure the Secured Obligations (as defined in the Security Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor hereby grants to Grantee,
for the benefit of the Secured Parties (as defined in the Security Agreement), a
continuing security interest in and to all of Grantor's right, title and
interest in and to all of the following property, whether now owned or existing
or hereafter acquired or arising and regardless of where located (all being
collectively referred to as the "COPYRIGHT COLLATERAL"):
(i) each Copyright (as defined in the Security Agreement),
including, without limitation, each Copyright registration and
application referred to in Schedule 1 annexed hereto;
39
<PAGE> 40
(ii) each Copyright License (as defined in the Security
Agreement), including, without limitation, each Copyright License
identified in Schedule 1 annexed hereto; and
(iii) all proceeds of and revenues from the foregoing, including,
without limitation, all proceeds of and revenues from any claim by
Grantor against third parties for past, present or future infringement of
any Copyright, including, without limitation, any Copyright referred to
in Schedule 1 annexed hereto, and all rights and benefits of Grantor
under any Copyright License, including, without limitation, any Copyright
License identified in Schedule 1 annexed hereto.
Grantor hereby irrevocably constitutes and appoints Grantee and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full power and authority in the name of Grantor or
in its name, from time to time, in Grantee's discretion, so long as any Event of
Default (as defined in the Note Purchase Agreement) has occurred and is
continuing, to take with respect to the Copyright Collateral any and all
appropriate action which Grantor might take with respect to the Copyright
Collateral and to execute any and all documents and instruments which may be
necessary or desirable to carry out the terms of this Copyright Security
Agreement and to accomplish the purposes hereof.
This security interest is granted in conjunction with the security
interests granted to Grantee pursuant to the Security Agreement. Grantor does
hereby further acknowledge and affirm that the rights and remedies of Grantee
with respect to the security interest in the Copyright Collateral made and
granted hereby are more fully set forth in the Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
40
<PAGE> 41
IN WITNESS WHEREOF, Grantor has caused this Copyright Security Agreement
to be duly executed by its officer thereunto duly authorized as of the ____ day
of _______, 19__.
[COMPANY]
By:
-------------------------
Name:
Title:
Acknowledged:
[Med Funding, Inc]., as Collateral Agent
By:
---------------------------
Name:
Title:
41
<PAGE> 42
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
I, ______________________, a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that _________________________,
_______________ of [NAME OF COMPANY], personally known to me to be the same
person whose name is subscribed to the foregoing instrument as such
_________________, appeared before me this day in person and acknowledged that
(s)he signed, executed and delivered the said instrument as her/his own free and
voluntary act and as the free and voluntary act of said Company, for the uses
and purposes therein set forth being duly authorized so to do.
GIVEN under my hand and Notarial Seal this ___ day of _______________,
19__.
[Seal]
- ------------------------------------
Signature of notary public
My Commission expires
--------------
42
<PAGE> 43
SCHEDULE 1
TO COPYRIGHT
SECURITY AGREEMENT
COPYRIGHT REGISTRATIONS
Registration No. Reg. Date Title
COPYRIGHT APPLICATIONS
Serial No. Date Filed Title
43
<PAGE> 44
EXHIBIT E TO
SECURITY AGREEMENT
PLEDGED DEPOSIT AGREEMENT
AGREEMENT dated as of ___________, 19__ among __________________________
(the "BANK"), ____________________________________, a _____________ corporation
(the "DEPOSITOR"), and [MED FUNDING, INC.,] as Collateral Agent (with its
successors in such capacity, the "COLLATERAL AGENT") under the Security
Agreement referenced below.
WHEREAS, Medaphis Corporation, the Subsidiary Guarantors party thereto
and [Med Funding, Inc.] are parties to a Note Purchase Agreement, dated as of
December __, 1997, as the same may be hereafter amended, restated or
supplemented (the "NOTE PURCHASE AGREEMENT");
WHEREAS, the Depositor [, a Subsidiary Guarantor under the Note Purchase
Agreement,] has established with the Bank a bank account number ________________
(the "ACCOUNT") into which it is contemplated that the Depositor from time to
time may deposit payments or other remittances now or hereafter received by the
Depositor on some or all of its accounts, contract rights, chattel paper,
instruments, drafts, general intangibles or other collateral in which the
Depositor has granted to the Collateral Agent a security interest pursuant to a
Security Agreement dated as of December ___, 1997 (as amended, the "SECURITY
AGREEMENT");
WHEREAS, pursuant to the Security Agreement, the Depositor has granted to
the Collateral Agent a security interest in the Account and all funds on deposit
therein; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth their relative rights and duties with respect to the Account and all
amounts on deposit therein from time to time.
NOW, THEREFORE, the parties hereby agree as follows:
1. The Depositor and the Bank hereby confirm to the Collateral Agent that
the Account has been established by the Depositor with the Bank, and the
Depositor hereby irrevocably authorizes, instructs and directs the Bank, from
and after the Bank's receipt of written notice from the Collateral Agent that an
"Event of Default" has occurred and is continuing under (and as such term is
defined in) the Note Purchase Agreement (any such notice being hereinafter
called a "DEFAULT NOTICE"), to honor only the instructions and directions of the
Collateral Agent with respect to any distributions, transfers or
44
<PAGE> 45
withdrawals of funds from or the investment of funds in the Account. Prior to
the Bank's receipt of any Default Notice, the Bank shall honor the Depositor's
instructions and directions with respect to the distribution,
2. The Bank hereby agrees that, except to the extent expressly provided
in Section 4 below, it will not exercise or claim any right of offset against,
security interest in or banker's lien on the Account or any funds on deposit
therein, and the Bank hereby further waivers and releases any such right,
interest or lien which it may have against any of the funds deposited in the
Account from and after its receipt of any Default Notice, except to the extent
expressly set forth in Section 4 below.
3. The Depositor hereby acknowledges that it has granted to the
Collateral Agent a present and continuing security interest in the Account and
all funds on deposit therein from time to time to the Collateral Agent as
collateral security for the Secured Obligations (as defined in the Security
Agreement), and the Depositor hereby authorizes and directs the Bank to hold the
Account and all funds on deposit therein from time to time as bailee for the
Collateral Agent, and the Bank hereby agrees to act as such bailee for the
Collateral Agent.
4. From and after the Bank's receipt of any Default Notice, the
Collateral Agent shall have the sole right to direct that any distributions,
transfers or withdrawals be made from the Account, and the Depositor shall not
have any right thereafter to transfer or withdraw any sums from the Account,
whether by check, draft, wire transfer or otherwise. If any checks, drafts or
other items deposited in the Account are returned unpaid or otherwise dishonored
after the Bank's receipt of the Default Notice, the Bank shall have the right to
charge any and all such returned or dishonored items against the Account, as
well as charging the Account for the Bank's customary fees and charges for
administering or otherwise handling the Account, or to demand reimbursement
therefor from the Depositor directly. If the balance of collected funds in the
Account is insufficient for such purpose at any time after the Bank's receipt of
a Default Notice, the Bank will immediately notify the Depositor and the
Collateral Agent of such fact and the Collateral Agent will reimburse the Bank
for any loss it may suffer if such items cannot be collected but (A) only if the
proceeds of such items have been previously transferred to the Collateral Agent
pursuant to this Agreement and (B) only to the extent the Bank is not reimbursed
therefor by the Depositor after demand by the Bank.
5. This Agreement may be terminated by the Depositor but only with the
express prior written consent of the Collateral Agent, and in that case the
Collateral Agent and the Depositor shall jointly notify the Bank of such
termination. This Agreement may be terminated by the Collateral Agent at any
time upon its delivery of written notice thereof to each of the Depositor and
the Bank. This Agreement may be terminated by the Bank at any time on not less
than fifteen (15) day's prior written notice of such intention delivered by it
to each of the Depositor and the Collateral Agent. The Bank's reimbursement and
indemnity rights against the Depositor and the Collateral Agent under
45
<PAGE> 46
Section 4 above and Section 7 below shall survive any termination of this
Agreement. Upon any termination of this Agreement, all funds in the Account
shall be forwarded by the Bank directly to the Depositor unless the Bank has
received a Default Notice on or before such termination in which case such funds
shall be forwarded by the Bank directly to the Collateral Agent.
6. The Bank shall be entitled to rely conclusively upon any Default
Notice it receives from the Collateral Agent and the Bank shall have no
obligation to investigate or verify the genuineness or correctness of any such
Default Notice. The Bank shall have no liability to Depositor for the Bank's
honoring of any instructions or directions regarding the Account which the Bank
receives from Collateral Agent from or after the Bank's receipt of a Default
Notice and the Bank shall be fully discharged from liability with respect to any
funds on deposit in the Account to the extent it honors such instructions and
transfers same to or at the direction of the Collateral Agent.
7. The Collateral Agent hereby agrees to indemnify the Bank and hold it
harmless against any loss, damage or expense it may suffer (including attorney's
fees, court costs and other litigation expenses) as a result of the Bank's
entering into this Agreement, honoring any instructions or directions it
receives from the Collateral Agent with respect to the Account after the Bank's
receipt of any Default Notice or not honoring any instructions it receives from
the Depositor with respect to the Account after the Bank's receipt of any
Default Notice, except to the extent such loss, damage or expense is the result
of the Bank's own gross negligence or wilful misconduct.
8. All notices or other communications required or provided under this
Agreement shall be in writing and shall be sent to each party at its respective
address set forth beneath its signature below (or at such other address as such
party may designate in writing to the other parties). Such notices or
communications shall be effective on the date received if received prior to
12:00 Noon (Atlanta time) on any business day of the Bank (or, if after 12:00
Noon or if on a non-business day, such notice or communication shall be
effective on the immediately succeeding business day of the Bank).
9. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, but neither the
Depositor nor the Bank shall be entitled to assign or delegate any of its rights
or duties hereunder without first obtaining the express prior written consent of
the Collateral Agent.
10. This Agreement shall be governed by the laws of the State of New York
(without giving effect to its conflicts of law rules).
11. This Agreement may be executed in any number of several counterparts.
46
<PAGE> 47
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Agreement as of the day and year first above set forth.
BANK:
----------------------------------------
By:
----------------------------------
Name:
Title:
Address:
DEPOSITOR
By:
----------------------------------
Name:
Title:
Address:
COLLATERAL AGENT:
[MED FUNDING, INC.]
By:
----------------------------------
Name:
Title:
47
<PAGE> 48
EXHIBIT F TO
SECURITY AGREEMENT
[WACHOVIA] ADDENDUM
TO SECURITY AGREEMENT AND PLEDGE AGREEMENT
ADDENDUM dated as of _______________ ____, 199__ to the Security
Agreement dated as of December ___, 1997 (as amended from time to time, the
"SECURITY AGREEMENT") among Medaphis Corporation (the "COMPANY"), the other
Grantors thereunder and [Med Funding, Inc.,] as Collateral Agent (together with
its successors in such capacity, the "COLLATERAL AGENT") and to the Pledge
Agreement dated as of December ___, 1997 (as amended from time to time, the
"PLEDGE AGREEMENT") among the Company, the other Grantors thereunder and the
Collateral Agent. Capitalized terms used but not defined herein are used herein
as defined in the Security Agreement.
1. [Wachovia Bank, N.A.] (["WACHOVIA"]) and certain of its affiliates
provide cash management services for the Company and its subsidiaries, and each
Grantor has agreed to grant a continuing security interest in and to all of its
right, title and interest in and to the Collateral under the Security Agreement
and Pledge Agreement to secure its Cash Management Services Obligations, subject
to the limitations contained in the Security Agreement and Pledge Agreement.
2. [Wachovia] acknowledges and agrees that from and after the date when
the Collateral Agent shall receive this Addendum, duly executed by [Wachovia],
(i) the Cash Management Obligations will become Secured Obligations under the
Security Agreement and Pledge Agreement, subject to the limitations contained
therein, and (ii) [Wachovia] shall become a Secured Party thereunder, and shall
thereupon become entitled to the benefits, and be bound by the obligations,
under the Agreement and Pledge Agreement as a Secured Party, including without
limitation Section 10 of the Security Agreement.
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<PAGE> 49
IN WITNESS WHEREOF, the undersigned has caused this Addendum to be duly
executed by its duly authorized officer as of the date first above written.
[WACHOVIA BANK, N.A.]
By:
-------------------------------------
Name:
Title:
Address:
Accepted and Acknowledged:
[MED FUNDING, INC.]
By:
------------------------------------
Name:
Title:
49
<PAGE> 1
EXHIBIT 10.3
PLEDGE AGREEMENT
AGREEMENT dated as of December 23, 1997 among MEDAPHIS CORPORATION (with
its successors, the "COMPANY"), each SUBSIDIARY GUARANTOR party hereto or which
hereafter becomes a party hereto (with its successors, a "GRANTOR" and together
with the Company, collectively, the "GRANTORS"), [MED FUNDING, INC.] (with its
successors, "PURCHASER") on behalf of itself and as Collateral Agent (with its
successors in such capacity, the "COLLATERAL AGENT") for the Secured Parties
referred to below and, if it shall become a party hereto pursuant to Section 24,
[WACHOVIA BANK, N.A.] (with its successors, ["WACHOVIA"]).
W I T N E S S E T H :
WHEREAS, the Company, the Subsidiary Guarantors and Purchaser are parties
to a Note Purchase Agreement of even date herewith (as the same may be amended
from time to time, the "NOTE PURCHASE AGREEMENT"); and
WHEREAS, in order to induce Purchaser to enter into the Note Purchase
Agreement and to purchase the Notes issued pursuant to the Note Purchase
Agreement, each of the Subsidiary Guarantors has guaranteed, pursuant to the
Note Purchase Agreement and subject to the limitations contained therein, all of
the obligations of the Company under the Notes and the other Financing Documents
(as defined in the Note Purchase Agreement); and
WHEREAS, in order to induce Purchaser to enter into the Note Purchase
Agreement and to purchase the Notes issued pursuant to the Note Purchase
Agreement, each Grantor has agreed to grant a continuing security interest in
and to all of its right, title and interest in and to the Collateral (as
hereafter defined) to secure its obligations under the Financing Documents;
WHEREAS, [Wachovia] and its affiliates provide cash management services
for the Company and its Subsidiaries, and each Grantor has agreed to grant a
continuing security interest in and to all of its right, title and interest in
and to the Collateral to secure its Cash Management Services Obligations (as
defined in the Note Purchase Agreement), subject to the limitations contained
herein, if [Wachovia[ executes and delivers to the Collateral Agent a [Wachovia]
Addendum (as defined herein);
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Terms defined in the Note Purchase Agreement and
not otherwise defined herein have, as used herein, the respective meanings
provided for therein. The following additional terms, as used herein, have the
following respective meanings:
"COLLATERAL" has the meaning assigned to such term in Section 3(a).
"PLEDGED INSTRUMENTS" means (i) all notes described on Schedule 2 hereto
and (ii) any notes or other instruments required to be pledged to the Collateral
Agent pursuant to Section 3(b).
"PLEDGED SECURITIES" means the Pledged Instruments and the Pledged Stock.
"PLEDGED STOCK" means (i) all of the shares of the capital stock
described on Schedule 1 attached hereto and (ii) any other shares of capital
stock required to be pledged to the Collateral Agent pursuant to Section 3(b).
"SECURED OBLIGATIONS" means the obligations secured under this Agreement
which include (a) all obligations in respect of principal of and interest
(including, without limitation, any interest which accrues after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Company or any Subsidiary Guarantor) on any
Note issued pursuant to the Note Purchase Agreement, (b) all other amounts
payable under the Note Purchase Agreement or any other Financing Documents, (c)
only if [Wachovia] shall become a party hereto pursuant to Section 24, all Cash
Management Services Obligations, limited, however, as to this clause (c) to a
maximum aggregate amount of $3,000,000 and excluding from this clause (c) any
amounts arising from any failure of [Wachovia] and/or any of its affiliates to
comply in any material respect with the Guide to the Federal Reserve's Payments
System Risk Policy as in effect from time to time and (d) any amendments,
restatements, renewals, extensions or modifications of any of the foregoing.
"SECURED PARTIES" means (i) Purchaser, all other Holders and the
Collateral Agent and (ii) only if it shall become a party hereto pursuant to
Section 24, [Wachovia].
"SECURITY INTERESTS" means the security interests in the Collateral
granted hereunder securing the Secured Obligations.
["WACHOVIA"] means [Wachovia Bank, N.A.] and its successors.
2
<PAGE> 3
"[WACHOVIA] ADDENDUM" an addendum to this Agreement duly executed by
[Wachovia] and the Collateral Agent, substantially in the form of Exhibit F to
the Security Agreement dated as of the date hereof among the Company, the
Grantors thereunder and the Collateral Agent, as amended.
Unless otherwise defined herein, or unless the context otherwise
requires, all terms used herein which are defined in the New York Uniform
Commercial Code as in effect on the date hereof shall have the meanings therein
stated.
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Grantors, jointly and
severally, represent and warrant as follows:
(a) Title to Pledged Securities. Each Grantor owns all of the
Pledged Securities pledged by it hereunder, free and clear of any Liens
other Permitted Liens. All of the Pledged Stock has been duly authorized
and validly issued, and is fully paid and non-assessable, and is subject
to no options to purchase or similar rights of any Person. Each Grantor
is not and will not become a party to or otherwise bound by any
agreement, other than this Agreement, which restricts in any manner the
rights of any present or future holder of any of the Pledged Securities
with respect thereto.
(b) Validity, Perfection and Priority of Security Interests. Upon
the delivery of the Pledged Instruments and certificates representing the
Pledged Stock to the Collateral Agent in accordance with Section 4
hereof, the Collateral Agent will have valid and perfected security
interests in the Collateral subject to no prior Lien. No registration,
recordation or filing with any governmental body, agency or official is
required in connection with the execution or delivery of this Agreement
or necessary for the validity or enforceability hereof or for the
perfection or enforcement of the Security Interests. No Grantor has
performed or will perform any acts which might prevent the Collateral
Agent from enforcing any of the terms and conditions of this Agreement or
which would limit the Collateral Agent in any such enforcement.
(c) UCC Filing Locations. The chief executive office of each
Grantor is located at its address set forth on the signature pages of the
Note Purchase Agreement. Under the Uniform Commercial Code as in effect
in the State in which such office is located, a local filing is required
to perfect a security interest in collateral consisting of general
intangibles.
SECTION 3. THE SECURITY INTERESTS. In order to secure the full and
punctual payment of the Secured Obligations in accordance with the terms
thereof, and to secure the performance of all the obligations of each Grantor
hereunder:
3
<PAGE> 4
(a) Each Grantor hereby assigns and pledges to and with the
Collateral Agent, for the benefit of the Secured Parties, and grants to
the Collateral Agent, for the benefit of the Secured Parties, security
interests in the Pledged Securities, and all of its rights and privileges
with respect to the Pledged Securities, and all income and profits
thereon, and all interest, dividends and other payments and distributions
with respect thereto, and all proceeds of the foregoing (the
"COLLATERAL"). Contemporaneously with the execution and delivery hereof,
each Grantor is delivering to the Collateral Agent the Pledged Notes and
certificates representing the Pledged Stock in pledge by it hereunder.
(b) If any issuer of Pledged Securities at any time issues any
additional or substitute shares of capital stock of any class or any
substitute note, or owes any other Debt to any Grantor, such Grantor will
immediately pledge and deposit with the Collateral Agent, for the benefit
of the Secured Parties, certificates representing all such shares and
such note or an instrument evidencing such other Debt as additional
security for the Secured Obligations. All such shares, notes and
instruments constitute Pledged Securities and are subject to all
provisions of this Agreement.
(c) The Security Interests are granted as security only and shall
not subject the Collateral Agent or any other Secured Party to, or
transfer or in any way affect or modify, any obligation or liability of
any Grantor with respect to any of the Collateral or any transaction in
connection therewith.
SECTION 4. DELIVERY OF PLEDGED SECURITIES. All Pledged Instruments shall
be delivered to the Collateral Agent by each Grantor pursuant hereto endorsed to
the order of the Collateral Agent, for the benefit of the Secured Parties, and
accompanied by any required transfer tax stamps, all in form and substance
satisfactory to the Collateral Agent. All certificates representing Pledged
Stock delivered to the Collateral Agent by each Grantor pursuant hereto shall be
in suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, and accompanied by any
required transfer tax stamps, all in form and substance satisfactory to the
Collateral Agent.
SECTION 5. FURTHER ASSURANCES. (a) Each Grantor agrees that it will, at
its expense and in such manner and form as the Collateral Agent may reasonably
require, execute, deliver, file and record any financing statement, specific
assignment or other paper and take any other action that may be necessary or
desirable, or that the Collateral Agent may reasonably request, in order to
create, preserve, perfect or validate any Security Interest or to enable the
Collateral Agent to exercise and enforce its rights hereunder with respect to
any of the Collateral. To the extent permitted by applicable law, each Grantor
hereby authorizes the Collateral Agent to execute and file, in the name of such
Grantor or otherwise, Uniform Commercial Code financing statements (which may
4
<PAGE> 5
be carbon, photographic, photostatic or other reproductions of this Agreement or
of a financing statement relating to this Agreement) which the Collateral Agent
in its sole discretion may deem necessary or appropriate to further perfect the
Security Interests.
(b) Each Grantor agrees that it will not change (i) its name, identity or
corporate structure in any manner or (ii) the location of its chief executive
office unless it shall have given the Collateral Agent not less than 10 Business
Days' prior notice thereof.
SECTION 6. RECORD OWNERSHIP OF PLEDGED STOCK. If an Event of Default
shall have occurred and be continuing, the Collateral Agent may at any time or
from time to time, in its sole discretion, cause any or all of the Pledged Stock
to be transferred of record into the name of the Collateral Agent or its
nominee. Each Grantor will promptly give to the Collateral Agent copies of any
notices or other communications received by it with respect to Pledged Stock
registered in the name of such Grantor and the Collateral Agent will promptly
give to such Grantor copies of any notices and communications received by the
Collateral Agent with respect to Pledged Stock registered in the name of the
Collateral Agent or its nominee.
SECTION 7. RIGHT TO RECEIVE DISTRIBUTIONS ON COLLATERAL. The Collateral
Agent, for the benefit of the Secured Parties, shall have the right to receive
and, during the continuance of any Event of Default, to retain as Collateral
hereunder all dividends, interest and other payments and distributions made upon
or with respect to the Collateral and each Grantor shall take all such action as
the Collateral Agent may deem necessary or appropriate to give effect to such
right. All such dividends, interest and other payments and distributions which
are received by any Grantor shall be received in trust for the benefit of the
Secured Parties and, if the Collateral Agent so directs during the continuance
of an Event of Default, shall be segregated from other funds of such Grantor and
shall, forthwith upon demand by the Collateral Agent during the continuance of
an Event of Default, be paid over to the Collateral Agent as Collateral in the
same form as received (with any necessary endorsement). After all Defaults have
been cured, the Collateral Agent's right to retain dividends, interest and other
payments and distributions under this Section 7 shall cease and the Collateral
Agent shall pay over to each Grantor any such Collateral retained by it during
the continuance of a Default.
SECTION 8. RIGHT TO VOTE PLEDGED STOCK. Unless an Event of Default shall
have occurred and be continuing, each Grantor shall have the right, from time to
time, to vote and to give consents, ratifications and waivers with respect to
the Pledged Stock, and the Collateral Agent shall, upon receiving a written
request from any Grantor accompanied by a certificate signed by its principal
financial officer stating that no Event of Default has occurred and is
continuing, deliver to such Grantor or as specified in such request such
proxies, powers of attorney, consents, ratifications and waivers in respect of
any of the Pledged Stock which is registered in the name of the Collateral Agent
or its nominee as
5
<PAGE> 6
shall be specified in such request and be in form and substance satisfactory to
the Collateral Agent.
If an Event of Default shall have occurred and be continuing, the
Collateral Agent shall have the right to the extent permitted by law and each
Grantor shall take all such action as may be necessary or appropriate to give
effect to such right, to vote and to give consents, ratifications and waivers,
and take any other action with respect to any or all of the Pledged Stock with
the same force and effect as if the Collateral Agent were the absolute and sole
owner thereof.
SECTION 9. GENERAL AUTHORITY. Each Grantor hereby irrevocably appoints
the Collateral Agent its true and lawful attorney, with full power of
substitution, in the name of such Grantor, the Collateral Agent or otherwise,
for the sole use and benefit of the Collateral Agent and the other Secured
Parties, but at the Company's expense, to the extent permitted by law to
exercise, at any time and from time to time while an Event of Default has
occurred and is continuing, all or any of the following powers with respect to
all or any of the Collateral:
(a) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due upon or by virtue thereof,
(b) to settle, compromise, compound, prosecute or defend any
action or proceeding with respect thereto,
(c) to sell, transfer, assign or otherwise deal in or with the
same or the proceeds or avails thereof, as fully and effectually as if
the Collateral Agent were the absolute owner thereof, and
(d) to extend the time of payment of any or all thereof and to
make any allowance and other adjustments with reference thereto;
provided that the Collateral Agent shall give a Grantor not less than ten days'
prior notice of the time and place of any sale or other intended disposition of
any of the Collateral granted by such Grantor, except any Collateral which is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market. The Collateral Agent and each Grantor agree that
such notice constitutes "reasonable notification" within the meaning of Section
9-504(3) of the Uniform Commercial Code.
SECTION 10. REMEDIES UPON EVENT OF DEFAULT. If any Event of Default shall
have occurred and be continuing, the Collateral Agent may exercise on behalf of
the Secured Parties all the rights of a secured party under the Uniform
Commercial Code (whether or not in effect in the jurisdiction where such rights
are exercised) and, in addition, the Collateral Agent may, without being
required to give any notice, except as
6
<PAGE> 7
herein provided or as may be required by mandatory provisions of law, (i) apply
the cash, if any, then held by it as Collateral as specified in Section 13 and
(ii) if there shall be no such cash or if such cash shall be insufficient to pay
all the Secured Obligations in full, sell the Collateral or any part thereof at
public or private sale or at any broker's board or on any securities exchange,
for cash, upon credit or for future delivery, and at such price or prices as the
Collateral Agent may deem satisfactory. The Collateral Agent may be the
purchaser of any or all of the Collateral so sold at any public sale (or, if the
Collateral is of a type customarily sold in a recognized market or is of a type
which is the subject of widely distributed standard price quotations, at any
private sale). The Collateral Agent is authorized, in connection with any such
sale, if it deems it advisable so to do, (A) to restrict the prospective bidders
on or purchasers of any of the Pledged Securities to a limited number of
sophisticated investors who will represent and agree that they are purchasing
for their own account for investment and not with a view to the distribution or
sale of any of such Pledged Securities, (B) to cause to be placed on
certificates for any or all of the Pledged Securities or on any other securities
pledged hereunder a legend to the effect that such security has not been
registered under the Securities Act of 1933 and may not be disposed of in
violation of the provision of said Act, and (C) to impose such other limitations
or conditions in connection with any such sale as the Collateral Agent deems
necessary or advisable in order to comply with said Act or any other law. Each
Grantor will execute and deliver such documents and take such other action as
the Collateral Agent deems necessary or advisable in order that any such sale
may be made in compliance with law. Upon any such sale the Collateral Agent
shall have the right to deliver, assign and transfer to the purchaser thereof
the Collateral so sold. Each purchaser at any such sale shall hold the
Collateral so sold absolutely and free from any claim or right of whatsoever
kind, including any equity or right of redemption of any Grantor which may be
waived, and each Grantor, to the extent permitted by law, hereby specifically
waives all rights of redemption, stay or appraisal which it has or may have
under any law now existing or hereafter adopted. The notice (if any) of such
sale required by Section 9 shall (1) in the case of a public sale, state the
time and place fixed for such sale, (2) in the case of a sale at a broker's
board or on a securities exchange, state the board or exchange at which such
sale is to be made and the day on which the Collateral, or the portion thereof
so being sold, will first be offered for sale at such board or exchange, and (3)
in the case of a private sale, state the day after which such sale may be
consummated. Any such public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Collateral Agent may
fix in the notice of such sale. At any such sale the Collateral may be sold in
one lot as an entirety or in separate parcels, as the Collateral Agent may
determine. The Collateral Agent shall not be obligated to make any such sale
pursuant to any such notice. The Collateral Agent may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In the case of any sale of all or any part of the Collateral on
credit or for future delivery, the Collateral so sold may be retained by the
Collateral Agent until the selling price is paid by
7
<PAGE> 8
the purchaser thereof, but the Collateral Agent shall not incur any liability in
the case of the failure of such purchaser to take up and pay for the Collateral
so sold and, in the case of any such failure, such Collateral may again be sold
upon like notice. The Collateral Agent, instead of exercising the power of sale
herein conferred upon it, may proceed by a suit or suits at law or in equity to
foreclose the Security Interests and sell the Collateral, or any portion
thereof, under a judgment or decree of a court or courts of competent
jurisdiction.
SECTION 11. EXPENSES. The Company agrees that it will forthwith upon
demand pay to each Secured Party:
(a) the amount of any taxes which the Collateral Agent or any
other Secured Party may have been required to pay by reason of the
Security Interests or to free any of the Collateral from any Lien
thereon, and
(b) the amount of any and all out-of-pocket expenses, including
the fees and disbursements of counsel and of any other experts, which the
Collateral Agent or any other Secured Party may incur in connection with
(i) the administration or enforcement of this Agreement, including such
expenses as are incurred to preserve the value of the Collateral and the
validity, perfection, rank and value of any Security Interest, (ii) the
collection, sale or other disposition of any of the Collateral, (iii) the
exercise by the Collateral Agent or any other Secured Party of any of the
rights conferred upon it hereunder or (iv) any Default or Event of
Default.
Any such amount not paid on demand shall, together with interest thereon until
paid at an annual rate equal to 3% plus the rate announced from time to time by
The Bank of New York as its prime rate, be Secured Obligations hereunder.
SECTION 12. LIMITATION ON DUTY OF COLLATERAL AGENT IN RESPECT OF
COLLATERAL. Beyond the exercise of reasonable care in the custody thereof, the
Collateral Agent shall have no duty as to any Collateral in its possession or
control or in the possession or control of any agent or bailee or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto. The Collateral Agent shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if the Collateral is accorded treatment substantially equal to
that which it accords its own property, and shall not be liable or responsible
for any loss or damage to any of the Collateral, or for any diminution in the
value thereof, by reason of the act or omission of any agent or bailee selected
by the Collateral Agent in good faith.
SECTION 13. APPLICATION OF PROCEEDS. Upon the occurrence and during the
continuance of an Event of Default, the proceeds of any sale of, or other
realization upon, all or any part of any Grantor's Collateral and any cash held
in any Pledged Account (as
8
<PAGE> 9
defined in the Security Agreement) shall be applied by the Collateral Agent in
the following order of priorities:
FIRST, to payment of the expenses of such sale or other
realization, including reasonable compensation to agents and counsel for
the Collateral Agent, and all expenses, liabilities and advances incurred
or made by the Collateral Agent in connection therewith, and any other
unreimbursed expenses for which the Collateral Agent is to be reimbursed
pursuant to Section 10.04 of the Note Purchase Agreement or Section 11
hereof and unpaid fees owing to the Collateral Agent under the Note
Purchase Agreement;
SECOND, to the ratable payment of all other Secured Obligations,
until all Secured Obligations shall have been paid in full; and
FINALLY, to payment to such Grantor or its successors or assigns,
or as a court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds.
The Collateral Agent may make distributions hereunder in cash or in kind or, on
a ratable basis, in any combination thereof.
SECTION 14. CONCERNING THE COLLATERAL AGENT. The provisions of Section 10
of the Security Agreement shall inure to the benefit of the Collateral Agent in
respect of this Agreement and shall be binding upon the parties hereto and any
other Secured Parties in such respect. In furtherance and not in derogation of
the rights, privileges and immunities of the Collateral Agent therein set forth:
(a) The Collateral Agent is authorized to take all such action as
is provided to be taken by it as Collateral Agent hereunder and all other
action reasonably incidental thereto. As to any matters not expressly
provided for herein (including, without limitation, the timing and
methods of realization upon the Collateral) the Collateral Agent shall
act or refrain from acting in accordance with its discretion.
(b) The Collateral Agent shall not be responsible for the
existence, genuineness or value of any of the Collateral or for the
validity, perfection, priority or enforceability of the Security
Interests in any of the Collateral, whether impaired by operation of law
or by reason of any action or omission to act on its part hereunder. The
Collateral Agent shall have no duty to ascertain or inquire as to the
performance or observance of any of the terms of this Agreement by any
Grantor.
9
<PAGE> 10
SECTION 15. APPOINTMENT OF CO-AGENTS. At any time or times, in order to
comply with any legal requirement in any jurisdiction, the Collateral Agent may
appoint a bank or trust company or one or more other persons, either to act as
co-agent or co-agents, jointly with the Collateral Agent, or to act as separate
agent or agents on behalf of the Collateral Agent with such power and authority
as may be necessary for the effectual operation of the provisions hereof and may
be specified in the instrument of appointment (which may, in the discretion of
the Collateral Agent, include provisions for the protection of such co-agent or
separate agent similar to the provisions of Section 14).
SECTION 16. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL.
Upon the repayment in full of all Secured Obligations and the termination of the
Commitment under the Note Purchase Agreement, the Security Interests shall
terminate and all rights to the Collateral shall revert to each Grantor. Nothing
in this Agreement shall prohibit a merger or consolidation otherwise permitted
by Section 6.15(a) of the Note Purchase Agreement. If a merger or consolidation
permitted thereby shall be consummated in which the issuer of any Pledged Stock
is the not the surviving entity, and if at such time and after giving effect to
such event no Default shall have occurred and be continuing, the Security
Interests in such Pledged Stock shall terminate and the Collateral Agent shall
return such Pledged Stock to the Grantor thereof. At any time and from time to
time prior to such termination of the Security Interests, the Collateral Agent
may release any of the Collateral only with the prior written consent of the
Majority Holders. Upon any such termination of the Security Interests or release
of Collateral, the Collateral Agent will, at the expense of the Company,
execute, deliver and return to the Grantors such documents and instruments
(including certificates representing Pledged Securities and any stock powers or
other instruments of transfer) as the Grantors shall reasonably request to
evidence the termination of the Security Interests or the release of such
Collateral, as the case may be.
SECTION 17. NOTICES. All notices hereunder shall be given in accordance
with Section 10.01 of the Note Purchase Agreement. In the case of [Wachovia],
its address shall be as set forth on the [Wachovia] Addendum, or such other
address as [Wachovia] may hereafter specify to the Company and the Collateral
Agent for such purpose.
SECTION 18. WAIVERS, NON-EXCLUSIVE REMEDIES. No failure on the part of
the Collateral Agent or any other Secured Party to exercise, and no delay in
exercising and no course of dealing with respect to, any right under this
Agreement shall operate as a waiver thereof; nor shall any single or partial
exercise by the Collateral Agent or any other Secured Party of any right under
the Note Purchase Agreement or any other Financing Document preclude any other
or further exercise thereof or the exercise of any other right. The rights in
this Agreement and the other Financing Documents are cumulative and are not
exclusive of any other remedies provided by law.
10
<PAGE> 11
SECTION 19. SUCCESSORS AND ASSIGNS. This Agreement is for the benefit of
the Secured Parties and their successors and assigns, and in the event of an
assignment of all or any of the Secured Obligations, the rights hereunder, to
the extent applicable to the indebtedness so assigned, may be transferred with
such indebtedness. This Agreement shall be binding on each Grantor and its
successors and assigns.
SECTION 20. CHANGES IN WRITING. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only in
writing signed by each Grantor affected thereby and the Collateral Agent.
SECTION 21. NEW YORK LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York, except as otherwise
required by mandatory provisions of law and except to the extent that remedies
provided by the laws of any jurisdiction other than New York are governed by the
laws of such jurisdiction.
SECTION 22. SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Secured Parties in
order to carry out the intentions of the parties hereto as nearly as may be
possible; and (ii) the invalidity or unenforceability of any provision hereof in
any jurisdiction shall not affect the validity or enforceability of such
provision in any other jurisdiction.
SECTION 23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 24. [WACHOVIA] ADDENDUM. From and after the date when the
Collateral Agent shall receive a duly executed [Wachovia] Addendum, (i) the Cash
Management Obligations will become Secured Obligations hereunder, subject to the
limitations contained herein, and (ii) [Wachovia] shall become a Secured Party
hereunder, and shall thereupon become entitled to the benefits, and be bound by
the obligations, under this Agreement as a Secured Party, including without
limitation Section 10 of the Security Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
MEDAPHIS CORPORATION
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
SUBSIDIARY GUARANTORS
ASSETCARE, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
AUTOMATION ATWORK
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG ALLIANCE/IT, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
12
<PAGE> 13
] BSG CORPORATION
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
BSG GOVERNMENT SOLUTIONS, INC.
(FORMERLY KNOWN AS RAPID SYSTEMS
SOLUTIONS, INC.)
By: /s/ Randolph L. M. Hutto
-------------------------
Name: Randolph L. M. Hutto
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
CONSORT TECHNOLOGIES, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
GOTTLIEB'S FINANCIAL SERVICES, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
13
<PAGE> 14
HEALTH DATA SCIENCES CORPORATION
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS HEALTHCARE INFORMATION
TECHNOLOGY COMPANY (F/K/A MEDAPHIS
SYSTEMS CORPORATION)
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS PHYSICIAN SERVICES
CORPORATION
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDAPHIS SERVICES CORPORATION
(F/K/A MEDAPHIS HOSPITAL SERVICES CORPORATION)
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
MEDICAL MANAGEMENT SCIENCES, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
14
<PAGE> 15
NATIONAL HEALTHCARE
TECHNOLOGIES, INC.
By: /s/ Jerome H. Baglien
-------------------------
Name: Jerome H. Baglien
Title: Senior Vice President
15
<PAGE> 16
COLLATERAL AGENT
[MED FUNDING, INC.], AS COLLATERAL AGENT
By:
--------------------------------
Name:
Title:
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 19,270
<SECURITIES> 0
<RECEIVABLES> 167,750
<ALLOWANCES> 6,225
<INVENTORY> 0
<CURRENT-ASSETS> 220,930
<PP&E> 97,895
<DEPRECIATION> 0
<TOTAL-ASSETS> 935,790
<CURRENT-LIABILITIES> 130,887
<BONDS> 0
0
382
<COMMON> 589
<OTHER-SE> 553,103
<TOTAL-LIABILITY-AND-EQUITY> 935,790
<SALES> 538,012
<TOTAL-REVENUES> 538,012
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 529,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,761
<INCOME-PRETAX> (1,579)
<INCOME-TAX> 1,071
<INCOME-CONTINUING> (2,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,780)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,631
<SECURITIES> 0
<RECEIVABLES> 179,734
<ALLOWANCES> 21,325
<INVENTORY> 0
<CURRENT-ASSETS> 255,239
<PP&E> 97,850
<DEPRECIATION> 0
<TOTAL-ASSETS> 936,854
<CURRENT-LIABILITIES> 198,747
<BONDS> 0
0
0
<COMMON> 717
<OTHER-SE> 507,808
<TOTAL-LIABILITY-AND-EQUITY> 936,854
<SALES> 596,714
<TOTAL-REVENUES> 596,714
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 796,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,585
<INCOME-PRETAX> (211,426)
<INCOME-TAX> (74,089)
<INCOME-CONTINUING> (137,337)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136,358)
<EPS-PRIMARY> (1.91)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDAPHIS CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,710
<SECURITIES> 0
<RECEIVABLES> 177,152
<ALLOWANCES> 17,322
<INVENTORY> 0
<CURRENT-ASSETS> 199,682
<PP&E> 80,756
<DEPRECIATION> 0
<TOTAL-ASSETS> 874,737
<CURRENT-LIABILITIES> 150,911
<BONDS> 0
0
0
<COMMON> 731
<OTHER-SE> 506,883
<TOTAL-LIABILITY-AND-EQUITY> 874,737
<SALES> 423,162
<TOTAL-REVENUES> 423,162
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 506,051
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,417
<INCOME-PRETAX> (102,306)
<INCOME-TAX> (16,773)
<INCOME-CONTINUING> (85,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,391
<CHANGES> 0
<NET-INCOME> (9,142)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995,
December 31, 1996 and September 30, 1997............... 3
Consolidated Statements of Operations for the years ended
December 31, 1995 and December 31, 1996 and the nine
months ended September 30, 1997........................ 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1996 and the nine
months ended September 30, 1997........................ 5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995 and December 31, 1996 and
the nine months ended September 30, 1997............... 6
Notes to Consolidated Financial Statements................ 7
</TABLE>
1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Medaphis Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Medaphis Corporation and its subsidiaries at December 31, 1995 and 1996 and
September 30, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996 and for the nine
month period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As more fully discussed in Note 2 of the Notes to Consolidated Financial
Statements, the Company restated its financial statements for the years ended
December 31, 1995 and 1996. As a result of the restatement for certain revenue
recognition practices, the predecessor accountants withdrew their audit opinion
dated March 31, 1997 covering these years. The audit opinion issued by the
predecessor accountants dated March 31, 1997 included an explanatory paragraph
expressing substantial doubt about the Company's ability to continue as a going
concern due to certain step-down payments required during 1997 under the
Company's Senior Credit Facility. As discussed in Note 8 of the Notes to
Consolidated Financial Statements, on December 23, 1997, the Company entered
into a credit facility that increased the Company's borrowing capacity and
extended the term into 1999, thereby removing the substantial doubt expressed in
the predecessor accountants' audit opinion.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Atlanta, Georgia
December 23, 1997
2
<PAGE> 3
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(AS RESTATED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 19,270 $ 7,631 $ 6,710
Restricted cash........................................... 15,340 19,568 4,884
Accounts receivable, billed (less allowances of $6,225,
$21,325 and $17,322)................................... 84,256 99,823 103,800
Accounts receivable, unbilled............................. 83,494 79,911 73,352
Deferred income taxes..................................... -- 36,177 --
Other..................................................... 18,570 12,129 10,936
-------- -------- ---------
Total current assets.............................. 220,930 255,239 199,682
Property and equipment...................................... 97,895 97,850 80,756
Deferred income taxes....................................... -- 43,044 69,029
Intangible assets........................................... 611,544 539,151 520,298
Other....................................................... 5,421 1,570 4,972
-------- -------- ---------
$935,790 $936,854 $ 874,737
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 23,220 $ 11,765 $ 16,019
Accrued compensation...................................... 24,505 30,332 36,377
Accrued expenses.......................................... 72,481 100,675 73,994
Current portion of long-term debt......................... 10,681 55,975 15,209
Deferred income taxes..................................... -- -- 9,312
-------- -------- ---------
Total current liabilities......................... 130,887 198,747 150,911
Long-term debt.............................................. 150,565 215,752 151,975
Accrued litigation settlement............................... -- -- 52,500
Deferred income taxes....................................... 17,963 -- --
Convertible subordinated debentures......................... 63,375 -- --
Other obligations........................................... 18,926 13,830 11,737
-------- -------- ---------
Total liabilities................................. 381,716 428,329 367,123
-------- -------- ---------
Commitments and contingencies (Notes 10 and 11)
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1997;
none issued............................................ -- -- --
Preferred stock, assumed in acquisitions.................. 382 -- --
Common stock, voting, $.01 par value, 100,000 authorized
in 1995, 200,000 authorized in 1996; issued and
outstanding 58,917 in 1995, 71,705 in 1996 and 73,143
in 1997................................................ 589 717 731
Common stock, non-voting, $0.01 par value, 600 authorized
in 1995, 1996 and 1997; none issued.................... -- -- --
Paid-in capital........................................... 574,387 666,673 674,843
Accumulated deficit....................................... (21,284) (158,696) (167,960)
-------- -------- ---------
554,074 508,694 507,614
Less treasury stock, at cost -- 16 shares in 1996......... -- (169) --
-------- -------- ---------
Total stockholders' equity........................ 554,074 508,525 507,614
-------- -------- ---------
$935,790 $936,854 $ 874,737
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- --------------
(AS RESTATED)
<S> <C> <C> <C>
Revenue................................................. $ 538,012 $ 596,714 $423,162
--------- --------- --------
Salaries and wages...................................... 314,790 398,573 281,508
Other operating expenses................................ 134,055 163,677 115,841
Depreciation............................................ 14,187 28,276 21,540
Amortization............................................ 18,048 25,713 18,001
Interest expense, net................................... 9,761 11,585 19,417
Litigation settlement................................... -- -- 52,500
Restructuring and other charges......................... 48,750 180,316 16,661
--------- --------- --------
Total expenses................................ 539,591 808,140 525,468
--------- --------- --------
Loss before income taxes................................ (1,579) (211,426) (102,306)
Income tax expense (benefit)............................ 1,071 (74,089) (16,773)
--------- --------- --------
Loss before extraordinary item.......................... (2,650) (137,337) (85,533)
Extraordinary item: Gain on sale of HRI, net of tax..... -- -- 76,391
--------- --------- --------
Net loss...................................... (2,650) (137,337) (9,142)
--------- --------- --------
Pro forma tax adjustments, principally income taxes..... (2,130) 979 --
--------- --------- --------
Pro forma net loss...................................... $ (4,780) $(136,358) $ (9,142)
========= ========= ========
Pro forma net loss per common share:
Pro forma loss before extraordinary item.............. $ (0.09) $ (1.91) $ (1.18)
Extraordinary item: Gain on sale of HRI, net of tax... -- -- 1.05
--------- --------- --------
Pro forma net loss.................................... $ (0.09) $ (1.91) $ (0.13)
========= ========= ========
Weighted average shares outstanding..................... 52,591 71,225 72,542
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (2,650) $(137,337) $ (9,142)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 32,235 53,989 39,541
Gain on sale of HRI..................................... -- -- (76,391)
Impairment loss on assets............................... 5,035 135,195 7,338
Deferred income taxes................................... 740 (77,068) (15,906)
Changes in assets and liabilities, excluding effects of
acquisitions:
Restricted cash...................................... (3,253) (6,152) 799
Accounts receivable, billed.......................... (21,472) (11,316) (6,217)
Accounts receivable, unbilled........................ (12,094) 1,511 7,829
Accounts payable..................................... 344 (10,297) 5,015
Accrued compensation................................. (204) 5,277 8,193
Accrued expenses..................................... 26,606 28,913 (15,243)
Accrued litigation settlement........................ -- -- 52,500
Other, net........................................... (5,435) 9,422 (3,133)
--------- --------- ---------
Net cash provided by (used for) operating
activities.................................... 19,852 (7,863) (4,817)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................ (76,077) (18,200) (5,897)
Purchases of property and equipment....................... (51,120) (51,135) (15,198)
Proceeds from sale of HRI, net............................ -- -- 126,375
Proceeds from sale of property and equipment.............. -- -- 3,644
Software development costs................................ (35,611) (37,946) (4,452)
Other..................................................... 650 -- --
--------- --------- ---------
Net cash (used for) provided by investing
activities.................................... (162,158) (107,281) 104,472
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock........................... 147,197 -- 1,290
Proceeds from the exercise of stock options............... 4,621 11,475 5,518
Proceeds from borrowings.................................. 140,243 129,155 98,992
Payments of long-term debt................................ (136,319) (36,511) (203,368)
Dividends to shareholders of acquired companies........... (4,052) (6) --
Repurchase of stock and warrants.......................... (7,355) (4,577) --
Other..................................................... -- 4,260 (3,008)
--------- --------- ---------
Net cash provided by (used for) financing
activities.................................... 144,335 103,796 (100,576)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Net change................................................ 2,029 (11,348) (921)
Balance at beginning of period (see Note 3)............... 17,241 18,979 7,631
--------- --------- ---------
Balance at end of period.................................. $ 19,270 $ 7,631 $ 6,710
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PREFERRED TREASURY TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCK STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AMOUNT EQUITY
------ ------ --------- --------- -------- ------------- -------- -------------
(AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994, AS
RESTATED........................ 45,990 $460 22,191 $ 225 $251,378 $ (16,059) $ -- $ 236,004
Issuance of common stock.......... 4,244 42 -- -- 121,580 -- -- 121,622
Issuance of common stock in
acquisitions.................... 4,020 40 -- -- 148,419 -- -- 148,459
Exercise of stock options
(including tax benefit of
$7,901)......................... 557 6 -- -- 12,516 -- -- 12,522
Issuance and conversion of
preferred stock at acquired
companies....................... 3,344 33 (2,737) 157 37,398 -- -- 37,588
Pre-merger dividends to former
owners.......................... -- -- -- -- -- (1,818) -- (1,818)
Net loss.......................... -- -- -- -- -- (2,650) -- (2,650)
Other............................. 762 8 -- -- 3,096 (757) -- 2,347
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1995...... 58,917 589 19,454 382 574,387 (21,284) -- 554,074
Changes in HDS's stockholders'
equity in the three months ended
March 31, 1996 (see Note 3)..... -- -- -- -- -- (382) -- (382)
Issuance of common stock in
acquisitions.................... 93 1 -- -- 3,823 249 -- 4,073
Exercise of stock options
(including tax benefit of
$21,012)........................ 1,536 16 -- -- 32,471 -- -- 32,487
Repurchase of stock and
warrants........................ (16) -- -- -- (5,422) -- (169) (5,591)
Conversion of preferred stock at
acquired companies.............. 6,528 65 (19,454) (382) 317 -- -- --
Conversion of subordinated
debentures...................... 4,527 45 -- -- 62,305 -- -- 62,350
Net loss.......................... -- -- -- -- (137,337) -- (137,337)
Other............................. 120 1 -- -- (1,208) 58 -- (1,149)
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996...... 71,705 717 -- -- 666,673 (158,696) (169) 508,525
Issuance of common stock.......... 228 2 -- -- 1,288 -- -- 1,290
Exercise of stock options......... 1,210 12 -- -- 5,506 -- -- 5,518
Net loss.......................... -- -- -- -- -- (9,142) -- (9,142)
Other............................. -- -- -- -- 1,376 (122) 169 1,423
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT SEPTEMBER 30, 1997..... 73,143 $731 -- $ -- $674,843 $(167,960) $ -- $ 507,614
====== ==== ======= ===== ======== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries ("Medaphis" or the
"Company"), including the retroactive effect of mergers accounted for under the
pooling-of-interests method of accounting. As more fully discussed in Note 2,
the Company has restated its consolidated financial statements for the years
ended December 31, 1995 and 1996 and nine months ended September 30, 1997.
CONSOLIDATION. All significant intercompany transactions have been
eliminated. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
NATURE OF OPERATIONS. Medaphis provides business management services and
systems primarily to the healthcare industry throughout the United States. The
Company historically has not experienced any significant losses related to
individual clients, classes of clients or groups of clients in any geographical
area.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, principally represents amounts invoiced
to clients. Accounts receivable, unbilled, represents amounts recognized for
services rendered but not yet invoiced and is based on the Company's estimate of
the fees that will be invoiced when collections on patient accounts are
received. During the third quarter of 1997, the Company refined its method for
calculating the estimate for accounts receivable, unbilled, which resulted in a
decrease to revenue of $10.7 million.
Revenue from software licenses is generally recognized upon shipment of the
products and when no significant contractual obligations remain outstanding.
When the Company receives payment prior to shipment or fulfillment of
significant vendor obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of significant vendor
obligations. The license agreements typically provide for partial payments
subsequent to shipment; such terms result in an unbilled receivable at the date
the revenue is recognized. Costs related to insignificant vendor obligations are
accrued upon recognition of the license revenue. Software maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically one year.
Revenues from systems integration contracts are recorded based on the terms
of the underlying contracts, which are primarily time and material or fixed
price contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Anticipated losses, if any, are charged to operations in the period such
losses are determined. Revenue for which customers have not yet been invoiced is
reflected as accounts receivable, unbilled in the accompanying consolidated
balance sheets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
RESTRICTED CASH. Restricted cash represents amounts collected on behalf of
certain clients, a portion of which is held in trust until remitted to such
clients.
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets,
7
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally four to ten years for furniture and fixtures, three to seven years for
equipment, and 20 years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
client lists and software development costs.
Goodwill and Client Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method,
generally over 40 years. Client lists are amortized using the straight line
method over their estimated useful period of benefit, generally 7 to 20 years.
The Company monitors events and changes in circumstances that could
indicate carrying amounts of intangible assets may not be recoverable. When
events or changes in circumstances are present that indicate the carrying amount
of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows. Should the Company determine that the carrying values of specific
intangible assets are not recoverable, the Company would record a charge to
reduce the carrying value of such assets to their fair values. During 1996, the
Company adopted a plan to shut down its wholly-owned operating subsidiary,
Imonics Corporation ("Imonics"), and recorded a charge of approximately $13.0
million for the write-off of the unamortized goodwill associated with the
purchase of Imonics.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software utilized in
providing the Company's business management systems and services. Software
development costs are capitalized upon the establishment of technological
feasibility for each product or process and capitalization ceases when the
product or process is available for general release to customers or is put into
service. Expenditures on capitalized software development costs were
approximately $35.6 million, $37.9 million and $4.5 million in 1995, 1996 and
the nine-month period ended September 30, 1997, respectively. In 1996, the
Company abandoned its reengineering program and adopted a plan to shut down
Imonics and, as a result of these actions, wrote off approximately $86.1 million
of capitalized software costs which had no future value to the Company (see Note
4). The Company recorded research and development expenses of approximately $2.8
million, $3.2 million and $2.3 million in 1995, 1996 and the nine-month period
ended September 30, 1997, respectively.
Software development costs are amortized using the straight line method
over the estimated economic lives of the assets, which are generally three to
five years. Amortization expense related to the Company's capitalized software
costs totaled $5.1 million, $6.6 million and $4.6 million in 1995, 1996 and the
nine-month period ended September 30, 1997, respectively.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Effective in 1996, the Company
implemented the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123").
SFAS No. 123 requires that companies which elect to not account for stock-based
compensation as prescribed by that statement shall disclose the pro forma
effects on net income (loss) and net income (loss) per share as if SFAS No. 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS No. 123.
LEGAL COSTS. The Company records charges for the legal and administrative
fees, costs and expenses and damages or settlements it anticipates incurring in
conjunction with its legal matters when management can reasonably estimate these
costs.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws
8
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and changes to such laws. Management includes the consideration of future events
to assess the likelihood that tax benefits will be realized in the future.
PRO FORMA PROVISION FOR INCOME TAXES. In 1995 and 1996, the Company
acquired the Automation Atwork Companies ("Atwork"), Rapid Systems Solutions,
Inc. ("Rapid Systems") and BSG Corporation ("BSG") in merger transactions
accounted for as poolings-of- interests. Prior to the mergers, Atwork, Rapid
Systems and a company acquired by BSG prior to the merger between BSG and the
Company (the "BSG Merger") had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma provision (benefit) for income taxes, taken together with
reported income tax expense (benefit), presents the combined pro forma tax
expense (benefit) of such entities as if they had been "C" corporations during
the periods presented.
PRO FORMA NET LOSS PER COMMON SHARE. Pro forma net income (loss) per
common share is based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Common stock
equivalents include the dilutive effect of the assumed exercise of certain
outstanding stock options and conversion of convertible preferred stock. Fully
diluted pro forma net income per common share is not presented as it is not
materially different from primary pro forma net income (loss) per common share
or it is antidilutive. The Company's convertible subordinated debentures were
not considered common stock equivalents at issuance and are therefore only
included in the computation of fully diluted pro forma net loss per common
share.
NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 provides for new
accounting principles used in the calculation of earnings per share and shall be
effective for financial statements for both interim and annual periods ending
after December 15, 1997. This pronouncement cannot be adopted early. The
following table presents basic and diluted weighted average shares outstanding
and a calculation of the pro forma net loss per share using the guidelines of
SFAS No. 128.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------
1995 1996 1997
---------- ----------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic weighted average shares outstanding............... 52,591 71,225 72,542
======== ========= ========
Pro forma loss before extraordinary item................ $ (4,780) $(136,358) $(85,533)
Extraordinary item: Gain on sale of HRI, net of tax..... -- -- 76,391
-------- --------- --------
Pro forma net loss...................................... $ (4,780) $(136,358) $ (9,142)
======== ========= ========
Basic earnings per share(1):
Pro forma loss before extraordinary item.............. $ (0.09) $ (1.91) $ (1.18)
Extraordinary item: Gain on sale of HRI, net of tax... -- -- 1.05
-------- --------- --------
Pro forma net loss.................................... $ (0.09) $ (1.91) $ (1.13)
======== ========= ========
</TABLE>
- ---------------
(1) Diluted earnings per share equals basic earnings per share due to the
reported losses.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way companies
report information about operating segments including the related disclosures
about products and services. The Company has elected to adopt SFAS No. 131
during the period ended September 30, 1997. See Note 17 where the Company
discloses information about its operating segments.
9
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company is currently assessing the impact of SOP
97-2 on the Company's financial position and results of operations.
In November 1997, the Emerging Issues Task Force ("EITF") issued EITF 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology" ("EITF 97-13"). EITF 97-13 requires costs such as proposal costs,
process reengineering and training costs previously capitalized to be expensed
in the quarter including November 1997. The Company does not anticipate the
fourth quarter charge under EITF 97-13 to materially impact the Company's
financial position at December 31, 1997.
2. RESTATEMENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at Health Data
Sciences Corporation ("HDS"), which was acquired in a merger transaction in June
1996 and accounted for as a pooling of interests. These practices related
principally to revenue recognized in fiscal years 1995 and 1996. As a result of
this evaluation, management determined that the revenue was improperly
recognized and, accordingly, restated the Company's financial statements for
years ended December 31, 1995 and 1996 and retained earnings (accumulated
deficit) as of December 31, 1994.
Subsequent to the restatement related to HDS, as part of its continued due
diligence efforts related to the refinancing, management completed its analysis
of the accounting for the December 1995 acquisition of Medical Management
Sciences, Inc. ("MMS") which was accounted for as a pooling of interests.
Management determined the acquisition of MMS should have been accounted for as a
purchase and accordingly, restated the Company's financial statements for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997.
As a result of the HDS restatement, the predecessor accountants withdrew
their audit opinion dated March 31, 1997 covering these years. The audit opinion
issued by the predecessor accountants dated March 31, 1997 included an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern due to certain step-down payments required during
1997 under the Company's Senior Credit Facility. As discussed in Note 8 of the
Notes to Consolidated Financial Statements, on December 23, 1997, the Company
entered into a credit facility that increased the Company's borrowing capacity
and extended the term into 1999, thereby removing the substantial doubt
expressed in the predecessor accountants' audit opinion.
The impact of the restatements are presented below:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1994
Retained earnings (deficit)......................... $ 4,838 $ (16,059)
Total stockholders' equity.......................... $ 257,097 $ 236,004
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue............................................. $ 559,877 $ 538,012
Pro forma net loss.................................. (8,504) (4,780)
Pro forma net loss per share........................ $ (0.15) $ (0.09)
</TABLE>
10
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
AS OF DECEMBER 31, 1995
Current assets...................................... $ 223,165 $ 220,930
Total assets........................................ 795,606 935,790
Current liabilities................................. 127,935 130,887
Total liabilities................................... 374,300 381,716
Total stockholders' equity.......................... $ 421,306 $ 554,074
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenue............................................. $ 608,313 $ 596,714
Pro forma net loss.................................. (123,642) (136,358)
Pro forma net loss per share........................ $ (1.74) $ (1.91)
AS OF DECEMBER 31, 1996
Current assets...................................... $ 269,385 $ 255,239
Total assets........................................ 815,624 936,854
Current liabilities................................. 193,752 198,747
Total liabilities................................... 423,334 428,329
Total stockholders' equity.......................... $ 392,290 $ 508,525
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenue............................................. $ 423,162 $ 423,162
Pro forma net loss.................................. (5,467) (9,142)
Pro forma net loss per share........................ $ (0.08) $ (0.13)
AS OF SEPTEMBER 30, 1997
Current assets...................................... $ 199,682 $ 199,682
Total assets........................................ 735,462 874,737
Current liabilities................................. 296,291 150,911
Total liabilities................................... 367,123 367,123
Total stockholders' equity.......................... $ 368,339 $ 507,614
</TABLE>
3. BUSINESS COMBINATIONS AND DIVESTITURES
From January 1, 1995 through December 31, 1996, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
<TABLE>
<CAPTION>
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
- ---------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Sage Communication, Inc. ("Sage")....................... * October 1996
The Medico Group, Ltd................................... * April 1996
Medical Management Computer Sciences, Inc............... * February 1996
CBT Financial Services, Inc............................. * February 1996
The Receivables Management Division of MedQuist, Inc.... $ 17,300 December 1995
Medical Management Sciences Inc. ("MMS")................ 148,000 December 1995
The Halley Exchange, Inc. ("Halley").................... * December 1995
Billing and Professional Services, Inc.................. * October 1995
Medical Office Consultants, Inc......................... * May 1995
Computers Diversified, Inc.............................. 15,500 April 1995
Medical Management, Inc................................. 8,000 March 1995
The Decision Support Group, Inc......................... * January 1995
</TABLE>
- ---------------
* Consideration not material.
11
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The operating results of the acquired businesses
are included in the Company's consolidated statements of operations from the
respective dates of acquisition. The pro forma impact of the foregoing
acquisitions are not presented due to the immaterial effect these acquisitions
have on the Company's results of operations for 1995 and 1996.
In addition to the foregoing acquisitions, the Company acquired seven
businesses in 1995 and 1996 which were accounted for using the
pooling-of-interests method of accounting. Following is a list of the businesses
acquired and the shares exchanged:
<TABLE>
<CAPTION>
SHARES ACQUISITION
COMPANY ACQUIRED EXCHANGED DATE
- ---------------- --------- ----------------
<S> <C> <C>
HDS......................................................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC").................. * February 1996
Consort Technologies, Inc. ("Consort")...................... 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")......................... 3,265,000 August 1995
Atwork...................................................... 8,000,000 March 1995
</TABLE>
- ---------------
* Consideration not material
Since these acquisitions have been recorded using the pooling-of-interests
method of accounting, no adjustment has been made to the historical carrying
amounts of assets acquired and liabilities assumed. The accompanying
consolidated financial statements have been restated to include the financial
position and operating results of Atwork, HRI, Rapid Systems, BSG and HDS for
all periods prior to the mergers.
Prior to its merger with the Company, HDS reported on a fiscal period
ending March 31. HDS's financial position and operating results as of and for
the year ended March 31, 1996 were combined with the Company's financial
position and operating results as of and for the years ended December 31, 1995.
Accordingly, HDS's operating results for the three months ended March 31, 1996
were duplicated in each of the years ended December 31, 1995 and 1996. HDS's
revenues and net income for that three-month period were $3,758,000 and
$382,000, respectively. The beginning cash and cash equivalents balance in the
accompanying 1996 consolidated statement of cash flows does not equal the
December 31, 1995 cash and cash equivalents balance as a result of the
combination, in the 1995 consolidated balance sheet, of HDS's financial position
as of March 31, 1996 with the financial position of the Company as of December
31, 1995.
A summary of revenue and net income (loss) for each of the three
pooling-of-interests transactions consummated in 1996 for the year ended
December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
NET INCOME
REVENUE (LOSS)
------- ----------
<S> <C> <C>
Rapid Systems............................................. $14,722 $ 972
BSG....................................................... 69,663 (1,045)
HDS, as restated.......................................... 10,449 (4,294)
</TABLE>
12
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of revenue and pro forma net income (loss) for each of the three
pooling-of-interests transactions consummated after the first quarter of 1996
for interim year-to-date periods preceding the dates of consummation are as
follows (in thousands):
<TABLE>
<CAPTION>
INTERIM PERIOD PRO FORMA
PRECEDING NET INCOME
COMPANY ACQUIRED CONSUMMATION REVENUE (LOSS)
- ---------------- -------------- ------- -----------------
<S> <C> <C> <C>
Rapid Systems................................ March 31, 1996 $ 5,248 $ (498)
BSG.......................................... March 31, 1996 19,539 2,497
HDS.......................................... March 31, 1996 3,758 382
</TABLE>
On May 28, 1997, Medaphis sold HRI through an initial public offering of
100% of its stock, which generated net proceeds to the Company of approximately
$126.4 million and an extraordinary gain of $76.4 million, net of taxes of $46.2
million. Medaphis acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests and therefore, the resultant gain from
the sale has been presented as an extraordinary item. The net proceeds from the
sale were used to pay down borrowings under the Second Amended Facility (see
Note 8).
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring charges................................. $15,037 $ 14,076 $ 5,465
Software abandonment.................................. 1,800 86,088 --
Property and equipment impairment..................... 5,030 35,592 6,959
Intangible asset impairment........................... -- 13,048 --
Legal costs........................................... 12,000 12,800 2,600
Pooling charges....................................... 9,200 9,798 (46)
Severance costs....................................... 4,933 3,913 1,683
Other................................................. 750 5,001 --
------- -------- -------
$48,750 $180,316 $16,661
======= ======== =======
</TABLE>
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two components
of the Reengineering Project: (1) workflow, process and operational improvements
along with new technology development, and (2) office consolidation within its
wholly owned operating subsidiary, Medaphis Physician Services Corporation
("MPSC") (the "MPSC Restructuring Plan"). The Company had recorded a
restructuring reserve for the exit costs associated with the MPSC Restructuring
Plan in 1995 of $15.0 million. In August 1996, the Company revised the MPSC
Restructuring Plan and increased its lease termination costs by $2.0 and reduced
other reserves by $3.8 million. During the first half of 1996, the Company
incurred $5.2 million of costs that were related to the Reengineering Project,
which had not previously been reserved. In 1997, the Company reevaluated the
adequacy of the reserves established for the MPSC Restructuring Plan and
recorded an additional charge of $1.7 million for lease termination costs.
During 1996, the Company adopted a plan to consolidate its system
integration businesses, BSG Corporation ("BSG"), Rapid Systems Solutions, Inc.
("Rapid Systems") and Imonics Corporation ("Imonics") (the "BSG Group
Restructuring"). In December 1996, the Company adopted a plan to shut down
Imonics (the "Imonics Shutdown"). In connection with the BSG Group Restructuring
and the Imonics Shutdown, Medaphis recorded charges of $3.0 million for the
costs associated with the termination of certain
13
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases and $6.5 million for severance costs for approximately 200 Imonics
employees who had been notified of their termination and $1.2 million for other
exit activities.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies, the BSG and HIT Groups, into Per-Se Technologies (the
"Per-Se Restructuring"). In connection with the Per-Se Restructuring, the
Company recorded charges of $2.7 million for the costs associated with the
termination of certain leases and $1.1 million for severance costs related to
the employees who had been notified of their termination by September 30, 1997.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for both the restructuring of Imonics
and MPSC are as follows:
<TABLE>
<CAPTION>
1995 COSTS RESERVE COSTS RESERVE
INITIAL APPLIED BALANCE APPLIED BALANCE
RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31, RESERVE
CHARGE RESERVE 1995 ADJUSTMENTS RESERVES 1996 ADJUSTMENTS
------- ------- ------------ ----------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Lease termination costs.... $ 6,726 $ (736) $ 5,990 $ 5,017 $ (3,493) $ 7,514 $4,395
Incremental costs
associated with
discontinued client
contracts................ 5,488 (797) 4,691 (2,690) (2,001) -- --
Severance.................. -- -- -- 6,541 (3,793) 2,748 1,070
Other...................... 2,823 (1,035) 1,788 5,208 (5,774) 1,222 --
------- ------- ------- ------- -------- ------- ------
$15,037 $(2,568) $12,469 $14,076 $(15,061) $11,484 $5,465
======= ======= ======= ======= ======== ======= ======
<CAPTION>
COSTS RESERVE
APPLIED BALANCE
AGAINST SEPTEMBER 30,
RESERVE 1997
------- -------------
(IN THOUSANDS)
<S> <C> <C>
Lease termination costs.... $(3,249) $ 8,660
Incremental costs
associated with
discontinued client
contracts................ -- --
Severance.................. (2,369) 1,449
Other...................... (1,166) 56
------- -------
$(6,784) $10,165
======= =======
</TABLE>
Software Abandonment. In connection with the Halley acquisition in 1995,
the Company recorded a $1.8 million charge related to the cost of purchased
research and development activities related to acquired technology for which
technological feasibility had not yet been established and which had no
alternative future uses.
In June 1996, the Company began a comprehensive assessment of the
Reengineering Project. The comprehensive review was completed and management
came to the conclusion that it was not cost effective to continue the
development and deployment of the software and technology upon which the
Reengineering Project was based and that the reengineering software and
technology had no alternative useful application in the Company's operations. In
connection with abandonment of its Reengineering Project and the Imonics
Shutdown, the Company abandoned certain software development projects and
recorded charges for the write-off of $86.1 million of capitalized software
development costs related to these projects.
Property and Equipment Impairment. In connection with the abandonment of
the Reengineering Project and the Imonics Shutdown in 1996 and the MPSC
Restructuring Plan in 1995, the Company assessed the recoverability of certain
of its long lived assets and recorded impairment losses of approximately $5.0
million and $35.6 million in 1995 and 1996, respectively.
In connection with the Per-Se Restructuring and the Company's assessment of
the recoverability of certain of its long-lived assets, the Company recorded a
charge of $7.0 million for impairment losses during the nine months ended
September 30, 1997.
Intangible Asset Impairment. In connection with the Imonics Shutdown,
Medaphis recorded a charge of $13.0 million for the write-off of the unamortized
goodwill associated with the purchase of Imonics.
Legal Costs. In 1995, the Company recorded a charge of $12.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with the California Investigation and various putative class
action lawsuits which were based on this investigation.
In 1996, the Company accrued an additional $2.0 million for the legal and
administrative fees, costs and expenses associated with the California
Investigation. Also in 1996, the Company recorded a charge of $5.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with
14
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
various putative class action lawsuits which have been filed since August 14,
1996 (the "1996 Lawsuits") against the Company and certain of its former
officers, one of whom was also a director. The Company also accrued $4.6 million
for the legal costs and other fees the Company had or planned to incur in
connection with the turnaround effort undertaken by the new management team and
various other legal matters. Also in 1996, the Company had recorded a $1.2
million charge for the anticipated settlement of the 1995 Class Action
Settlement (see Note 11).
In 1997, the Company recorded charges of $3.0 million for the legal and
administrative fees, costs and expenses it has incurred and plans to incur in
connection with the GFS Investigation.
Also in 1997, the Company evaluated the adequacy of the reserves
established for the California Investigation and the turnaround plan adopted in
December 1996 and reduced these reserves by $3.4 million. The Company also
increased its reserve for the 1996 Lawsuits by $3.0 million.
Pooling Charges. In 1995 and 1996, Medaphis acquired seven companies in
merger transactions accounted for under the pooling of interests method of
accounting. In connection therewith, the Company incurred transaction fees,
costs and expenses, which have been reflected in Medaphis' operating results and
are set forth below as (income)/expense:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Atwork................................................... $6,000 $ (430) --
HRI...................................................... 2,000 (778) --
Consort.................................................. 1,200 (529) --
IVC...................................................... -- 169 --
Rapid Systems............................................ -- 584 (15)
BSG...................................................... -- 6,094 (14)
HDS...................................................... -- 4,688 (17)
------ ------ ----
$9,200 $9,798 $(46)
====== ====== ====
</TABLE>
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $4.9 and
$0.9 million in 1995 and 1996, respectively, in accordance with Statement of
Financial Accounting Standards No. 112 to reflect the expense for employees'
rights to involuntary severance benefits that have accumulated to date.
In 1996 and 1997 the Company recorded charges of $3.0 million and $1.7
million, respectively, for severance costs associated with former executive
management.
Other Costs. During 1996, the Company canceled an initiative to develop an
on-line practice management system. The Company recorded a charge of
approximately $2.0 million relating to the deferred costs associated with this
project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations. In addition, the Company also recorded a charge of
approximately $1.7 million for miscellaneous asset write-offs.
15
<PAGE> 16
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................. $ 2,873 $ 2,873 $ 2,508
Buildings........................................ 9,839 8,105 7,085
Furniture and fixtures........................... 19,485 23,276 23,122
Equipment........................................ 100,866 120,731 115,313
Other............................................ 6,055 9,766 10,873
-------- -------- --------
139,118 164,751 158,901
Less accumulated depreciation.................... 41,223 66,901 78,145
-------- -------- --------
$ 97,895 $ 97,850 $ 80,756
======== ======== ========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill......................................... $494,278 $488,138 $486,159
Client lists..................................... 74,613 79,954 79,954
Software development costs....................... 82,219 34,030 33,783
Other............................................ 2,159 1,000 --
-------- -------- --------
653,269 603,122 599,896
Less accumulated amortization.................... 41,725 63,971 79,598
-------- -------- --------
$611,544 $539,151 $520,298
======== ======== ========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued costs of businesses acquired............. $ 13,034 $ 9,904 $ 2,863
Funds due clients................................ 12,757 19,207 4,815
Deferred revenue................................. 15,090 18,853 17,238
Accrued legal costs.............................. 8,264 15,173 11,571
Accrued restructuring and severance costs........ 7,801 18,080 9,598
Interest......................................... 2,917 985 3,886
Other............................................ 12,618 18,473 24,023
-------- -------- --------
$ 72,481 $100,675 $ 73,994
======== ======== ========
</TABLE>
16
<PAGE> 17
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under the credit facilities........... $128,000 $242,730 $147,911
Capital lease obligations, weighted average
effective interest rates of 7.4%, 8.4% and
8.1%........................................... 23,670 27,810 18,129
Other............................................ 9,576 1,187 1,144
-------- -------- --------
161,246 271,727 167,184
Less current portion............................. 10,681 55,975 15,209
-------- -------- --------
$150,565 $215,752 $151,975
======== ======== ========
</TABLE>
At December 31, 1995 and 1996, the Company had a $250 million revolving
credit agreement ("the Senior Credit Facility") which was composed of a $240
million revolving credit line and a $10 million cash management line with a
six-bank syndicate to finance future acquisitions, working capital and other
general corporate needs. The Company had the option of making "LIBOR" based
loans or "base rate" loans under the Senior Credit Facility. LIBOR based loans
bore interest at LIBOR for the then current interest period plus amounts varying
from 1.25% to 1.75% based on the Company's financial performance. Base rate
loans bore interest equal to prime. At December 31, 1995 and 1996, the Company
had LIBOR based loans outstanding at interest rates ranging from 7.1% to 7.2%
and 6.78% to 6.90%, respectively. The Senior Credit Facility contained, among
other things, financial covenants which required the Company to maintain certain
financial ratios. The Company was in compliance with all covenants as of
December 31, 1995 and 1996.
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement, increased the
revolving line of credit from $250 million to $285 million and had a maturity
date of June 30, 1998. The Second Amended Facility also required mandatory loan
commitment reductions to $200 million and $150 million on July 31, 1997 and
January 31, 1998, respectively. In developing its 1997 business plan, the
Company did not expect to generate sufficient cash flow from operations to meet
the required debt reduction and, therefore, management had adopted a plan to
divest HRI. On May 28, 1997, the Company was successful in divesting HRI through
an initial public offering of 100% of its stock. This sale generated
approximately $126.4 million of net proceeds, of which $117 million was used to
reduce the Company's borrowings under the Second Amended Facility and it also
reduced the loan commitment under the Second Facility to $168 million, which met
the required reduction for July 31, 1997. At September 30, 1997 the Second
Amended Facility bore interest at 9.5%.
On September 18, 1997, the Company entered into a letter agreement with the
requisite lenders under the Second Amended Facility which, among other things
(i) waived the Company's compliance with the remaining financial covenants and
(ii) required the Company to repay all loans and terminate all the lenders'
commitments by November 30, 1997. On October 24, 1997, the Company entered into
a letter agreement with the requisite lenders under the Second Amended Facility
which, among other things, waived any defaults or events of default which might
otherwise result in the event of certain restatements of the Company's financial
statements and extended the mandatory repayment and termination date to January
31, 1998.
On November 19, 1997, the Company entered into the First Modification of
the Second Amended Facility ("The First Modification"), which among other
things: (i) waived any defaults or events of default which might have otherwise
resulted from the restatement of the Company's financial statements; (ii)
eliminated the step-down in loan commitments to $150 million scheduled to occur
on January 31, 1998; and (iii) reinstated the maturity of the Second Amended
Facility to June 30, 1998. The First Modification
17
<PAGE> 18
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also establishes certain financial covenants for the fiscal year 1997 and for
monthly and quarterly periods in fiscal year 1998.
On December 23, 1997, Medaphis entered into a $210 million loan facility
(the "New Facility") with an affiliate of Donaldson, Lufkin & Jenrette. The
proceeds of the New Facility were used to repay the Second Amended Facility.
Borrowings under the New Facility initially bear interest at Prime plus 250
basis points with rates increasing 100 basis points at June 23, 1997 and 50
basis points each quarter thereafter through the loan's maturity on April 1,
1999. The New Facility contains certain quarterly financial covenants related to
the Company's performance, is secured by substantially all of the assets of the
Company and its subsidiaries, and is guaranteed by substantially all of the
Company's subsidiaries. The facility is callable, in whole or in part, at the
option of Medaphis, at any time. The notes evidencing the New Facility were
placed privately and have no registration rights. Loan costs for the New
Facility totaled approximately $8.1 million.
All amounts outstanding under the Second Amended Facility at September 30,
1997 were repaid with proceeds from the New Facility and debt under the New
Facility has been classified as long-term.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the Company's Common Stock on each of
January 1, 1998 and April 1, 1998, provided that the Second Amended Facility has
not been repaid and terminated prior to such vesting dates. As a result of the
Company securing the New Facility, the warrants have been cancelled.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1995, 1996 and September 30, 1997 the net book value of
equipment subject to capital leases totaled $20.3 million, $27.5 million and
$20.3 million respectively.
The carrying amounts of long-term debt and capital lease obligations
reflected in the consolidated balance sheets approximate fair value of such
instruments due to the variable rate nature of the long-term debt and the fixed
rates on the capital lease obligations which approximate market rates.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
<TABLE>
<S> <C>
Fourth quarter 1997......................................... $ 3,635
1998........................................................ 11,574
1999........................................................ 150,940
2000........................................................ 63
2001........................................................ 69
2002........................................................ 76
Thereafter.................................................. 827
--------
$167,184
========
</TABLE>
9. CONVERTIBLE SUBORDINATED DEBENTURES
In 1993, the Company issued $63.4 million of 6.5% convertible subordinated
debentures to finance the acquisition of CompMed, Inc. The debentures were due
on January 1, 2000. The debenture holders had the right to convert the
debentures into shares of the Company's common stock at a conversion price of
$14.00 per share. In 1995, the Company gave notice of its intent to redeem the
debentures on January 1, 1996. Such notice triggered the conversion right of the
debenture holders through the date of the redemption. All of the debenture
holders exercised their conversion right effective January 1, 1996 and, as a
result, approximately 4.5 million shares were issued in the conversion in 1996.
The fair value of these convertible subordinated debentures was approximately
$170 million based on the market price of Medaphis common stock into which the
debentures were converted on January 1, 1996. Pro forma net loss per common
share for 1995, assuming the debentures had been converted on January 1, 1995,
and assuming the repayment of indebtedness
18
<PAGE> 19
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding under the Senior Credit Facility associated with the Company's April
1995 public offering had occurred on January 1, 1995 (see Note 12) would have
been $(0.09) per share.
10. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $22.4
million, $25.6 million, and $18.6 million for the years ended December 31, 1995,
1996 and the nine months ended September 30, 1997, respectively.
Future minimum lease payments under noncancelable operating leases
beginning in 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $25,103
1999........................................................ 21,697
2000........................................................ 15,261
2001........................................................ 8,413
2002........................................................ 7,003
Thereafter.................................................. 20,890
-------
$98,367
=======
</TABLE>
11. LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices") (the "California Investigation"). Medaphis
first became aware of the California Investigation on June 13, 1995 when search
warrants were executed on the Designated Offices and it and MPSC received grand
jury subpoenas. Medaphis received an additional grand jury subpoena on August
22, 1997, with which it is complying. The subpoena requires, among other things,
records of any audit or investigative reports relating to the billing of payors
globally for radiological services during the period January 1, 1991 to date and
any refunds owed to or issued to payors with respect to such global billing
reports in the Company's various offices, including the Designated Offices.
Although the precise scope of the California Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
billing and collection practices in the Designated Offices. No charges or claims
by the government have been made. Although the Company continues to believe that
the principal focus of the California Investigation remains on the billing and
collection practices in the Designated Offices, there can be no assurance that
the California Investigation will not expand to other offices, that the
California Investigation will be resolved promptly, that additional subpoenas or
search warrants will not be received by Medaphis or MPSC or that the California
Investigation will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the California Investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the California Investigation. The
charges are intended to cover only the anticipated expenses of the California
Investigation and the related lawsuits and do not include any provision for
fines, penalties, damages, assessments, judgments or sanctions that may arise
out of such matters.
19
<PAGE> 20
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, Medaphis, various of
its current and former officers and directors and the lead underwriters
associated with Medaphis' public offering of Common Stock in April 1995, were
named as defendants in putative shareholder class action lawsuits filed in the
United States District Court for the Northern District of Georgia. In general,
these lawsuits alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed to settle this action on a class-wide basis
for $4.75 million, subject to court approval (the "1995 Class Action
Settlement"). The 1995 Class Action Settlement included the related putative
class action lawsuit currently pending in the Superior Court of Cobb County,
Georgia, described more fully below. On October 29, 1997 the court certified a
class for settlement purposes, approved the settlement and entered final
judgment dismissing the action with prejudice. One of Medaphis' directors and
officers' liability insurance carriers has paid $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ended December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through June 15, 1995. Plaintiffs sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
As originally disclosed in its Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS") (the "GFS
Investigation"). In 1993, Medaphis acquired GFS, an emergency room physician
billing company located in Jacksonville, Florida, which had developed a
computerized coding system. In 1994, Medaphis acquired and merged into GFS
another emergency room physician billing company, Physician Billing, Inc.,
located in Grand Rapids, Michigan. For the year ended December 31, 1996, GFS
represented approximately 7% of Medaphis' revenue. During that year, GFS
processed approximately 5.6 million claims, approximately 2 million of which
were made to government programs. The government has requested that GFS
voluntarily produce records, and GFS is complying with that request. Although
the precise scope and
20
<PAGE> 21
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject matter of the GFS Investigation are not known to the Company, Medaphis
believes that the GFS Investigation, which is being participated in by federal
law enforcement agencies having both civil and criminal authority, involves
GFS's billing procedures and the computerized coding system used in Jacksonville
and Grand Rapids to process claims and may lead to claims of errors in billing.
There can be no assurance that the GFS Investigation will be resolved promptly
or that the GFS Investigation will not have a material adverse effect upon
Medaphis. No charges or claims by the government have been made. Currently, the
Company has recorded charges of $2 million and $1 million in the second and
third quarters of 1997, respectively, solely for legal and administrative fees,
costs and expenses in connection with the GFS Investigation, which charges do
not include any provision for fines, penalties, damages, assessments, judgments
or sanctions that may arise out of this matter.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then current and
former officers, one of whom was also a director, were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia. On November 22, 1996, the
plaintiffs in these lawsuits filed a Consolidated Amended Class Action
Complaint. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and Health Data Sciences Corporation ("HDS"). The
Consolidated Second Amended Complaint seeks compensatory and rescissory damages,
as well as fees, interest and other costs. On February 14, 1997, the defendants
moved to dismiss the Consolidated Second Amended Complaint in its entirety. On
May 27, 1997, the court denied defendants' motion to dismiss. As a result of the
Company's restatement of its fiscal 1995 financial statements, the Company may
not be able to sustain a defense to strict liability on certain claims under the
1933 Act, but the Company believes that it has substantial defenses to the
alleged damages relating to such 1933 Act claims.
The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") to settle the 1996 putative shareholder
class action litigation which is the subject of the Consolidated Second Amended
Complaint on a class-wide basis for $20 million in cash (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
shares of Medaphis Common Stock, and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Stipulation
also includes, among other things: (i) a complete release of claims against the
Company, the individual defendants and certain related persons and entities; and
(ii) certain anti-dilution rights in favor of plaintiffs with respect to certain
future issuances of shares of Medaphis Common Stock or warrants or rights to
acquire Medaphis Common Stock to settle existing civil litigation and claims
pending or asserted against the Company, subject to a 5.0 million share basket
below which there will be no dilution adjustments. The Stipulation also contains
other conditions including, but not limited to, consent and approval of the
Company's insurance carriers and the insurance carriers' payment of the cash
portion of the settlement, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company recorded a $52.5 million charge in the quarter ended September 30,
1997 for this settlement. Such amount has been reflected
21
<PAGE> 22
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as a non-current liability as the Company does not anticipate satisfying the
obligation within the next twelve months due to the anticipated time required to
receive the requisite approvals.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs on behalf of the Company. On January 28, 1997, Medaphis and certain
individual defendants filed a motion to dismiss the complaint. On February 11,
1997, the plaintiff filed an amended complaint adding as defendants, additional
current and former directors and officers of Medaphis. On April 23, 1997,
Medaphis and all other defendants filed a motion to dismiss the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. Plaintiff
seeks rescissory, compensatory and punitive damages, rescission, injunctive
relief and costs. On January 10, 1997, the defendants filed a demurrer to the
complaint. On February 5, 1997 the Court overruled defendants demurrer. On March
18, 1997, the court denied the plaintiff's motion for a preliminary injunction.
On July 16, 1997, plaintiff filed an amended complaint adding several new
parties, including current and former directors and former and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatement of its fiscal 1995 financial
statements, the Company may not be able to sustain a defense to strict liability
on certain claims under the 1933 Act, but the Company believes that it has
substantial defenses to the alleged damages relating to such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to Medaphis stock options in connection with Medaphis' acquisition of
BSG. The plaintiffs allege failure to perform diligence, breaches of fiduciary
duties of candor, loyalty and fair dealing and negligence against the BSG
defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh) and fraud
and deceit against the Medaphis defendants (Medaphis and Brown). Plaintiffs seek
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis defendants and BSG defendants filed motions to
dismiss the complaint. On or about July 3, 1997, in lieu of responding to these
motions, the plaintiffs filed an amended complaint, adding new claims under the
1933 Act and common law and new parties, including former officers of Medaphis,
Medaphis' former outside auditors and BSG. On or about October 29, 1997 all
defendants filed motions to dismiss the amended complaint.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG. On December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through September 30, 1998.
22
<PAGE> 23
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
non-compete covenants and contract provisions between Medaphis and plaintiffs.
Defendants have filed a motion to dismiss the complaint. Discovery has been
stayed pending resolution of the motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ending December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996, and June 30, 1996.
In addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
1996. The Company intends to cooperate fully with the Commission in its
investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against and written demands
placed upon the Company, there can be no assurance that additional lawsuits will
not be filed against the Company. Further, there can be no assurance that the
lawsuits, the written demands and the pending governmental investigations will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigations will
not consume the time and attention of the senior management of the Company, or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
12. CAPITAL STOCK
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq National Market
rules), 20
23
<PAGE> 24
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million shares of one or more series of preferred stock (the "Preferred Stock"),
with such terms and for such consideration as the Board of Directors may
determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Company's Common Stock and non-voting common
stock (the "Non-voting Common Stock") with respect to dividends and liquidation
rights. Depending on the voting rights applicable to each series of Preferred
Stock, the issuance of shares of Preferred Stock could dilute the voting power
of the holders of the Common Stock.
On May 1, 1996, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation, thereby
increasing the number of authorized shares of the Company's voting common stock
from 100 million to 200 million shares.
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of common stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its common stock and 244,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
Prior to the BSG Merger, BSG had two classes of preferred stock
outstanding. Dividends were noncumulative and payable at 8% per year at the
discretion of BSG's Board of Directors. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of BSG, and
the preferred shareholders had the right to vote on an as converted basis. In
connection with the BSG Merger on May 6, 1996, all preferred shares were
converted into common shares of BSG which were subsequently exchanged for common
shares of the Company.
Prior to the Company's merger with HDS, HDS had three classes of preferred
stock outstanding. The preferred stock carried no guaranteed dividend features
and had no mandatory redemption features. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of HDS. In
connection with HDS's merger with the Company on June 29, 1996, all preferred
shares were converted into common shares of HDS which were subsequently
exchanged for common shares of the Company.
13. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies, a Non-Qualified Stock Option Plan for Non-executive Employees and
several stock option plans assumed as a result of the BSG Merger. Granted
options expire 10 to 11 years after the date of grant and generally vest over a
three-to-five-year period. In connection with the BSG Merger, the Company
offered to issue options under the Company's Non-Qualified Stock Option Plan for
Employees of Acquired Companies in exchange for options outstanding under the
BSG option plans.
The Company also has a Non-Employee Director Stock Option Plan ("Director
Plan") for non-employees who serve on the Company's Board of Directors. The plan
was approved by the Company's stockholders at the annual stockholders' meeting
in 1995. The Director Plan provides for an initial grant of 10,000 options at a
strike price corresponding to the date on which the non-employee director is
elected or
24
<PAGE> 25
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
appointed to the Board of Directors. Additionally, each non-employee director
receives an annual grant of 2,000 options at each subsequent annual meeting in
which the non-employee director is a member of the Board of Directors. All
options granted under the Director Plan vest over a five-year period and expire
11 years from the date of grant.
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former executive officers to purchase up to an
aggregate of 550,746 shares of the Company's common stock at $2 per share. All
options available for grant under this plan have been granted, expire January
16, 2001 and are currently exercisable.
Activity related to all stock option plans is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- NINE MONTHS ENDED
1995 1996 SEPTEMBER 30,1997
------------------------- ------------------------- -------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
as of January 1.... 6,446 $ 8.38 9,559 $12.27 11,214 $8.86
Granted.............. 4,109 17.66 7,023 11.55 9,093 6.19
Exercised............ (557) 7.79 (1,536) 7.95 (1,210) 4.74
Canceled............. (439) 11.24 (3,832) 22.66 (9,350) 9.69
----- ------ ------
Options outstanding
as of period end... 9,559 $12.27 11,214 $ 8.86 9,747 $6.08
===== ====== ======
Options exercisable
as of period end... 2,613 $ 7.18 3,100 $ 7.53 2,721 $6.04
Weighted-average fair
value of options
granted during the
year............... $8.78 $ 6.38 $ 3.05
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
SEPTEMBER 30, REMAINING WEIGHTED- SEPTEMBER 30,
1997 CONTRACTUAL AVERAGE 1997 WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------ -------------- ----------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01 to $5.38.......... 7,838 8.94 $ 4.90 1,996 $ 4.02
$7.19 to $9.06.......... 1,078 8.34 8.59 360 8.75
$9.88 to $10.00......... 523 8.49 9.94 191 9.88
$13.00 to $22.82........ 204 7.74 16.52 136 17.35
$25.00 to $52.01........ 104 8.92 29.03 38 27.82
------ ------ ----- -------
$0.01 to $52.01......... 9,747 8.82 $ 6.08 2,721 $ 6.04
====== =====
</TABLE>
On October 25, 1996, the Company changed the exercise price of
approximately 2.0 million of its then outstanding stock options which had an
exercise price of $15 or greater. These options have a new exercise price of
$9.875. No other terms of these options were changed.
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which have an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of
25
<PAGE> 26
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company were adjusted as part of such option restrike, but no adjustments
were made to any options held by directors or former employees of the Company.
In approving the adjustment, the Compensation Committee relied upon the views of
its outside advisors with respect to the legal, accounting and compensation
issues associated with the action and took into consideration, among other
things, the following factors: (i) the Company historically had paid salaries
which were at or below market levels and had made up for lower salaries through
stock option grants to employees; (ii) the Company historically had used stock
options as its principal long-term incentive program; (iii) the highly skilled
employees of the Company possessed marketable skills; and (iv) senior management
of the Company believed that there was potential for increased attrition among
its key employees and that adjustment of the exercise price of the outstanding
options would significantly help to mitigate such risk.
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's stockholders at
the annual stockholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value common stock to certain executive
officers who have since resigned from the Company. The restricted stock vests
ratably over a four-year period from the date of award. Seventy-five percent of
the awards made under the Restricted Plan have vested.
In 1996, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Reengineering, Consolidation and Business
Improvement Cash Incentive Plan ("Reengineering Incentive Plan") and the Company
granted 155,749 units pursuant to the provisions of the plan to certain key
employees of the Company. The Reengineering Incentive Plan provides for the
payment of cash bonuses to participants if certain performance goals related to
the Company's reengineering and consolidation project are achieved and certain
general business improvement milestones are satisfied. Awards under the plan are
based on units awarded to each participant. If the performance goals specified
in the Reengineering Incentive Plan are achieved and the awards vest, the value
of each unit will equal the average price of the Company's common stock during
the ten trading days immediately preceding such vesting date. At the point it
becomes probable that the performance goals and milestones will be met, the
Company will begin to accrue for the full amount of these bonuses. All awards
made under the Reengineering Incentive Plan, to the extent they remain unvested,
terminate on December 31, 1997. Due to the Company's decision to abandon the
reengineering program, certain of the performance goals and milestones will not
be met prior to December 31, 1997, therefore all grants pursuant to the
Reengineering Incentive Plan will terminate.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted with an exercise price equal to the quoted market price of the
Company's common stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Expected life (years).................................. 5.66 4.88 4.33
Risk-free interest rate................................ 6.30% 6.25% 6.39%
Dividend rate.......................................... 0.00% 0.00% 0.00%
Expected volatility.................................... 26.68% 46.88% 54.09%
</TABLE>
26
<PAGE> 27
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma loss per share would have increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net loss:
As reported.................................. $ (4,780) $(136,358) $ (9,142)
Pro forma -- for SFAS No. 123................ $ (6,995) $(143,121) $(20,445)
Pro forma net loss per share:
As reported.................................. $ (0.09) $ (1.91) $ (0.13)
Pro forma -- for SFAS No. 123................ $ (0.13) $ (2.01) $ (0.28)
</TABLE>
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
14. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------ -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 66 $ 635 $ --
State........................................ 1,795 2,533 1,677
Deferred:
Federal...................................... (190) (67,993) (23,214)
State........................................ (1,041) (9,221) (3,416)
Foreign...................................... -- 146 382
Valuation allowance............................ 441 (189) 7,798
------ -------- --------
Income tax expense (benefit)................... 1,071 (74,089) (16,773)
Income tax expense on extraordinary item....... -- -- 46,192
Pro forma tax adjustments...................... 2,636 (979) --
------ -------- --------
$3,707 $(75,068) $ 29,419
====== ======== ========
</TABLE>
In 1995 and 1996, the Company acquired Atwork, Consort, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior to
the mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired by BSG
prior to the BSG Merger had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma net income (loss) and pro forma net income (loss) per
common share are presented in the consolidated statements of operations as if
each of these entities had been a "C" corporation during the periods presented.
27
<PAGE> 28
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income (loss) before income taxes and income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at federal
statutory rate.............................. $ (553) $(73,999) $(35,807)
State taxes, net of federal benefit........... 363 (7,347) (4,706)
Nondeductible goodwill amortization........... 1,298 2,666 2,028
Nondeductible deal costs of business
combinations................................ 3,186 3,529 (38)
Other items not deductible for tax purposes... 371 1,051 336
Nondeductible litigation settlement........... -- -- 13,097
Valuation allowance........................... 441 (189) 7,798
Foreign....................................... -- 146 382
Other......................................... (1,399) (925) 137
------- -------- --------
$ 3,707 $(75,068) $(16,773)
======= ======== ========
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1995 and 1996
and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards..................... $ 58,888 $122,424 $100,013
Research and development credits..................... 1,078 -- --
Valuation allowance.................................. (18,310) (18,334) (26,460)
Accounts receivable.................................. (28,342) (32,293) (33,005)
Depreciation and amortization........................ (45,637) (22,485) (25,804)
Accrued expenses..................................... 21,166 34,268 42,479
Other................................................ (6,806) (4,359) 2,494
-------- -------- --------
$(17,963) $ 79,221 $ 59,717
======== ======== ========
</TABLE>
As of September 30, 1997, the Company had federal net operating loss
carryforwards for income tax purposes of approximately $248.0 million which
expire at various dates between 1997 and 2011. The Internal Revenue Code of
1986, as amended, may impose substantial limitations on the use of net operating
loss carryforwards upon the occurrence of an "ownership change." The Company has
experienced three ownership changes which have established maximum annual
limitations on income against which net operating losses incurred prior to the
ownership changes may be offset. However, because the limitation operates in a
cumulative manner and in previous years the Company did not utilize net
operating losses ("NOLs"), the Company has approximately $181.0 million in
cumulative unutilized NOLs available in 1997. In future years, currently
unavailable NOLs will become available to offset income prior to the date of
their expiration. As of September 30, 1997, the Company has recorded a deferred
tax asset of $75.6 million reflecting primarily the benefit of $100.0 million in
loss carryforwards. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
28
<PAGE> 29
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance relates primarily to the uncertainty of the
realizability of net operating loss carryforwards assumed in certain business
combinations. The increase in the valuation allowance during 1997 is due to the
Company providing a full valuation allowance on the acquired NOLs.
15. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $3.3 million, $3.5 million, and $3.6 million for the
years ended December 31, 1995, 1996 and the nine-month period ended September
30, 1997, respectively.
The Company maintains a noncontributory money purchase pension plan which
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan was $1.0 million in 1995, $1.2
million in 1996 and $0.7 million in the nine-month period ended September 30,
1997.
In May 1996, the Company's stockholders approved the adoption of the
Company's Employee Stock Purchase Plan ("ESPP") in which eligible employees of
the Company can purchase shares of common stock at a price equal to the lessor
of 85% of the fair market value of the common stock on the first date of the
purchase period or the last date of the purchase period. The maximum number of
shares authorized by this plan is 300,000 of which 157,121 shares are remaining
after the first purchase on July 1, 1997. The ESPP requires shareholder approval
to increase the number of shares authorized under the plan.
16. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.............. $28,321 $ 2,888 $ --
Additions to capital lease obligations........... 17,646 15,705 --
Common stock issued in conjunction with
acquisitions.................................. 148,459 -- --
Issuance of stock warrants....................... -- -- 4,969
Conversion of subordinated debentures............ -- 63,375 --
Cash paid for:
Interest (net of amounts capitalized of $2,359
and $4,092 for 1995 and 1996, respectively)... 10,828 14,762 12,503
Income taxes..................................... 3,040 7,314 10,347
</TABLE>
17. SEGMENT REPORTING
Medaphis has five reportable segments: Physician Services, Hospital
Services, HRI, HIT, and the BSG Group. Physician Services is a provider of
business management solutions and claims processing to physicians in the United
States. Hospital Services is a provider of business management services to
hospitals in the United States. HRI provides subrogation and related recovery
services primarily to healthcare payors. HRI was sold on May 28, 1997. HIT
provides application software and systems integration services to both hospitals
and physicians. The BSG Group provides full-service systems integration,
information technology
29
<PAGE> 30
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consulting and tailored software development to more than 100 clients in a
variety of markets, including healthcare.
Medaphis evaluates each segments' performance based on operating profit or
loss. The Company also accounts for intersegment sales as if the sales were to
third parties.
The Company's reportable segments are strategic business units that offer
different products and services. Information concerning the operations in these
segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Physician Services................................ $289,968 $ 294,406 $ 206,685
Hospital Services................................. 69,689 89,715 73,096
HRI............................................... 22,667 31,419 14,720
HIT............................................... 58,799 70,047 62,319
BSG Group......................................... 98,615 113,988 67,375
Corporate and eliminations........................ (1,726) (2,861) (1,033)
-------- --------- ---------
$538,012 $ 596,714 $ 423,162
======== ========= =========
Operating profit (loss)(1):
Physician Services................................ $ 29,719 $ (13,054) $ (6,131)
Hospital Services................................. 14,282 13,309 7,179
HRI............................................... 5,611 8,502 3,685
HIT............................................... 13,302 14,050 12,839
BSG Group......................................... 5,249 (14,982) (4,370)
Corporate......................................... (11,231) (27,350) (26,930)
-------- --------- ---------
$ 56,932 $ (19,525) $ (13,728)
-------- --------- ---------
Interest expense, net............................... 9,761 11,585 19,417
-------- --------- ---------
Restructuring and other charges (including
litigation settlement):
Physician Services................................ $ 38,800 $ 98,951 $ 6,894
Hospital Services................................. -- 67 --
HRI............................................... 2,000 (778) --
HIT............................................... 7,950 3,957 3,253
BSG Group......................................... -- 60,882 2,430
Corporate......................................... -- 17,237 56,584
-------- --------- ---------
$ 48,750 $ 180,316 $ 69,161
-------- --------- ---------
Loss before income taxes............................ $ (1,579) $(211,426) $(102,306)
======== ========= =========
Depreciation and amortization:
Physician Services................................ $ 17,521 $ 32,428 $ 25,989
Hospital Services................................. 3,499 4,884 4,143
HRI............................................... 695 883 401
HIT............................................... 4,153 6,135 4,614
BSG Group......................................... 5,842 7,980 3,292
Corporate......................................... 525 1,679 1,102
-------- --------- ---------
$ 32,235 $ 53,989 $ 39,541
======== ========= =========
</TABLE>
30
<PAGE> 31
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures:
Physician Services................................ $ 30,113 $ 23,607 $ 4,000
Hospital Services................................. 3,391 6,377 5,938
HRI............................................... 1,278 1,448 108
HIT............................................... 1,847 3,204 1,914
BSG Group......................................... 12,927 13,376 2,045
Corporate......................................... 1,564 3,123 1,193
-------- --------- ---------
$ 51,120 $ 51,135 $ 15,198
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Identifiable Assets:
Physician Services................................ $688,971 $602,984 $564,975
Hospital Services................................. 85,950 97,626 105,931
HRI............................................... 13,234 23,863 --
HIT............................................... 66,580 67,961 76,736
BSG Group......................................... 70,807 51,972 36,770
Corporate......................................... 10,248 92,448 90,325
-------- -------- --------
$935,790 $936,854 $874,737
======== ======== ========
</TABLE>
- ---------------
(1) Excludes restructuring and other charges, litigation settlement and interest
expense.
31
<PAGE> 32
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995 (AS PREVIOUSLY REPORTED)
Revenue........................................... $133,093 $141,286 $140,752 $ 144,746
Pro forma net income (loss)....................... (11,857) 7,226 (2,723) (1,150)
Pro forma net income (loss) per common share...... $ (0.23) $ 0.10 $ (0.05) $ (0.02)
Weighted average shares outstanding............. 50,932 69,053 57,696 58,068
1995 (AS RESTATED)
Revenue........................................... $126,921 $136,245 $135,609 $ 139,237
Pro forma net income (loss)....................... (13,429) 6,947 (2,204) 3,906
Pro forma net income (loss) per common share...... $ (0.29) $ 0.10 $ (0.04) $ 0.07
Weighted average shares outstanding............. 46,932 65,053 53,696 57,068
1996 (AS PREVIOUSLY REPORTED)
Revenue........................................... $162,249 $169,719 $132,874 $ 143,471
Pro forma net income (loss)....................... 11,013 (3,097) (31,502) (100,056)
Pro forma net income (loss) per common share...... $ 0.15 $ (0.04) $ (0.44) $ (1.40)
Weighted average shares outstanding............. 75,704 71,167 71,665 71,695
1996 (AS RESTATED)
Revenue........................................... $162,249 $160,768 $132,121 $ 141,576
Pro forma net income (loss)....................... 9,424 (9,930) (33,384) (102,468)
Pro forma net income (loss) per common share...... $ 0.12 $ (0.14) $ (0.47) $ (1.43)
Weighted average shares outstanding............. 75,704 71,167 71,665 71,695
1997 (AS PREVIOUSLY REPORTED)
Revenue........................................... $147,546 $147,970 $124,649 --
Net loss before extraordinary item................ (1,839) (248) (79,984) --
Extraordinary item................................ -- 76,391 -- --
Net loss per common share before extraordinary
item............................................ $ (0.03) $ (0.00) $ (1.10) --
Extraordinary item per common share............... $ -- $ 1.02 $ -- --
Weighted average shares outstanding............. 72,235 75,142 72,942 --
1997 (AS RESTATED)
Revenue........................................... $147,546 $150,967 $124,649 $ --
Net loss before extraordinary item................ (3,064) (1,260) (81,209) --
Extraordinary item................................ -- 76,391 -- --
Net loss per common share before extraordinary
item............................................ $ (0.04) $ (0.02) $ (1.11) --
Extraordinary item per common share............... $ -- $ 1.02 $ -- --
Weighted average shares outstanding............. 72,235 75,142 72,942 --
</TABLE>
32
<PAGE> 1
EXHIBIT 99.2
NEWS RELEASE
INVESTOR CONTACT: CARYN DICKERSON
(770) 444-5348
MEDIA CONTACT: JOHN GRIMALDI
(212) 755-2850
MICHAEL SITRICK
(800) 288-8809
FOR IMMEDIATE RELEASE
MEDAPHIS CLOSES $210 MILLION LOAN FACILITY; WILL FURTHER RESTATE PRIOR
FINANCIALS TO ACCOUNT FOR 1995 ACQUISITION AS PURCHASE ACCOUNTING TRANSACTION
PURSUANT TO PREVIOUSLY ANNOUNCED AUDIT
ATLANTA GEORGIA - (December 24, 1997) - Medaphis Corporation (NASDAQ: MEDA)
today announced the closing of a $210 million loan facility from an affiliate of
Donaldson, Lufkin & Jenrette (DLJ). The facility will be used to refinance
Medaphis' existing $168 million bank facility (of which approximately $153
million is outstanding), provide liquidity for near term working capital needs
and for general corporate purposes.
The Company also said that, pursuant to the completion of the previously
announced audit of fiscal years 1995 and 1996 by its new auditors, Price
Waterhouse LLP, results for those years and the first nine months of 1997 will
be restated to account for the December 1995 acquisition of Medical Management
Sciences, Inc. (MMS) as a purchase accounting transaction. Previously this
acquisition had been accounted for as a pooling-of-interests business
combination. Medaphis said that the audit opinions it received from Price
Waterhouse for fiscal years 1995, 1996 and the first nine months of fiscal 1997
were unqualified and not subject to any modifying paragraphs.
<PAGE> 2
Medaphis said that restatement of the MMS acquisition as a purchase
accounting transaction will not have any cash impact on the Company. The Company
said that fiscal 1995 EBITDA will be adjusted downward by approximately $2.8
million. The restatement will have no effect on EBITDA in fiscal 1996, 1997 or
in any future years. Balance sheet assets, primarily goodwill, will increase by
approximately $160 million.
The Company said that borrowings under the DLJ loan facility will bear
interest initially at Prime plus 250 basis points with increasing rates after
six months through the loan's maturity on April 1, 1999. The loan facility
contains the usual and customary covenants for financing instruments of this
nature, is secured by substantially all of the Company's subsidiaries. The
facility is callable, in whole or in part, at the option of the issuer, at any
time. The notes evidencing the loan facility have been placed privately and have
no registration rights.
The Company said that appropriate documents would be filed with the
Securities and Exchange Commission.
David McDowell, Chairman and Chief Executive Officer of Medaphis, cited
the completion of this loan facility as a significant step in the Company's
turnaround efforts. "We have made important progress on a number of fronts in
1997," he stated. "Efforts to improve our businesses have shown encouraging
results. We are extremely gratified by the confidence shown in the Company by
our lenders and other important constituents and the dedication, hard work and
loyalty exhibited by our customers and employees. We intend to continue to build
on the progress we have made."
<PAGE> 3
Medaphis is a leading provider of business management services and
information products to healthcare providers, corporations and other
organizations. Based in Atlanta, Georgia, Medaphis currently services
approximately 20,700 physicians and 2,700 hospitals across the nation and more
than 100 systems integration customers in industries including multi-unit
retailing, energy telecommunications, financial services, manufacturing and
transportation.
This Press Release contains statements which constitute
"forward-looking-statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995. "Forward-looking-statements" in this Press
Release include the intent, belief or current expectations of the Company and
members of its senior management team with respect to the Company's future
liquidity prospects, as well as the assumptions upon which such statements are
based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and the actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those contemplated by the forward-looking statements in the Press Release
include, but are not limited to, adverse developments with respect to the
Company's liquidity position or operations of the Company's various business
units. Additional information on matters discussed in this press release,
including factors that would cause actual results to differ materially from
those contemplated within this Press Release can be found in the Company's Safe
Harbor Compliance Statement included as an exhibit to its Form 10-Q for the
quarter ended September 30, 1997 which was filed with the U.S. Securities and
Exchange Commission on November 19, 1997.
###
